SUPPLEMENT DATED JUNE 19, 2017, TO THE PRELIMINARY OFFICIAL STATEMENT DATED JUNE 9, 2017

$395,880,000* HEALTH AND HIGHER EDUCATIONAL FACILITIES AUTHORITY Revenue Bonds MedStar Health Issue, Series 2017A (the “Bonds”)

This Supplement to the Preliminary Official Statement dated June 19, 2017 (the “Supplement”) supplements the Preliminary Official Statement dated June 9, 2017 (the “Preliminary Official Statement”) related to the Bonds described above and constitutes an integral part of the Preliminary Official Statement.

Capitalized terms used but not defined in this Supplement have the meanings ascribed thereto in the Preliminary Official Statement.

Appendix C to the Preliminary Official Statement is amended by changing the last paragraph of the definition of “Investment Obligations” on page C-3 as follows (deletions shown in bold strikethrough and additions shown in bold double-underline):

provided, that the issuer of each obligation described in clause (c) above and each obligation described in clause (e) above shall be rated by Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings (“S&P”) in one of its three highest rating categories and each obligation described in clause (g) above shall be rated by Moody’s and or S&P in its highest rating category.

______* Preliminary; subject to change. This Preliminary Official Statement and the information contained herein are subject to completion or amendment. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, qualification or filing under the securities laws of any such jurisdiction. for deliveryonoraboutJune29, 2017. Herrington &SutcliffeLLP,counsel totheUnderwriters,andcertainotherconditions.Itis expectedthattheBondswillbeavailable Vice PresidentandGeneralCounsel oftheCorporationandBallardSpahrLLP,specialcounsel totheCorporation,andbyOrrick, the approvalofMcKennonShelton &HennLLP,BondCounseltotheAuthority,approval ofcertainlegalmattersbytheExecutive -- Book-EntryOnlySystem.” Indenture, andtheBondTrusteewillhavenoobligationtomakeanypaymentsbeneficialownerofBonds.See“The Bonds made whenduebyU.S.BankNationalAssociation,Richmond,(the“BondTrustee”),toDTCinaccordancewith theBond Bonds are maintained under a book-entry system, payments of the principal of andpremium,ifany, and interest on the Bonds will be their initialdeliveryispayableonNovember15,2017,andsemiannuallythereaftereachMay1515.Aslong asthe will actassecuritiesdepository.PurchasesoftheBondsbeinbook-entryformonly.Interestonfrom dateof initially willbemaintainedunderabook-entrysystem which TheDepository Trust Company,NewYork,York(“DTC”), * Preliminary, subjecttochange. payment. TheAuthorityhasnotaxingpower. thereof ortheAuthoritytolevypledgeanyformoftaxation whateverthereforortomakeanyappropriationfortheir not directlyorindirectlycontingentlyobligate,morally orotherwise,theStateofMaryland,anypoliticalsubdivision Authority is pledged to the payment of the principal of or the interest on the Bonds. The issuance of the Bonds does neither thefaithandcreditnortaxingpowerofStateMaryland,anypoliticalsubdivisionthereof orofthe or theinterestthereonexceptfromRevenuesandotheramountspledgedthereforunderBondIndenture, and under theMasterIndenture.See“SecurityandSourcesofPaymentforBonds.” in favoroftheMasterTrusteejointlyandseverallyguaranteeingpaymentperformanceobligationsCorporation herein, theMaterialSystemAffiliatesandcertainother(the“Guarantors”)haveenteredintoaGuaranty Agreement ratably withcertainotheroutstandingObligationsoftheCorporationunderMasterIndenture.Inaddition,exceptas described and securedbyapromissorynoteoftheObligatedGrouptoAuthorityissuedunderMasterIndentureequally and in theBondIndenture,proceedsofBonds.TheobligationsCorporationunderLoanAgreementareevidenced (the “Corporation”)totheAuthorityorBondTrusteepursuantLoanAgreementandextent provided Dated: Dateofinitialdelivery their transferortheincometherefrom.See“TaxMatters.” local taxes;noopinionisexpressedastoestateorinheritancetaxesanyothernotleviedassesseddirectlyontheBonds, income derivedfromtheBonds,includingprofitsmadeintheirsaleortransfer,areforeverexemptallMarylandstateand business intheUnitedStatesofAmerica.BytermsAct,interestonBonds,transferBondsandany income taxpurposesandwillbesubjecttothebranchprofitsimposedoncertainforeigncorporationsengagedinatradeor a corporation’s “adjusted current earnings” in the calculation of a corporation’s alternative minimum taxable income for federal taxpayers asanenumerateditemoftaxpreferenceorotherspecificadjustment;however,interestontheBondswillbeincludedin and (ii) interest on the Bonds is not includable in the alternative minimum taxable income of individuals, corporations or other with certaincovenantsdescribedherein,interestontheBondsisexcludablefromgrossincomeforfederaltaxpurposes NEW ISSUE--BOOK-ENTRYONLY The Bondsaresubjecttoredemptionpriormaturityasdescribed hereinunder“TheBonds--RedemptionProvisions.” The Bondsareoffered,subjecttopriorsale,when,asandifissued bytheAuthorityandacceptedUnderwriters,subjectto The BondsconstitutespecialobligationsoftheAuthoritypayablefrompaymentsby The Bondsareissuableonlyasfullyregisteredbondsindenominationsof$5,000andintegralmultiplesthereof.Allthe None of the State of Maryland, any politicalsubdivision thereof or the Authority shall be obligated to pay the Bonds In theopinionofBondCounseltoAuthority,underexistingstatutes,regulationsanddecisions(i)assumingcompliance RBC Capital Markets $150,760,000* $159,835,000* $85,285,000* PRELIMINARY OFFICIAL STATEMENT DATED JUNE 9, 2017 J.P. Morgan

Citigroup EDUCATIONAL FACILITIES AUTHORITY

MARYLAND HEALTH AND HIGHER

_____% _____% _____% MedStar HealthIssue,Series2017A

Term BondsdueMay15,2047* Term BondsdueMay15,2045* Term BondsdueMay15,2042*

$395,880,000* Revenue Bonds US Bancorp

Wells Fargo Securities Loop Capital Markets BofA MerrillLynch

Yield: Yield: Yield:

_____% _____% _____%

CUSIP: CUSIP: CUSIP: RATINGS:

Due: May15,asshownbelow

S&P: Moody’s: Fitch: See “Ratings.”

A2 A A

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. No dealer, broker, sales representative or other person has been authorized by Maryland Health and Higher Educational Facilities Authority (the “Authority”), MedStar Health, Inc. (the “Corporation”) or the Underwriters to give any information or to make any representation other than as contained in this Official Statement and, if given or made, such other information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from the Authority, the Corporation, The Depository Trust Company (“DTC”) and other sources that are believed to be reliable but is not guaranteed as to accuracy or completeness by the Underwriters, and is not to be construed as a representation either by the Underwriters or, as to information from sources other than the Authority, by the Authority, or, as to information from sources other than DTC, by DTC. The Authority has either provided or reviewed the information under the headings “The Authority,” “State Not Liable on Bonds” and “Corporate Existence of the Authority” as it relates to the Authority and will not be responsible for any other statements or information in this Official Statement. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with and as part of their responsibility to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. CUSIP numbers on the cover page of this Official Statement are subject to a copyright of the American Bankers Association. CUSIP numbers herein are provided by CUSIP Global Services, which is managed by S&P Capital IQ, a division of McGraw–Hill Financial, and none of the Authority, the Underwriters or the Obligated Group Members takes any responsibility for the accuracy thereof. CUSIP numbers are not intended to create a database and do not serve in any way as a substitute for CUSIP Global Services. This Official Statement is not to be construed as a contract or agreement between the Authority and the purchasers or holders of any of the Bonds. This Official Statement contains certain “forward-looking statements” concerning the operations and financial condition of the Corporation. These statements are based upon a number of assumptions and estimates which are subject to significant uncertainties, many of which are beyond the control of the Corporation. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate” and similar expressions are meant to identify these forward-looking statements. Actual results may differ materially from those expressed or implied by these forward-looking statements. The Corporation does not plan to issue any updates or revisions to these forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur. All quotations from and summaries and explanations of provisions of laws and documents herein do not purport to be complete and reference is made to such laws and documents for full and complete statements of their provisions. Any statements made in this Official Statement involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale of the Bonds shall under any circumstances create any implication that there has been no change in the affairs of the Authority, the Corporation or DTC since the date hereof. TABLE OF CONTENTS

Page Page INTRODUCTORY STATEMENT ...... 1 UNDERWRITING ...... 86 ESTIMATED USES AND SOURCES OF FUNDS ...... 3 RATINGS ...... 87 PLAN OF FINANCING ...... 3 TAX MATTERS ...... 88 THE BONDS ...... 5 LEGALITY OF BONDS FOR INVESTMENT SECURITY AND SOURCES OF PAYMENT AND DEPOSIT ...... 92 FOR THE BONDS ...... 9 STATE NOT LIABLE ON BONDS...... 92 ANNUAL DEBT SERVICE REQUIREMENTS OF CORPORATE EXISTENCE OF THE SYSTEM LONG-TERM INDEBTEDNESS ...... 15 AUTHORITY ...... 93 OTHER INDEBTEDNESS ...... 16 LEGAL MATTERS ...... 93 THE AUTHORITY ...... 18 FINANCIAL ADVISORS ...... 93 THE PROJECT ...... 21 INDEPENDENT AUDITORS ...... 93 REGULATORY ENVIRONMENT ...... 2 3 CERTAIN RELATIONSHIPS ...... 94 CERTAIN BONDHOLDERS’ RISKS ...... 34 CONTINUING DISCLOSURE ...... 94 MISCELLANEOUS ...... 95 Appendix A -- MedStar Health, Inc. and the System Appendix B -- Consolidated Financial Statements of MedStar Health, Inc. and its Subsidiaries Appendix B-1 -- Selected Interim Unaudited Financial Information of MedStar Health, Inc. and its Subsidiaries Appendix C -- Summaries of Principal Legal Documents Appendix D -- Form of Continuing Disclosure Agreement Appendix E -- Proposed Form of Opinion of Bond Counsel Appendix F -- Book-Entry Only System

MARYLAND HEALTH AND HIGHER EDUCATIONAL FACILITIES AUTHORITY

401 E. PRATT STREET SUITE 1224 , MARYLAND 21202 410-837-6220 FAX 410-685-1611

OFFICIAL STATEMENT

relating to

$395,880,000* MARYLAND HEALTH AND HIGHER EDUCATIONAL FACILITIES AUTHORITY Revenue Bonds MedStar Health Issue, Series 2017A

______

INTRODUCTORY STATEMENT

This Official Statement sets forth certain information for use in connection with the sale by Maryland Health and Higher Educational Facilities Authority (the “Authority”) of its $395,880,000* Revenue Bonds, MedStar Health Issue, Series 2017A (the “Bonds”). The Bonds are issued pursuant to (i) the Maryland Health and Higher Educational Facilities Authority Act, Sections 10-301 through 10-356 of the Economic Development Article of the Annotated Code of Maryland, as amended (the “Act”), (ii) certain proceedings of the Authority, and (iii) an Indenture of Trust (the “Bond Indenture”) between the Authority and U.S. Bank National Association, Richmond, Virginia, as trustee (the “Bond Trustee”). For the definitions of certain words and terms used in this Official Statement, see “Definitions of Certain Terms Used in the Bond Indenture and Loan Agreement” and “Summary of Certain Provisions of the Master Indenture -- Definitions” in Appendix C.

MedStar Health, Inc. (the “Corporation”) is the controlling entity of an integrated health services organization (the “System”) offering a broad continuum of health care services to residents of the Baltimore-Washington, D.C. region. The System consists of the Corporation, 10 (collectively, the “System Hospitals”) and other health services affiliates (together with the System Hospitals, the “System Affiliates”) which provide acute care (secondary, tertiary and

______* Preliminary, subject to change.

- 1 - quaternary), primary care, emergency care, urgent care, ambulatory surgery, rehabilitation (-based and outpatient), post-acute care, home care, health promotion and wellness, and medical research and education. For detailed information concerning the Corporation and the System Affiliates, see Appendix A. Appendix B sets forth consolidated financial statements of the Corporation and its subsidiaries for the Fiscal Years ended June 30, 2015 and June 30, 2016 audited by KPMG LLP. Appendix B-1 sets forth selected interim unaudited financial information with respect to the Corporation and its subsidiaries for the nine-month periods ended March 31, 2016 and 2017. Such financial statements and information include affiliates of the Corporation that are not Members of the Obligated Group or Guarantors.

The Bonds are being issued at the request of the Corporation for the purpose of financing and refinancing a portion of the costs of acquisition, construction and equipping of certain capital projects including (a) a new 6-story, approximately 417,000 square foot surgical pavilion building to be located east of and connected to the main hospital building of MedStar Hospital and (b) additional construction, renovations and improvements at certain other System Hospitals (collectively, the “Project”). See “Estimated Uses and Sources of Funds” and “The Project.”

Under certain circumstances, the principal amount of the Bonds offered hereby may be reduced by up to $75 million and in lieu thereof an index floating rate bond (the “Index Floating Rate Bond”) may be issued in a direct placement with a commercial lender on or about the date of issuance of the Bonds. The issuance of the Index Floating Rate Bond is subject to market and other conditions and the Index Floating Rate Bond is not being offered pursuant to this Official Statement. See “Plan of Financing.”

All non-governmental Maryland hospitals charge for hospital services at rates approved by the Maryland Health Services Cost Review Commission (the “HSCRC” or the “Rate Commission”). See “Regulatory Environment -- Maryland Health Services Cost Review Commission.” HSCRC-approved rates only apply to the rates charged by the seven System Hospitals located in the State of Maryland. The District of Columbia does not regulate the rates charged by hospitals.

Certain risk factors that should be considered by prospective investors in the Bonds are set forth under “Certain Bondholders’ Risks.”

- 2 -

ESTIMATED USES AND SOURCES OF FUNDS*

The estimated costs of a portion of the Project and certain incidental costs related thereto and the sources of funds available therefor are as follows:

USES OF FUNDS:

Estimated costs of a portion of the Project: (1) Construction, renovation and equipment ...... $358,400,000 Capitalized interest(2) ...... 65,600,000 Total ...... 424,000,000 Estimated financing expenses (3) ...... 3,962,945 Total uses of funds ...... $427,962,945

SOURCES OF FUNDS:

Bonds ...... $395,880,000 Net original issue premium ...... 32,082,945 Total sources of funds ...... $427,962,945

(1) See “Project.” (2) Amount to be deposited into the Capitalized Interest Account that is anticipated to suffice for payment of the interest on the Bonds for the period expected to extend from the date of their delivery to _____ 15, 20__, based upon an assumed average annual interest rate of ___% on the Bonds. (3) Includes the Underwriters’ discount, certain fees and expenses of the financial advisors to the Corporation and the Authority, legal counsel to the Corporation and the Underwriters and Bond Counsel to the Authority, certain accounting fees, rating agency fees and bidding agent fees, as well as printing costs, fees and expenses of the Bond Trustee and the Master Trustee and other miscellaneous expenses. ______*Preliminary, subject to change.

PLAN OF FINANCING

The proceeds of the Bonds and other available funds will be used to finance and refinance the Project, capitalized interest on the Bonds and certain expenses related to the issuance of the Bonds. See “Estimated Uses and Sources of Funds” above.

The proceeds of the Bonds will be loaned to the Corporation pursuant to a Loan Agreement (the “Loan Agreement”) between the Corporation and the Authority. The obligations of the Corporation under the Loan Agreement will be evidenced and secured by a promissory note of the Obligated Group to the Authority in principal amount equal to the aggregate principal amount of the Bonds (the “2017A Obligation”), issued in accordance with the Master Trust Indenture between the Corporation and U.S. Bank National Association, Richmond, Virginia, as successor trustee (the “Master Trustee”), as amended and supplemented (the “Master Indenture”). The Corporation is currently the sole Member of the Obligated Group.

Currently, the System Affiliates are not Members of the Obligated Group. Except as described below, however, all Material System Affiliates, as well as certain other System

- 3 -

Affiliates (collectively, the “Guarantors”) have entered into a Guaranty Agreement, as amended (the “Guaranty Agreement”), jointly and severally guaranteeing the payment and performance of the obligations of the Corporation under the Master Indenture. Pursuant to the Master Indenture, except as otherwise provided therein, the Corporation has agreed to cause each Material System Affiliate to be a party to the Guaranty Agreement provided that a new Material System Affiliate can comply with the requirements set forth in the Master Indenture for the admission of Members to the Obligated Group. Notwithstanding the requirement under the Master Indenture that the Corporation shall cause each Material System Affiliate to be a party to the Guaranty Agreement, any Guarantor may be released from the provisions of the Guaranty Agreement by complying with the provisions of the Master Indenture relating to the withdrawal of Members from the Obligated Group. See “Summary of Certain Provisions of the Master Indenture -- Parties to Guaranty Agreement” in Appendix C. The Guarantors currently include each of the 10 System Hospitals: MedStar Washington Hospital Center, MedStar Georgetown University Hospital and MedStar National Rehabilitation Network, each of which is located in the District of Columbia, and MedStar Union Memorial Hospital, MedStar Franklin Square Medical Center, MedStar Hospital Center, MedStar Good Samaritan Hospital, MedStar Montgomery Medical Center, MedStar Harbor Hospital and MedStar St. Mary’s Hospital, which are located in Maryland (collectively, the “Maryland Hospitals”). See “Corporate Organization and System Affiliates” and “Acute Care Facilities -- The Hospitals” in Appendix A and “Security and Sources of Payment for the Bonds -- Guaranty Agreement” below.

MedStar Family Choice, Inc., a Medicaid and Medicare managed care organization licensed by the State of Maryland and the District of Columbia (“MFC”), is a Material System Affiliate as defined under the Master Indenture. The Master Indenture, however, was previously amended to provide that MFC will not be required to become a party to the Guaranty Agreement. See “Security and Sources of Payment for the Bonds -- Amendments of Master Indenture.”

Under certain circumstances, the principal amount of the Bonds offered hereby may be reduced by up to $75 million and in lieu thereof an Index Floating Rate Bond may be issued in a principal amount up to $75 million in a direct placement with a commercial lender on or about the date of issuance of the Bonds. The proceeds of the Index Floating Rate Bond would be advanced to the Corporation over a period of up to 30 months in order to finance a portion of the costs of the Project. If the Index Floating Rate Bond is issued, it is expected to be evidenced and secured by an Obligation (the “2017B Obligation”) issued under the Master Indenture. See “Other Indebtedness -- Parity Debt.” The issuance of the Index Floating Rate Bond is subject to market and other conditions and the Index Floating Rate Bond is not being offered pursuant to this Official Statement.

Upon the issuance of the Bonds and, if issued, the Index Floating Rate Bond, approximately $1.224 billion aggregate principal amount of Obligations issued under the Master Indenture that secures bonds and credit facilities will remain outstanding, exclusive of the 2017A Obligation and the 2017B Obligation, secured equally and ratably with the Bonds by the Master Indenture. See “Other Indebtedness” below.

- 4 -

THE BONDS

General

The Bonds are dated as of the date of initial delivery, bear interest from such date at the rates set forth on the cover page of this Official Statement, payable on November 15, 2017, and semiannually thereafter on each May 15 and November 15 and, subject to the redemption provisions set forth below, mature on the dates and in the amounts set forth on the cover page of this Official Statement. Interest is calculated on the basis of a year consisting of twelve 30-day months.

The Bonds are issued only as fully registered bonds in denominations of $5,000 and integral multiples thereof. The Bonds initially will be maintained under a book-entry only system; Beneficial Owners will have no right to receive physical possession of the Bonds and payments of the principal or Redemption Price of and interest on the Bonds will be made as described below under “Book-Entry Only System.” If the book-entry only system is discontinued, interest on the Bonds will be payable by check mailed by the Bond Trustee to the persons in whose names the Bonds are registered as of the first day of the month in which the interest payment date occurs (or such other day as shall be established by the Bond Trustee as described under “Summary of Certain Provisions of the Bond Indenture -- Special Record Dates” in Appendix C) at their addresses shown on the registration books maintained by the Bond Trustee, which is registrar and paying agent for the Bonds, and the principal or Redemption Price of the Bonds will be payable only upon presentation and surrender of such Bonds at the Designated Office of the Bond Trustee.

Redemption Provisions

Optional Redemption

Bonds maturing on or after May 15, 20___ are subject to redemption prior to maturity beginning on May 15, 20___, at the option of the Authority upon the direction of the Corporation, as a whole or in part at any time, at the principal amount of such Bonds to be redeemed, plus accrued interest thereon to the date set for redemption.

In lieu of redeeming any Bonds called for redemption, at the option of the Authority, the Corporation will have the right to purchase such Bonds or cause such Bonds to be purchased on the date named for redemption at a price equal to the principal amount of such Bonds and accrued interest thereon to the date set for redemption, and by their acceptance of the Bonds, the holders thereof will be deemed to have agreed to sell such Bonds to or upon the order of the Corporation on such date. If there shall have been deposited with the Bond Trustee the purchase price of such Bonds on such date, then such Bonds shall be deemed to have been purchased on such date whether or not the holders thereof surrender such Bonds for purchase and such holders shall not be entitled to interest accruing on such Bonds subsequent to such date and shall have no claims with respect thereto except to receive the purchase price of such Bonds so held by the Bond Trustee.

- 5 -

Sinking Fund Redemption

The Bonds maturing on May 15, 2042* will be subject to redemption prior to maturity, at the principal amount thereof plus accrued interest to the redemption date, from mandatory Sinking Fund Installments on each May 15 as follows:

Term Bonds Due May 15, 2042*

Sinking Fund Sinking Fund Year Installment Year Installment $ $

The average life of the Bonds maturing on May 15, 2042* is approximately _____ years.

The Bonds maturing on May 15, 2045* will be subject to redemption prior to maturity, at the principal amount thereof plus accrued interest to the redemption date, from mandatory Sinking Fund Installments on each May 15 as follows:

Term Bonds Due May 15, 2045*

Sinking Fund Sinking Fund Year Installment Year Installment $ $

The average life of the Bonds maturing on May 15, 2045* is approximately _____ years.

The Bonds maturing on May 15, 2047* will be subject to redemption prior to maturity, at the principal amount thereof plus accrued interest to the redemption date, from mandatory Sinking Fund Installments on each May 15 as follows:

Term Bonds Due May 15, 2047*

Sinking Fund Sinking Fund Year Installment Year Installment $ $

The average life of the Bonds maturing on May 15, 2047* is approximately _____ years.

______*Preliminary, subject to change.

- 6 -

Upon any purchase of Bonds subject to redemption from a Sinking Fund Installment and surrender of such Bonds to the Bond Trustee for cancellation, and upon any redemption of Bonds subject to redemption from a Sinking Fund Installment, an amount equal to the principal amount thereof shall be credited toward the applicable Sinking Fund Installment, and any principal amount of Bonds purchased or redeemed in excess of such Sinking Fund Installment may be applied toward the reduction of any future Sinking Fund Installments applicable to such Bonds as the Corporation may designate.

Extraordinary Optional Redemption

Outstanding Bonds are subject to redemption prior to maturity as a whole or in part at any time, at a Redemption Price equal to the principal amount thereof plus accrued interest thereon to the date set for redemption, from funds deposited in the Redemption Fund from (i) proceeds from title insurance with respect to any Operating Assets, (ii) proceeds from the condemnation of any Operating Assets in whole or in part or from agreements with, or action by, a public authority in the nature of or in lieu of condemnation proceedings and (iii) proceeds from insurance received in connection with the loss, damage or destruction of any Operating Assets.

The Bonds are also subject to redemption prior to maturity, as a whole or in part, on the earliest practicable date in the event that (i) a Member of the Obligated Group or System Affiliate determines in good faith that continued operation of any portion of the Operating Assets is not financially feasible or is otherwise disadvantageous to such Member or System Affiliate, respectively, (ii) as a result thereof, such Member of the Obligated Group or System Affiliate sells, leases or otherwise disposes of such portion of the Operating Assets to a person or entity unrelated to the Obligated Group or any System Affiliate and (iii) there is delivered to the Authority a written statement of Bond Counsel to the effect that, unless such Bonds are redeemed, retired or defeased either prior to or concurrently with such sale, lease or other disposition, or on a subsequent date prior to the first date on which the Bonds are subject to redemption at the option of the Authority at the direction of the Corporation, Bond Counsel will be unable to render an unqualified opinion that such sale, lease or other disposition of such Operating Assets will not adversely affect the excludability from gross income, for federal income tax purposes, of the interest on the Bonds. Any such redemption shall be at a Redemption Price equal to the principal amount thereof, plus accrued interest to the redemption date.

Redemption Subject to Certain Conditions

Any redemption of Bonds (other than redemption from the Sinking Fund Installments for such Bonds) shall be subject to the deposit of funds for such redemption by or on behalf of the Obligated Group and may be subject to such other conditions as the Authority, upon the Request of the Corporation, shall determine.

Selection of Bonds to Be Redeemed

If fewer than all of the Bonds shall be called for redemption, the maturities of the Bonds to be redeemed shall be selected by the Authority at the direction of the Corporation from among the Bonds of such maturities required or permitted to be redeemed. So long as the Bonds are maintained under a book-entry only system, except as otherwise directed by the Authority, the selection of individual ownership interests in the Bonds of any maturity to be credited with any

- 7 -

partial redemption shall be made as described in Appendix F. At any other time, if fewer than all of the Bonds of any one maturity are called for redemption, the particular Bonds to be redeemed will be selected by lot or in such other manner as the Authority shall direct upon the request of the Corporation.

Notice of Redemption

So long as the Bonds are maintained under a book-entry only system, notice of the call for any redemption of Bonds will be given as described in Appendix F at least 20 days before the redemption date. At any other time, the Bond Trustee is required under the Bond Indenture to mail notice of the call for any redemption at least 20 days before the redemption date to the registered owners of the Bonds to be redeemed at their addresses as they appear on the registration books maintained by the Bond Trustee, but failure so to mail any such notice to any of such registered owners will not affect the validity of the proceedings for the redemption of any Bonds. Bonds so called for redemption will cease to bear interest on the specified redemption date and will no longer be secured by the Bond Indenture, provided that funds for such redemption are on deposit at that time with the Bond Trustee and all other conditions, if any, to the redemption of such Bonds are satisfied on or before the specified redemption date.

Book-Entry Only System

All of the Bonds initially will be maintained under a book-entry system under which The Depository Trust Company, New York, New York (“DTC” and, together with any successor securities depository for the Bonds, the “Securities Depository”), will act as securities depository. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co., DTC’s partnership nominee. Purchases of beneficial interests in the Bonds will be in book-entry form only and purchasers of beneficial ownership interests will not receive certificates representing their interests in the Bonds purchased. So long as the Bonds are in book-entry only form, the principal of and interest on the Bonds will be payable, and redemption and other notices with respect to the Bonds will be given, only to DTC, as the registered owner of the Bonds, and not to the beneficial owners of such Bonds, and neither the Authority nor the Bond Trustee will have any responsibility or obligation with respect to payments or notices to beneficial owners. Beneficial owners may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as ascertaining whether the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to beneficial owners or providing their names and addresses to the Bond Trustee and requesting that copies of the notices be provided directly to them. For a further description of the book-entry only system, see Appendix F.

Registration and Exchange of Bonds

So long as the Bonds are maintained under a book-entry only system, transfers of ownership interests in the Bonds will be made as described in Appendix F. If the book-entry only system is discontinued, any Bond may be exchanged for an equal aggregate principal amount of Bonds maturing on the same date and bearing interest at the same rate, and the transfer of any Bond may be registered, upon presentation and surrender of such Bond at the designated office of the Bond Trustee, together with an assignment duly executed by the registered owner or his attorney or legal representative. The Authority and the Bond Trustee may require the person requesting any such exchange or transfer to reimburse them for any tax or

- 8 - other governmental charge payable in connection therewith. Neither the Authority nor the Bond Trustee shall be required to register the transfer of any Bond or make any such exchange of any Bond during the 15 days preceding the date of mailing of any notice of redemption of such Bond or after a notice of the redemption of such Bond or any portion thereof has been mailed.

Acceleration

Upon the occurrence of certain events, the due date for the payment of the principal of the Bonds may be accelerated. See “Summary of Certain Provisions of the Bond Indenture -- Events of Default and Remedies” in Appendix C.

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS

General

The Bonds are special obligations of the Authority, the principal or Redemption Price of and interest on which are payable solely from Revenues and to the extent provided in the Bond Indenture, the proceeds of the Bonds.

None of the State of Maryland, any political subdivision thereof or the Authority shall be obligated to pay the Bonds or the interest thereon except from Revenues and other amounts pledged therefor under the Bond Indenture, and neither the faith and credit nor the taxing power of the State of Maryland, of any political subdivision thereof or of the Authority is pledged to the payment of the principal of or the interest on the Bonds. The issuance of the Bonds does not directly or indirectly or contingently obligate, morally or otherwise, the State of Maryland or any political subdivision thereof or the Authority to levy or to pledge any form of taxation whatever therefor or to make any appropriation for their payment. The Authority has no taxing power. See “State Not Liable on Bonds.”

Pledge of Revenues

Pursuant to the Bond Indenture, the Authority pledges and assigns to the Bond Trustee the Authority’s right, title and interest to the Revenues, the Loan Agreement and the 2017A Obligation, subject to the provisions of the Bond Indenture described under “Summary of Certain Provisions of the Bond Indenture -- Enforcement of Loan Agreement and Note” in Appendix C. The Revenues include all payments to the Authority or the Bond Trustee pursuant to the Loan Agreement and the 2017A Obligation (including payments made by the Guarantors under the Guaranty Agreement), other than payments to the Authority of its initial fee, the Annual Administrative Fees, any Administrative Expenditures and any indemnity payments to the Authority.

Loan Agreement

The Loan Agreement is an unconditional general obligation of the Corporation and will remain in full force and effect until all of the Bonds and the interest thereon have been paid or provision for the payment thereof has been made in accordance with the Bond Indenture. The Loan Agreement requires the Corporation to make payments in such amounts and at such times

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as shall be sufficient to provide for the payment of the principal of and the premium, if any, and interest on such Bonds when due.

Master Indenture

Under the Master Indenture, the Obligated Group is authorized to issue Obligations to evidence or secure Indebtedness or Financial Products Agreements not constituting Indebtedness. The obligations of the Corporation under the Loan Agreement will be evidenced and secured by the 2017A Obligation issued by the Obligated Group under the Master Indenture. Under the Master Indenture, the Obligated Group unconditionally and irrevocably covenants that it will pay the principal of and interest and premium, if any, on the Obligations and all other amounts payable under the Master Indenture. See “Summary of Certain Provisions of the Master Indenture -- Definitions” in Appendix C. The 2017A Obligation will be secured by the Master Indenture, equally and ratably with the existing Obligations and any other Obligations outstanding from time to time under the Master Indenture. See “Other Indebtedness” below.

The Master Indenture provides that any person may be admitted to the Obligated Group and that any Member of the Obligated Group may withdraw from the Obligated Group upon the satisfaction of certain conditions. Currently the Corporation is the sole Member of the Obligated Group, and the Corporation has no present intention of admitting any other party to the Obligated Group. See “Entrance into the Obligated Group” and “Cessation of Status as a Member of the Obligated Group” under “Summary of Certain Provisions of the Master Indenture” in Appendix C.

The Master Indenture may be amended in certain circumstances without the necessity of obtaining the consent of or giving notice to the Holders of Obligations, including amendments necessary to permit any Member of the Obligated Group to affiliate or merge with, on acceptable terms, one or more corporations that provide health care services and which, in the opinion of Counsel, do not materially adversely affect the Holders of Obligations. See “Summary of Certain Provisions of the Master Indenture -- Supplemental Master Indentures Not Requiring Consent of Obligation Holders” in Appendix C. The Master Indenture may also be amended in certain other circumstances with the consent of the Holders of not less than a majority in aggregate principal amount of Obligations. See “Summary of Certain Provisions of the Master Indenture -- Supplemental Master Indentures Requiring Consent of Obligation Holders” in Appendix C.

Under certain circumstances, the Obligated Group and the Master Trustee may, without the consent of the Holders of any Obligations or Related Bonds, enter into one or more supplements, amendments, restatements, replacements or substitutions of the Master Indenture to modify, amend, restate, supplement, replace, substitute, change or remove any covenant, term or provision of the Master Indenture, in whole or in part. See “Summary of Certain Provisions of the Master Indenture -- Obligation and Document Substitution” in Appendix C. Notwithstanding the foregoing, the Corporation has agreed in the Loan Agreement that the Master Indenture may not be replaced or substituted in its entirety unless the consent of a majority in aggregate principal amount of Outstanding Bonds has been secured. Supplements, amendments, restatements, replacements or substitutions of less than the entirety of the Master Indenture are not limited by this provision of the Loan Agreement. See “Summary of Certain Provisions of the Loan Agreement -- Master Indenture” in Appendix C.

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Guaranty Agreement

Under the Guaranty Agreement, the Guarantors unconditionally guarantee jointly and severally (i) the full and prompt payment of the principal of and any prepayment premium on the outstanding Obligations when and as the same shall become due, whether at the stated maturity thereof, by acceleration, call for prepayment or otherwise, (ii) the full and prompt payment of the interest on the outstanding Obligations when and as the same shall become due, (iii) any other payment required to be made by the Members of the Obligated Group under the Master Indenture and (iv) the full and complete performance by the Members of the Obligated Group of any other covenants, warranties, duties and obligations of the Members of the Obligated Group under the provisions of the outstanding Obligations and the Master Indenture. See “Summary of Certain Provisions of the Guaranty Agreement” in Appendix C. Currently, the Guarantors consist of the 10 System Hospitals, as well as HH MedStar Health, Inc., Parkway Ventures, Inc., VNA, Inc. and MedStar Enterprises, Inc.

In the Guaranty Agreement, each Guarantor agrees to comply with the covenants contained in the Master Indenture as if such Guarantor were a Member of the Obligated Group. Notwithstanding the requirement under the Master Indenture that the Corporation shall cause each Material System Affiliate (except as described in the Master Indenture) to be a party to the Guaranty Agreement, any Guarantor may be released from the provisions of the Guaranty Agreement by complying with the provisions of the Master Indenture relating to the withdrawal of Members from the Obligated Group, and new Guarantors may only be added to the Guaranty Agreement by complying with the provisions of the Master Indenture relating to entry of Members into the Obligated Group. See “Summary of Certain Provisions of the Master Indenture -- Entrance into the Obligated Group” and “-- Cessation of Status as a Member of the Obligated Group” in Appendix C.

Deeds of Trust; Amendment Regarding Deeds of Trust

The obligations of the Guarantors under the Guaranty Agreement are secured by a separate Deed of Trust, Security Agreement and Financing Statement with respect to the principal hospital facilities and the Pledged Revenues of the System Hospitals (collectively, the “Deeds of Trust”). The real property subject to the Deeds of Trust (the “Mortgaged Property”) consists generally of the acute care and rehabilitation hospitals and related parking facilities of the System Hospitals. See “Summary of Certain Provisions of the Deeds of Trust” in Appendix C. The liens on the Mortgaged Property under the Deeds of Trust, except with respect to the facilities of MedStar Southern Maryland Hospital Center, secure all amounts due and payable under the Guaranty Agreement without any limitation regarding the amount recoverable under such Deeds of Trust. The lien under the Deed of Trust with respect to the facilities of MedStar Southern Maryland Hospital Center, however, secures all amounts due and payable under the Guaranty Agreement to a maximum amount equal to $33,600,000, which amount equals the appraised value of such facilities as of June 19, 2012. The Deeds of Trust are subject to Permitted Encumbrances. See “Summary of Certain Provisions of the Deeds of Trust” in Appendix C. The obligations of the Guarantors under the Guaranty Agreement are not secured by a security interest in any personal property of the System Hospitals.

While the Deeds of Trust cover substantially all of the acute care hospital facilities, rehabilitation hospital facilities and related parking facilities, they do not cover all property of the System Hospitals. In addition, the Deeds of Trust allow for the release of certain property

- 11 - from the liens created by the Deeds of Trust without the necessity of satisfying any financial tests. Additionally, the Deeds of Trust provide that the Master Trustee shall release property from the Deeds of Trust upon request of the Corporation if the conditions to disposition of property contained in the Master Indenture are satisfied. See “Summary of Certain Provisions of the Master Indenture -- Sale, Lease or Other Disposition of Property” and “Summary of Certain Provisions of the Deeds of Trust -- Covenants and Agreements Relating to the Release of Property and Subordination of Liens” in Appendix C.

The Guaranty Agreement is expected to be amended to provide that the obligations of the Guarantors under the Guaranty Agreement will no longer be required to be secured by the Deeds of Trust (the “Springing Amendment”) and to incorporate into the Guaranty Agreement the security interest in the Pledged Revenues currently contained in the Deeds of Trust. The Springing Amendment will require the consent of a majority of the holders of Related Bonds secured by Obligations as well as a majority of the holders of outstanding Obligations under the Master Indenture and will become effective once such consent is obtained. The holders of the Bonds will be deemed to have consented to the Springing Amendment as a result of the purchase of the Bonds.

Security Interest in Pledged Revenues

Under the Master Indenture and the Deeds of Trust, as security for the payments due thereunder, the Corporation and the System Hospitals, respectively, grant to the Master Trustee a security interest in the Pledged Revenues, subject to certain Permitted Encumbrances. The “Pledged Revenues” include (a) all receipts, revenues, income and other moneys acquired by or on behalf of the Corporation and the System Hospitals from the operation of any of their facilities whether now existing or hereafter acquired, and all rights to receive the same (including accounts, instruments, chattel paper and general intangibles representing a right to payment constituting revenues of the Corporation or the System Hospitals), whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by the Corporation or the System Hospitals and all proceeds of the foregoing and (b) the non-operating revenues of the Corporation and the System Hospitals, including, without limitation, contributions, donations and pledges, whether in the form of cash, securities or other personal property, that are legally available to meet the obligations of the Corporation or the System Hospitals under the Master Indenture and the Guaranty Agreement, respectively. Gifts, grants, bequests, donations and contributions made to the Corporation or the System Hospitals designated at the time of making thereof by the donor or maker as being for certain specific purposes, and the income derived therefrom and all receipts, revenues, income and other moneys subject to Permitted Encumbrances as defined in the Master Indenture and permitted therein, at present or in the future do not constitute Pledged Revenues. The Master Trustee’s security interest in the Pledged Revenues may be limited as described herein under “Certain Bondholders’ Risks -- Limitations on Enforceability of Rights and Remedies.”

Rate Covenant

The Members of the Obligated Group agree under the Master Indenture to cause the System Affiliates to charge such fees and rates and to exercise such skill and diligence as to provide income from their Property, together with other available funds, sufficient to pay promptly all payments of principal and interest on all Indebtedness, all expenses of operation,

- 12 - maintenance and repair of their Property and all other payments required to be made under the Master Indenture to the extent permitted by law.

If at the end of any Fiscal Year, the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Obligated Group Agent is required under the Master Indenture to retain a Consultant to make recommendations with respect to the rates, fees and charges of the System Affiliates and the System’s methods of operation and other factors affecting their financial condition in order to increase the Debt Service Coverage Ratio to 1.10 to 1 in the succeeding Fiscal Year. The Master Indenture requires each Member, and the Guaranty Agreement requires each Guarantor, to cause each of the System Affiliates, if any, that it controls to follow each recommendation of the Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member) and permitted by law.

Notwithstanding the provisions of the Master Indenture described above, if in any Fiscal Year the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Obligated Group Agent is not required to retain a Consultant if:

(i) there is filed with the Master Trustee the written report of a Consultant to the effect that applicable laws or regulations have prevented the System from generating income available for debt service during such Fiscal Year in an amount sufficient to produce a Debt Service Coverage Ratio of the System of 1.10 to 1 or higher;

(ii) the report of such Consultant indicates that the fees and rates charged by the System Affiliates are such that the System Affiliates have generated the maximum amount of System Revenues reasonably practicable given such laws or regulations; and

(iii) the Debt Service Coverage Ratio was at least 1.00 to 1 for such Fiscal Year.

The Obligated Group Agent will not be required to cause a Consultant’s report to be prepared more frequently than once every two Fiscal Years if at the end of the first of such two Fiscal Years the Obligated Group Agent provides to the Master Trustee an Officer’s Certificate or an opinion of counsel to the effect that the applicable laws and regulations underlying the Consultant’s report delivered in respect of the previous Fiscal Year have not changed in any material way.

Any failure of the Members of the Obligated Group and the Guarantors to generate a Debt Service Coverage Ratio of at least 1.00 to 1 as of the end of two consecutive Fiscal Years will constitute an Event of Default under the Master Indenture and the Guaranty Agreement if, as of the end of the second of such Fiscal Years, the System has less than 55 Days Cash on Hand.

No Debt Service Reserve Fund for the Bonds

The Bonds will not be secured by a debt service reserve fund.

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Amendments of Master Indenture

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

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ANNUAL DEBT SERVICE REQUIREMENTS OF SYSTEM LONG-TERM INDEBTEDNESS

The following table sets forth for each Fiscal Year ending June 30: (i) the principal due on the Bonds (whether at maturity or by mandatory redemption) for such period; (ii) the interest due on the Bonds for such period; (iii) the total debt service requirements of the Bonds; (iv) the total debt service requirements of the other System Long-Term Indebtedness for such period; and (v) the total debt service requirements of the Bonds and the other System Long-Term Indebtedness.

Total Debt Service on Bonds Other System Long- Year Principal Interest Total Term Indebtedness(1) Total 2018 $81,434,729 2019 81,443,162 2020 81,444,673 2021 81,460,193 2022 81,466,145 2023 81,474,225 2024 81,395,991 2025 81,416,316 2026 81,409,609 2027 81,418,272 2028 81,457,670 2029 81,475,910 2030 81,440,100 2031 81,446,407 2032 81,455,563 2033 74,888,089 2034 75,033,329 2035 78,310,524 2036 78,457,138 2037 78,606,447 2038 78,741,832 2039 63,297,463 2040 55,816,054 2041 55,948,379 2042 56,073,329 2043 31,267,854 2044 31,270,204 2045 31,268,104 2046 31,265,704 2047

______(1) Assumes unhedged variable rate demand obligations bear interest at an annual rate of 3.50% and hedged variable rate demand obligations bear interest at an annual rate of 3.69% and are not required to be purchased or redeemed (other than from sinking fund installments) prior to maturity. Assumes the bank line of credit with an outstanding balance of approximately $129.8 million and certain indebtedness in an aggregate principal amount of approximately $13.5 million (see “Other Indebtedness” below) bear interest at an annual rate of 3.50% and amortize over 30 years for level debt service.

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OTHER INDEBTEDNESS

Parity Debt

Outstanding Obligations

The 2017A Obligation constitutes an Obligation under the Master Indenture. Upon the issuance of the Bonds and, if issued, the Index Floating Rate Bond, in addition to the 2017A Obligation and the 2017B Obligation, there will remain outstanding approximately $1.078 billion of Obligations constituting long-term debt securing the following bonds: $139,015,000 aggregate principal amount of the Authority’s Revenue Bonds, Medlantic/Helix Issue, Series 1998A and Series 1998B, $63,235,000 aggregate principal amount of the Authority’s Revenue Bonds, MedStar Health Issue, Series 2011, the Authority’s Revenue Bond, MedStar Health Issue (2012) in the outstanding principal amount of $38,620,000 (the “2012 Authority Bond”), $115,765,000 aggregate principal amount of the Authority’s Revenue Bonds, MedStar Health Issue, Series 2013A (the “2013A Authority Bonds”), $149,760,000 aggregate principal amount of the Authority’s Revenue Bonds, MedStar Health Issue, Series 2013B, $353,210,000 aggregate principal amount of the Authority’s Revenue Bonds, MedStar Health Issue, Series 2015, $116,275,000 aggregate principal amount of the District of Columbia’s Multimodal Revenue Bonds, Medlantic/Helix Issue, Series 1998A (the “1998A District of Columbia Bonds”), $3,300,000 aggregate principal amount of the 1998B District of Columbia Bonds, $3,400,000 aggregate principal amount of the 1998C District of Columbia Bonds and $95,740,000 aggregate principal amount of the MedStar Health, Inc. Taxable Bonds, Series 2015 (collectively, the “Existing Bonds”). All of the Existing Bonds, other than the 1998A District of Columbia Bonds, are fixed rate bonds. The 1998A District of Columbia Bonds are multimodal bonds that are currently variable rate demand obligations backed by bank letters of credit. The Corporation may be required to purchase or redeem the 1998A District of Columbia Bonds prior to maturity upon the occurrence of certain events, including any failure by one or more of the credit facility providers securing such 1998A District of Columbia Bonds to extend its credit facility and the inability of the Corporation to obtain a substitute credit or liquidity facility or convert the interest rate on such 1998A District of Columbia Bonds to an interest mode not requiring a credit or liquidity facility. The interest rate on the 2012 Authority Bond may be increased upon the occurrence of certain events, such as a reduction in the Corporation’s ratings or changes in federal tax or other laws.

The Corporation maintains a $250 million bank line of credit with an outstanding balance of approximately $129.8 million at March 31, 2017 and a $30 million letter of credit facility with an outstanding balance of approximately $16.1 million at March 31, 2017. Each of the bank line of credit and the letter of credit facility is evidenced and secured by an Obligation. See “Management’s Discussion and Analysis of Operations and Financial Condition -- Liquidity and Capital Resources -- Lines of Credit and Bank Facilities” in Appendix A.

In addition, the Obligated Group issued an Obligation in connection with an interest rate swap agreement with a notional amount of $84.8 million at March 31, 2017 entered into by the Corporation relating to the 1998A District of Columbia Bonds. See “Management’s Discussion and Analysis of Operations and Financial Condition -- Interest Rate Swap Agreement” in Appendix A.

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As described above under “Plan of Financing,” under certain circumstances, the principal amount of the Bonds offered hereby may be reduced by up to $75 million and in lieu thereof an Index Floating Rate Bond may be issued in a principal amount up to $75 million in a direct placement with a commercial lender on or about the date of issuance of the Bonds. If the Index Floating Rate Bond is issued, it is expected to be evidenced and secured by the 2017B Obligation issued under the Master Indenture. If the Index Floating Rate Bond is issued it is expected to bear interest at an index floating rate set monthly equal to the product of 70% multiplied by the offered rate for U.S. dollars deposits for a one-month period in the London interbank market (LIBOR) plus 0.65%, subject to adjustment upon the occurrence of certain events, and to be subject to mandatory purchase on or about July 1, 2027. The issuance of the Index Floating Rate Bond is subject to market and other conditions and there is no assurance that the Index Floating Rate Bond will be issued or issued on the foregoing terms.

Additional Obligations

In addition to the 2017A Obligation, the 2017B Obligation, if issued, and the existing Obligations, the Corporation may issue additional Obligations under the Master Indenture upon compliance with the requirements thereof. The aggregate principal amount of Obligations that may be issued under the Master Indenture upon compliance with the requirements thereof is not limited. Under the Master Indenture, Obligations may be in the form of promissory notes or other forms of Indebtedness not constituting promissory notes (not including Non-Recourse Indebtedness). Financial Product Agreements and other Obligations that do not constitute Indebtedness also may be authenticated as Obligations under the Master Indenture.

Obligations Equally and Ratably Secured

The 2017A Obligation and, if issued, the 2017B Obligation will be secured equally and ratably on parity with the outstanding existing Obligations and any additional Obligations from time to time outstanding under the Master Indenture as to the security of the Pledged Revenues, the Guaranty Agreement and the Deeds of Trust to the extent provided in the Master Indenture.

Other Debt

As of March 31, 2017, in addition to the existing Obligations, approximately $13,536,446 aggregate principal amount of Indebtedness of the Corporation and the System Affiliates was outstanding. The Members of the Obligated Group or any other System Affiliates may issue or incur other Indebtedness on the conditions described in the Master Indenture. See “Summary of Certain Provisions of the Master Indenture -- Indebtedness” in Appendix C.

Future Capital Improvements

In addition to the indebtedness related to the Bonds, the Corporation’s financial forecast through fiscal year 2021 includes the incurrence of additional debt to fund growth in the Corporation’s ambulatory strategy and capital improvements across the System’s facilities in the approximate amount of $235,000,000. The incurrence of additional debt, however, has not been approved by the Corporation’s Board of Directors and specific projects have not been approved at this time. In the event such indebtedness is incurred which, as indicated above, is not certain at this time, the Corporation expects that it would be issued as or secured by Obligations under the Master Indenture on parity with the outstanding Obligations.

- 17 -

THE AUTHORITY

The Authority is a body politic and corporate of the State of Maryland, constituting an instrumentality organized and existing under and by virtue of the Act. The purpose of the Authority, as stated in the Act, is to assist certain educational institutions, including institutions of higher education and noncollegiate educational institutions, and health care institutions, including hospitals and life care and continuing-care retirement communities, in the construction, financing and refinancing of certain projects approved by the Authority.

Membership and Organization

The Act provides that the Authority shall consist of nine members, one of whom shall be the Treasurer of the State of Maryland, ex officio, and eight of whom shall be residents of the State appointed by the Governor. All members serve without compensation but are entitled to reimbursement for actual and necessary expenses incurred in the performance of their duties in relation to the Authority. The Governor annually designates one of the members of the Authority to serve as Chairman and one to serve as Vice-Chairman. Subject to the approval of the Governor, the Authority appoints an Executive Director as chief administrative officer to assume responsibility for day-to-day general management of the Authority’s affairs. Since 1996, Annette Anselmi has served as Executive Director of the Authority.

The members of the Authority and some of their past and present affiliations are:

Arnold Williams, Chairman; term expires July 1, 2019; resident of Baltimore County; Managing Director - Abrams Foster, Nole & Williams, P.A.; Chairman of the Board - Baltimore Development Corporation; member - Baltimore City Industrial Development Authority; Lexington Market, Inc.; The Presidents’ Roundtable; and The Greater Baltimore Committee; former Board Chairman - Bon Secours Health Systems, Inc.; former member - Baltimore City Chamber of Commerce; and Immediate Past Chair and former member - Maryland State Board of Accountancy.

Sheila K. Riggs, Vice-Chair; term as member expires July 1, 2018; resident of Baltimore City; immediate past Chairman of the Authority; Trustee and former Chairman of the Board - The Maryland Institute, College of Art; former President and Chairman of the Board - Greater Baltimore Medical Center; former Trustee and Secretary of the Board - Bryn Mawr School; former Co- Chairman - Baltimore Council on Foreign Affairs; and former member - Board of Loyola Notre Dame Library.

Nancy K. Kopp, ex officio; resident of Montgomery County; Treasurer of the State of Maryland; Chair - Maryland Capital Debt Affordability Committee; Maryland 529 (formerly College Savings Plans of Maryland); and Board of Trustees of the Maryland State Retirement and Pension System; and member - Maryland Board of Public Works; Board of Trustees of the Maryland Teachers & State Employees Supplemental Retirement Plans; Board of Revenue Estimates; and Financial Accounting Foundation Board of Trustees.

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Catherine Ashley-Cotleur, Ph.D., member; term expires July 1, 2017; resident of Washington County; Professor Emeritus - Frostburg State University, College of Business; member - American Marketing Association; member - St. Maria Goretti High School Board.

James P. Daly, Jr., member; term expires July 1, 2018; resident of Anne Arundel County; Principal - BH-Works, LLC; former Managing Director - Legg Mason Capital Management; former Principal - Alex. Brown & Sons Incorporated; Vice Chair - Board of Trustees of Mater Dei Prep (NJ); Chair - Advisory Board, Loyola University Maryland College of Arts and Sciences; and Board Member - Gibson Island Corporation.

Richard M. Lerner, member; term expires July 1, 2019; resident of Annapolis; Chairman of the Board - Hospice of the Chesapeake, Inc.; Member - President’s Council of Tulane University; former Chairman and CEO, Annapolis Bancorp, Inc. and BankAnnapolis; former Chairman, Maryland Region - First National Bank; former Chairman of the Board-Foundation for Community Partnerships (now known as Chesapeake Charities); and Hospice of the Chesapeake Foundation; former Board Member-Anne Arundel County CASA, Inc.

Frederick W. Meier, Jr., member; term expires July 1, 2020; resident of Baltimore City; Senior Advisor - Lord Baltimore Capital Corporation; former Executive Vice President - First Maryland Bancorp; Director - Rodney Trust Company; Attransco; and AMA Capital Partners; Board of Finance of the city of Baltimore; former Vice President and Trustee - The Baltimore Museum of Art; Honorary Trustee and former President of Board of Trustees - The Baltimore Boys’ Latin School of Maryland; former Member of Board of Governors - The Center Club; and former Director - Forestal San Jose (Chile); Jugos del Sur (Argentina); NORDEN A/S (Denmark); and Empresas Navieras, S.A.

Bonnie Phipps, CPA, FHFMA, member; term expires July 1, 2021; resident of Baltimore County; former Senior VP and Ministry Market Leader - Ascension Health, St. Louis, Missouri; former President and CEO - St. Agnes Healthcare, Baltimore, Maryland; and Saint Joseph’s Health System, Atlanta, Georgia; Board of Directors - Charlestown Retirement Community; St. Mary’s Seminary and University; and Notre Dame of Maryland University; Board of Financial Administration - Archdiocese of Baltimore; and member - Executive Alliance; and Healthcare Financial Management Association.

W. Daniel White, member; term expires July 1, 2020; resident of Baltimore County; retired Executive Vice President, Assistant Secretary and Assistant Treasurer of The Whiting-Turner Contracting Company; Advisory Board Member - Towson University and The Johns Hopkins University Whiting School of Engineering; Board Member and Immediate Past Board Chair - Maryland Family Network; Planning Committee Chair - Baltimore Country Club; former Board member - The Whiting-Turner Contracting Company, Stevenson University, Maryland Chamber of Commerce, Calvert Hall College High School, Leadership Maryland, Downtown Partnership, USS Constellation Museum, Multiple Sclerosis Society; and United Way Campaigns; former Member - Baltimore County Executive’s Advisory Board for Higher Education; Johns Hopkins University Engineering Alumni Association; and University of Maryland College of Engineering Construction Management Curriculum Advisory Board; former Committee Member - The Family Tree; former Chairman - The Woodbourne Center; former Vice Chairman - Baltimore County Chamber of Commerce, Economic Development; former Chairman - Advanced Resource Management Systems; former adjunct faculty - The Johns Hopkins University.

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Powers

The Act authorizes the Authority, among other things, to issue bonds, bond anticipation notes and other obligations and to refund the same; to fix and collect rates, rentals, fees and charges for services and facilities that a project provides or makes available; to directly, or through a participating institution acting as its designated agent, acquire, improve, maintain, operate, lease as lessee or lessor, and regulate a project and enter into contracts for any of these purposes and for the management of a project for certain educational institutions, including institutions of higher education and noncollegiate educational institutions, and health care institutions, including hospitals and life care and continuing-care retirement communities; to directly or, through a participating institution acting as its designated agent, establish rules and regulations for the use of a project; to accept a grant, loan or other assistance in any form from any private source subject to the provisions of the Act; to mortgage, pledge or otherwise encumber a project and its site or hold a mortgage or other encumbrance on a project and its site for the benefit of the holders of bonds issued to finance a project; to make a loan to a participating institution to improve or acquire a project in accordance with an agreement between the Authority and a participating institution; to refinance any part of a project and refund or repay bonds, mortgages, advances, loans or other obligations of a participating institution to the Authority, any person or any unit of federal, state or local government incurred to finance any part of a project; and to do all acts and things necessary or convenient to carry out the powers expressly granted by the Act.

Bonds and Notes

As of January 1, 2017, the Authority had issued bonds and notes aggregating approximately $24.933 billion in principal amount, of which approximately $8.695 billion remained outstanding under the applicable bond resolution or trust agreement. Since January 1, 2017, the Authority has issued approximately $654.3 million principal amount of additional bonds and notes.

The several series of outstanding bonds and notes issued by the Authority are special obligations of the Authority, payable solely from revenues of the Authority received in connection with the respective projects financed or refinanced, and do not constitute general obligations of the Authority, and the full faith and credit of the Authority is not pledged to the payment of the principal or redemption price of and interest on these bonds or notes.

Other than money available from the administrative fees received from participating institutions, it is not anticipated that the Authority will have any assets of its own. Property and funds held by or mortgaged to the Authority for a particular issue of bonds are not available to satisfy claims of holders of other issues of the Authority’s bonds. The Authority has no taxing powers.

The Authority expects to enter into separate agreements with other hospitals and related institutions, institutions for higher education and noncollegiate educational institutions to finance and refinance eligible projects. The Authority intends to issue other series of bonds and notes for the purpose of financing and refinancing projects pursuant to such agreements, and each such series will be issued pursuant to a resolution or trust agreement separate and apart from any other resolution or trust agreement, except to the extent a series of bonds may be issued on parity with bonds of another series if permitted by the applicable resolution or trust agreement.

- 20 -

THE PROJECT

Description of the Project

MedStar Georgetown University Hospital will construct and equip a new Medical/Surgical Pavilion on the Georgetown University campus (the “MGUH Project”). The new Medical/Surgical Pavilion will consist of an approximately 417,000 square foot, six-story tower located east of the main hospital, connected at the ground, first and fourth floor levels, as well as an approximately 421,000 square feet three-story, below ground parking and comprehensive ancillary support facilities. Additionally, a new helipad will be located on the rooftop of the pavilion with a connecting elevator to the operating room and emergency room. The proposed Medical/Surgical Pavilion and hospital renovation project includes the relocation of critical and intermediate care beds to create an all-private room model within the Medical/Surgical Pavilion and, ultimately, throughout the Hospital, the right-sizing of the surgical platform (operating and procedure rooms) and emergency care services, and the development of a phased comprehensive backfill plan to unify the new and existing facilities.

The Hospital’s new emergency department will have 32 state-of-the-art treatment bays with 1 SANE suite, spanning 34,828 square feet. The new facility will feature 32 standardized and universal operating rooms spanning 700 square feet each. There will be a total of 403 Medical/Surgical beds and ICU/CCU beds, including 156 new and private universal ICU – IMC patient rooms. Overall, there will be a net increase of 122 new beds post construction.

In addition to the MGUH Project, the Corporation expects to invest up to $61.2 million of Bond proceeds in a number of major capital projects across the System. Among these projects may include investment in operating rooms at MedStar Franklin Square Medical Center (“MFSMC”), patient rooms, procedural areas and other renovations at MedStar Washington Hospital Center (“MWHC”), and other System-wide projects. The MFSMC and MWHC projects require Certificates of Need, which have not yet been received.

Architect

The HKS | Shalom Baranes Joint Venture, comprised of HKS Architects, Inc. (HKS) & Shalom Baranes Associates, Inc. (SBA), has been engaged by the Corporation to provide design and engineering services for the MGUH Project. HKS, founded in 1939, is a full-service firm providing architectural, planning and development, civil, structural, mechanical and electrical engineering, and graphic and interior design services. HKS has provided comprehensive professional design services for numerous medical facilities for clients ranging from public and private community hospitals to major urban medical centers. SBA is a Washington D.C. based architectural firm founded in 1981 with an expertise in residential, commercial, institutional, and governmental design. SBA provides full architectural services for an international clientele that includes both private and public sector groups, with specialties that include architecture, project management, historic preservation, interior design, and master planning.

Development Manager

Trammell Crow Company (“TCC” or the “Development Manager”) has been engaged to act as the owner’s representative in an agency capacity on behalf of the Corporation for the MGUH

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Project. Founded in 1948, TCC is one of the nation’s leading developers and investors in commercial real estate, having developed or acquired more than 2,600 buildings valued at more than $60 billion and over 565 million square feet. TCC is licensed in the District of Columbia.

General Contractor

The Corporation is engaging Clark Construction Group, LLC (the “General Contractor”) as the general contractor for the MGUH Project. The General Contractor was originally established as The George Hyman Construction Company, Inc. in Washington, D.C. in 1906 and is licensed as a general contractor in Washington, D.C.

Construction Agreement

The Corporation and the Development Manager are currently negotiating a construction agreement (the “Construction Agreement”) with the General Contractor for the construction of the MGUH Project in the form of a cost plus percentage fee with guaranteed maximum price (the “Guaranteed Maximum Price”) agreement. The Corporation anticipates that the General Contractor will provide or cause to be provided performance bonds and/or comparable insurance coverage with respect to the performance and payment of subcontractors on the MGUH Project. Although the Corporation expects that the work will be completed at or below a negotiated Guaranteed Maximum Price, it is possible that the cost of construction could be adjusted to a level in excess of the Guaranteed Maximum Price. The Guaranteed Maximum Price could be increased or decreased in certain circumstances, including by written change orders authorized by the Corporation, unexpected subsurface conditions or delays, certain insured casualties or suspension of the work due to certain governmental actions.

Construction Schedule

Construction of the MGUH Project is scheduled to begin in January 2018 and is expected to be completed in June 2022.

Approvals and Permits

A certificate of need (the “Certificate of Need”) for the MGUH Project was issued by the State Health Planning and Development Agency (the “SHPDA”) on March 15, 2016. The Certificate of Need is valid until licensure so long as certain performance standards and conditions of certification are met. The schedule for the MGUH Project meets the performance standards of the Certificate of Need. If the performance standards and conditions of certification are not met, the Certificate of Need will expire unless the SHPDA extends the Certificate of Need. The Corporation would have the right, however, to apply for an extension of the performance requirements or a modification of the Certificate of Need prior to the time of the expiration of the Certificate of Need. Each portion of the MGUH Project for which the Certificate of Need was issued will receive pre- licensure review by the SHPDA prior to its utilization by the Corporation.

On June 8, 2017, the District of Columbia Zoning Commission issued a unanimous bench ruling approving the construction of the MGUH Project. The Zoning Commission’s ruling was made without objection following a public hearing in which the MGUH Project was supported on the record by the Georgetown Community Partnership (an advisory group created by the Zoning

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Commission in 2012), the affected Advisory Neighborhood Commissions (locally elected advisory groups), the Citizens Association of Georgetown (a neighborhood civic association), the Burleith Citizens Association (a neighborhood association), and others who might otherwise have had standing to object to the MGUH Project. The MGUH Project is also supported by the Old Georgetown Board and the Commission on Fine Arts (federally chartered agencies with purview over historic preservation and aesthetics). Over the past two years, the Corporation has regularly engaged with all of these organizations and the neighbors surrounding the MedStar Georgetown University Hospital Campus to share the MGUH Project plans and to seek feedback. This intensively collaborative process allowed concerns to be voiced and addressed, and ultimately resulted in the strong support of these organizations. There are no known opponents to the MGUH Project. A Zoning Commission decision may be appealed by an individual or organization with standing to challenge the decision, and appellate review is limited to whether the findings and decision are supported by substantial evidence on the record. Such a review may be requested for up to 30 days following publication of a final order. Pending a decision on appeal, the Zoning Commission approval remains in effect. In light of the Corporation’s work to identify and engage all who might be affected by the MGUH Project, the strong support from the organizations listed above, and the lack of any opposition on the record, the Corporation believes that the possibility of a challenge to the Zoning Commission’s approval is extremely remote. While there is no prescribed timeframe for a final order, the Corporation is working to expedite this process and will begin the MGUH Project promptly in accordance with the MGUH Project timeline without waiting for the appeal period to run.

The Corporation will begin the application process for all material construction permits for the MGUH Project in June 2017. The Corporation believes that all required permits will be obtained via normal administrative procedure and in sufficient time to permit construction of the MGUH Project to proceed in accordance with the construction schedule. Water, sewer and electric utilities are currently available at the site of the MGUH Project.

REGULATORY ENVIRONMENT

Certificate of Need

Under current law, certificate of need approval (or, in certain circumstances, a determination of exemption) is required for the development, operation or participation in certain health care projects in the District of Columbia and Maryland. See “Market Forces and Environment -- Market Regulation” in Appendix A.

Maryland Health Services Cost Review Commission

General

Hospital rate regulation was established by an act of the Maryland legislature in 1971, which created the Maryland Health Services Cost Review Commission. The Rate Commission was given broad authority to establish hospital rates and regulate cost containment, quality and financial stability. Under current law, the rates charged for most hospital services by non-governmental Maryland hospitals are subject to review and approval by the Rate Commission pursuant to Sections

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19-201 through 19-227 of the Health-General Article of the Annotated Code of Maryland, as amended (the “Rate Commission Act”). By the terms of the Rate Commission Act, no hospital subject to the Rate Commission Act is permitted to charge for covered hospital services (inpatient services, emergency services and outpatient services provided at the hospital) at rates other than those established by the Rate Commission in accordance with the procedures established under the Rate Commission Act. The Rate Commission is empowered by statute to initiate hospital rate reviews and to review hospital rate applications on an individual basis to assure that (i) the total costs of all hospital services offered by or through a hospital are reasonable, (ii) the hospital’s aggregate rates are reasonably related to the hospital’s aggregate costs and (iii) rates are charged equitably among all purchasers or classes of purchasers without undue discrimination or preference.

The Rate Commission Act provides in part that the Rate Commission, in discharging its duties, shall permit any nonprofit institution subject to its jurisdiction to charge reasonable rates which will permit the institution to provide, on a solvent basis, effective and efficient service in the public interest. The Rate Commission Act states that, in considering a request for change in or initiating a review of rate schedules or other charges, the Rate Commission shall permit any institution subject to the Rate Commission Act to charge rates which will in the aggregate produce sufficient total revenue to enable the institution reasonably to meet all of the obligations and requirements specified in the Rate Commission Act. The Rate Commission Act also provides that, in the determination of reasonable rates, the Rate Commission shall take into account all of the costs of complying with the determinations made by the Maryland Health Care Commission.

The Rate Commission Act requires all payors to pay Rate Commission-approved rates for appropriately billed, covered hospital services. Differentials up to 6% are allowed if the payor meets certain conditions. These differentials apply to Medicare and Medicaid as discussed in the next section.

Maryland Medicare Waiver

In 1976, Medicare signed a contract with the Rate Commission agreeing to pay Maryland acute care general hospitals, as an experimental program and subject to certain limitations, on the basis of Rate Commission-approved rates, less a 6% differential. This contract, commonly referred to as the “Medicare Waiver,” was in effect from 1977 through 2013, with several renewals. Under the Medicare Waiver, Maryland hospitals were exempted from reimbursement under the Medicare Inpatient Prospective Payment System and Outpatient Prospective Payment System pursuant to Section 1814(b)(3) of the Social Security Act.

Continuation of the Medicare Waiver was contingent on Maryland’s performance on certain factors, including Maryland’s aggregate rate of increase in Medicare cost per hospital admission as compared to the national rate of increase (the “Original Waiver Test”). Since the Original Waiver Test was primarily focused on inpatient services and factors such as cost-per-discharge and length of stay, the system did not provide regulated hospitals with incentives with respect to population health management and coordinated care and Maryland’s performance on the Original Waiver Test deteriorated over time.

On February 11, 2014, the Centers for Medicare and Medicaid Services (“CMS”) and the Governor of Maryland, the State Health Department and the Rate Commission (collectively, the “State”) signed the Maryland All-Payer Model Agreement (the “Agreement”) pursuant to Section

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1115A(b) of the Social Security Act. Pursuant to the Agreement, at the election of the State, reimbursement under Section 1814(b)(3) of the Social Security Act was terminated and the State elected instead for hospitals regulated by the Rate Commission to be reimbursed under the terms of the model (the “Model” or the “Waiver Model”) described below. The Agreement replaces the Original Waiver Test and provides that CMS will waive certain requirements of the Social Security Act as applied to regulated hospitals subject to the conditions of the Agreement. The Agreement obligates Maryland to continue its all-payor rate-setting system. Physician services and other non- hospital services are not covered by the Model.

The Agreement covers a performance period of five calendar years (each, a “Performance Year”) which commenced January 1, 2014 and ends December 31, 2018 (the “Performance Period”). The Agreement provides that, during the Performance Period, Medicare will continue to pay for services provided by Maryland hospitals regulated by the Rate Commission at rates established by the Rate Commission.

Performance under the Model is measured using the following five metrics: total inpatient and outpatient hospital revenue growth per capita; Medicare per beneficiary total hospital cost growth; transition to population-based payment reimbursement; reductions in hospital-acquired- conditions rates; and reductions in hospital Medicare readmission rates.

Prior to the beginning of the fourth Performance Year, the State may submit a proposal for a new model to take effect by no later than December 31, 2018, which must limit, at a minimum, the annual all-payor per capita total inpatient and outpatient hospital revenue growth. The State submitted a proposal (the “Progression Plan”) in December 2016. The Progression Plan outlines the State’s overall framework for modifying and extending the current Model to encompass its approach to limit growth in Medicare total cost of care and Medicaid costs for dual-eligibles. Under the Progression Plan, the State will continue to limit the growth in hospital revenues on an all-payer basis, recognizing that the specific targets will need to be revisited periodically based on environmental factors. Approval of the revised model and extension will be subject to the sole discretion of CMS and will require a separate agreement between the State and CMS. Representatives of the State and CMS currently are negotiating a “term sheet” to reflect their areas of agreement and guide the development of a new agreement. In the event that CMS does not approve the new agreement or the Agreement is terminated during the Performance Period, Maryland hospitals will have two years to complete the transition to the national Medicare reimbursement program, at which time the Agreement will terminate.

All-Payor Total Inpatient and Outpatient Hospital Revenue Growth Per Capita

Under the Agreement, during the first, second and third Performance Years, the State must limit the cumulative growth in total hospital inpatient and outpatient revenue per capita for Maryland residents to an amount less than or equal to the per capita growth ceiling. For the first, second and third Performance Years, the growth ceiling is fixed at 3.58% per capita per year, which represents the State’s per capita gross state product (“GSP”) compounded annual growth rate from 2002 through 2012. In the third quarter of the third Performance Year, the State may, subject to prior approval by CMS, update the annual all-payor per capita total hospital revenue growth limit for the fourth and fifth Performance Years to the State of Maryland’s most recent 10-year per capita GSP growth rate. The State has not requested an update of the annual all-payor per capita total hospital revenue growth limit for the fourth and fifth Performance Years.

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For each Performance Year, by no later than May 1 of the subsequent Performance Year, the State will calculate the applicable Performance Year’s all-payor per capita total hospital revenue amount for Maryland residents by dividing: (i) gross revenue from Maryland residents served in regulated hospitals (adjusted for changes in the differential to achieve the required Medicare savings of the Model) by (ii) the most recently available population estimates at the time of such calculation. At the same time, the State is required to calculate, for the entire Performance Period, the compounded annual all-payor revenue limit along with the total hospital revenue amount for Maryland residents.

Increases in per capita costs may occur due to factors wholly unrelated to the Model, such as the construction of a new hospital facility or the expansion of health care coverage under the Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). Upon the occurrence of any such increases, the State may submit to CMS information and data regarding the impact of such factors on the Model and proposed adjustments to the Model to take into account the impact of any such factors. Any adjustments will be made in the sole discretion of CMS.

Medicare per Beneficiary Total Hospital Cost Growth

Over the Performance Period, the State must produce aggregate savings in per beneficiary total hospital expenditures for Maryland resident fee-for-service Medicare beneficiaries (the “Expenditures”), regardless of the state in which the services were provided, of at least $330 million.

Under the Agreement, the State is to achieve the following savings amounts during the Performance Period:

Performance Year 1: no savings Performance Year 2: $49.5 million Performance Year 3: $82.5 million ($132 million in cumulative savings) Performance Year 4: $115.5 million ($247.5 million in cumulative savings) Performance Year 5: $82.5 million ($330 million in cumulative savings)

The Expenditures for 2013 were used to establish a baseline (the “Medicare Baseline”). The Medicare Baseline will be trended forward by the actual growth rate in national Medicare per beneficiary hospital expenditures to establish a benchmark (the “Medicare Benchmark”). For each Performance Year, CMS will calculate the savings by comparing the actual Expenditures to the Medicare Benchmark. CMS will make adjustments to the Medicare savings calculations, as necessary, to avoid accounting for, and payment of, duplicate amounts made to or received by hospitals in Maryland that are participating in any other existing or future Medicare program or model. To assure a fair comparison, CMS will adjust national Medicare fee-for-service expenditures in a manner similar to any adjustments made for Maryland Medicare fee-for-service expenditures.

Under the Agreement, the State will require hospitals participating in Medicare programs or models involving shared savings to provide information to the State at least annually respecting the amount of any shared savings payments distributed to the hospital (the “Shared Savings”),

- 26 - regardless of the entity receiving the payment from CMS, and CMS will adjust the State’s annual Medicare savings amount to take into account the Shared Savings.

As in the case of measuring the growth in hospital costs per capita, in the event of increases in Medicare per beneficiary costs that are unrelated to the Model, such as the construction of a new hospital facility or the expansion of health care coverage under the Affordable Care Act, the State may submit to CMS information and data regarding the impact of such factors on the Model and suggestions on how to adjust it based on such factors. Any adjustment will be at the sole discretion of CMS.

Population-Based Revenue

Over the course of the Performance Period, the State must facilitate the shift of all Regulated Revenue for State residents to Population-Based Payment Reimbursement. “Regulated Revenue” is defined under the Agreement as the revenue earned by regulated hospitals for which the State has legal authority to set payment rates and for which CMS has agreed to reimburse on the basis of the rates established under the Model. “Population-Based Payment Reimbursement” is defined as a hospital payment that either (1) is directly population-based, such as reimbursement that is tied to projected services for a specific population or specific residents, or (2) establishes a fixed global budget for hospitals for services related to historical trends, the hospital service area and residents served through innovative care models.

Beginning with the second Performance Year, the State will report the percentage of all Regulated Revenue for Maryland residents under Population-Based Payment Reimbursement for the previous Performance Year. This percentage will be calculated by placing all Regulated Revenue for Maryland residents, approved by CMS as Population-Based Payment Reimbursement, as the numerator with the denominator being all Regulated Revenue for State residents. Based on this formula, the following minimum percentages must be met:

Performance Year 2: 50% Performance Year 3: 60% Performance Year 4: 70% Performance Year 5: 80%

Waiver of Certain Medicare Program Conditions

Under the Agreement, CMS waives compliance with certain elements of the national Medicare program, subject to the State’s compliance with certain terms of the Agreement. Waiver of compliance with the Medicare Hospital Readmissions Reduction Program is based upon the State’s agreement to implement the Maryland Readmissions Reduction Program described below. Waiver of compliance with the Medicare Hospital Acquired Conditions Program is based upon the State’s agreement to implement the Maryland Hospital Acquired Conditions (“MHAC”) Program described below. The waiver of compliance with Medicare Hospital Value Based Purchasing (“VBP”) Program is contingent on the State’s submission of an annual report that provides satisfactory evidence that the State operates a similar program that achieves or surpasses the results in terms of patient health outcomes and cost savings as required by the Medicare VBP Program. If the State fails to meet any of the conditions to these waivers, it must submit a Corrective Action Plan (“CAP”) to CMS. If the State cannot correct the failure, CMS may terminate the waiver of

- 27 - compliance with the particular program and State hospitals will be required to comply with the applicable national Medicare requirements, although such an event would not constitute a triggering event for termination of the Model.

Maryland Readmission Reduction Program

Under the Agreement, the State is required to reduce the aggregate 30-day unadjusted all- cause, all-site readmission rate for Medicare fee-for-service beneficiaries, such that by the end of the fifth year of the Performance Period, the readmission rate for Medicare fee-for-service beneficiaries of Maryland hospitals must be equal to or less than the national rate (the “Maryland Readmission Reduction Program”). If, in a given Performance Year, Maryland hospitals fail to outperform the national readmission rate change by an amount equal to or greater than the cumulative difference between Maryland hospitals’ and national readmission rates in the base period divided by five, CMS may require a corrective action plan or terminate the Agreement.

In April 2014, the Rate Commission approved a new Readmission Reduction Incentive program, which provides potential revenue increases for hospitals that had reductions in risk- adjusted readmissions or have attained a specified level during calendar year. This program is designed to achieve the State’s requirement to match the national Medicare readmission rate by the end of the Model Performance Period.

Maryland Hospital-Acquired Conditions Program

Under the Agreement, the State is required to achieve over the five year term of the Agreement an aggregate 30% reduction of potentially preventable conditions, which are defined as either harmful events (e.g., accidental laceration during a procedure) or negative outcomes (e.g., hospital-acquired pneumonia) that result from the process of care and treatment rather from a natural progression of the underlying disease. If, in a given Performance Year, the State fails to achieve the determined aggregate statewide target reduction of potential preventable conditions (7% for FY 2017), CMS may require a corrective action plan or terminate the Agreement. Toward that end, the Rate Commission has established MHAC, a program of financial rewards and penalties designed to provide hospitals with an incentive to achieve the required reduction.

Maryland Quality Based Reimbursement Program

Under the Agreement, the State is required to provide evidence on an annual basis that it has achieved or surpassed measured results in terms of patient health outcomes and cost savings compared with those of the VBP program. The State’s Quality Based Reimbursement (“QBR”) program is similar to the VBP program and assesses hospital performance on a similar set of domains: clinical care (process and outcomes), patient safety, and patient experience of care. The State has received a waiver from the VBP program for FY 2016 and FY 2017.

Continuation of Indirect Medical Education and Graduate Medical Education

Under the Agreement, the Rate Commission will continue to include in rates additional payments to address the direct and indirect costs of graduate medical education and to apply those rules to regulated hospitals as it would to hospitals not paid under the Model.

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Termination of Model

Under the Agreement, notice will be provided to the State upon the determination by CMS that one of the following events (a “Triggering Event”) has occurred: (i) a material breach of any provision of the Agreement; (ii) the State has not produced aggregate savings in the Medicare per beneficiary total hospital expenditures for Maryland resident fee-for-service beneficiaries, regardless of the state in which the service was provided, for two consecutive Performance Years; (iii) the State fails to meet the cumulative target for a Performance Year by a total of $100 million or more; (iv) the annual growth rate in Medicare per beneficiary total cost of care for State of Maryland residents, regardless of the state in which such residents receive service, is greater than one percentage point above the annual national Medicare per beneficiary total cost of care growth rate during a single Performance Year; (v) effective in the second Performance Year, a determination by CMS that the annual growth rate in Medicare per beneficiary total cost of care for State residents, regardless of the state in which such residents receive service, is greater than the annual national Medicare per beneficiary total cost of care growth rate for any two consecutive Performance Years; (vi) the percentage of Medicare hospital revenue attributable to non-resident Medicare beneficiaries is one and one-half percentage points above the percentage level for calendar year 2013; (vii) the quality of care provided to beneficiaries has deteriorated; and (viii) the State or regulated Maryland hospitals have taken actions that compromise the integrity of the Model or the Medicare trust funds. Because the Rate Commission regulates hospital services only and payments to hospital providers in Maryland represent only 55% of Medicare expenditures used in calculating the Maryland total cost of care growth rate, and because certain of the factors used in determining whether a Triggering Event has occurred are substantially affected by actions taken by the Congress, CMS and nonhospital providers, a Triggering Event may occur as a result of activities that Maryland hospitals and the Rate Commission have limited or no ability to influence.

Notice of the occurrence of a Triggering Event will be provided no later than six months following the end of a Performance Year if the Triggering Event is one of the items enumerated in (ii) through (vii) above. Notice may be provided at any time for any other material breach of any provision of the Agreement. Upon receipt of any such notice, the State must provide within 90 calendar days a written response to CMS, and CMS may either accept the response as sufficient or require the State to submit a CAP. CMS will consider the factors surrounding the Triggering Event and determine, in its sole discretion, whether the State’s response is sufficient and no further action is warranted or a CAP is required. A CAP must be successfully implemented within one year from the date of the notice. If CMS determines that the State has not successfully implemented the CAP, then CMS may determine to modify, amend or rescind any aspect of the Model or may immediately terminate the Performance Period of the Agreement. The State may terminate the Agreement at any time, for any reason, upon 180 days’ notice to CMS. If the Agreement is terminated, the State has two years to transition to payment under the national Medicare program.

Rate-setting under New Model

Following the execution of the Agreement, a majority of regulated Maryland hospitals and health systems entered into rate-setting agreements with the Rate Commission under which the hospitals’ total revenue for services regulated by the Rate Commission is capped at a pre- determined amount (the “Global Budget Revenue” or “GBR”). Each hospital is required to adjust its rates from time to time so as not to exceed its GBR. If a hospital’s volume declines, it may

- 29 - increase its rates by up to five percent to maintain its revenues at the specified GBR level. Rates may be increased by up to 10 percent to offset volume declines with the approval of Rate Commission staff.

Each hospital’s Global Budget Revenue is updated annually with positive or negative adjustments for inflation, population changes and changes in market share. A hospital’s GBR may also be increased or decreased based on the hospital’s performance (or in the case of a health system, the health system’s performance) under the Maryland Readmission Reduction Program, the Maryland Hospital–Acquired Conditions Program and other measurements adopted by the Rate Commission to measure hospital quality. The Rate Commission may also adjust a hospital’s GBR to provide funding for specific projects or objectives, such as population health management and infrastructure development. In addition, the Rate Commission may adjust hospitals’ GBRs based on the State’s performance on the metrics reflected in the Agreement with CMS, and in particular to avoid the occurrence of a Triggering Event.

Early Performance under the Model

The HSCRC monitors the State’s progress on the key terms of the Model on an ongoing basis. The results reported through calendar 2016 have exceeded the terms required under the Agreement in most, but not all, respects.

(1) To date, Maryland has met the target under the Model limiting the annual growth in all- payor hospital per capita revenue for Maryland residents to 3.58%, having achieved a growth rate of 1.47% between calendar years 2013 and 2014, 2.31% between calendar years 2014 and 2015 and 0.29% between calendar years 2015 and 2016. See “All-Payor Total Inpatient and Outpatient Hospital Cost Growth Per Capita” above.

(2) The most recent finalized CMS data showed that comparing Maryland Medicare per beneficiary growth to national per beneficiary growth, the Model saved Medicare $116 million in calendar 2014, $135 million in calendar 2015 and $287 million in calendar 2016 toward the savings target described above under “Medicare per Beneficiary Total Hospital Cost Growth.”

(3) Maryland has shifted 100% of the revenues of regulated hospitals (all nonpublic acute care hospitals in Maryland) to global budget structures, exceeding the requirement of the Model described above under “Population-Based Revenue.”

(4) While the readmission rate in Maryland has decreased over the last several years, Maryland’s readmission rate for Medicare beneficiaries remains higher than the national average. The gap between the State average and the national average decreased by 0.91% between calendar years 2013 and 2016. See “Maryland Readmission Reduction Program” above.

(5) To date, Maryland has exceeded the Model’s target of reducing hospital-acquired conditions by 30% by 2018, having reduced all-payor case-mix adjusted potentially preventable complications by 43.33% between calendar years 2013 and 2016. See “Maryland Hospital Acquired Conditions Program” above.

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Rates at Maryland Hospitals

The rate structure for Maryland Hospitals within the System for all hospital-based services is subject to review and approval by the Rate Commission. Under the Rate Commission’s rate-setting system, such Maryland Hospitals’ inpatient and outpatient charges are the same for all patients regardless of payor, including Medicare and Medicaid.

As noted above, to implement the Agreement with CMS, the Rate Commission has introduced new revenue arrangements, including the GBR model. The Corporation has entered into a GBR arrangement covering all of the Maryland Hospitals.

District of Columbia Hospital Rates

In contrast to the State of Maryland, the District of Columbia does not regulate the rates charged by hospitals. The District of Columbia does not impose a single payor rate structure; instead, hospitals are free to set their own rates for services. However, the ability to recover those rates is subject to, among other things, contracts with third-party payors, such as Medicare, Medicaid, private health plans and managed care plans.

As noted above and explained further under “Certain Bondholders’ Risks” below, one of the goals of the Affordable Care Act was to promote a transition from a fee-for-service, procedure- based reimbursement model towards a pay for performance, quality outcomes-based reimbursement model. Public and private third-party payors are incorporating pay for performance programs into their contracts with hospitals. In the District of Columbia, these programs may provide for incentive payments for quality performance and some portion of rate-based revenues may be put at risk and subject to performance metrics established by the health care plans.

Maryland Hospital Bond Program

In 1985, the Maryland General Assembly (the “General Assembly”) enacted comprehensive health care legislation for the purpose of encouraging the reduction of excess capacity in the Maryland health care system. Pursuant to this legislation, the Maryland Hospital Bond Program (the “Bond Indemnification Program” or the “Program”) was created to preserve the access of Maryland health care facilities to adequate financing by establishing a program to facilitate the refinancing and payment of certain public obligations of a closed or delicensed hospital. The terms of the Program are set forth in Part IV of the Act, consisting of Sections 10-340 through 10-353 of the Economic Development Article of the Annotated Code of Maryland.

As defined in the Act, “public obligations” include all bonds, notes or other obligations for the payment of borrowed money issued by the Authority, the State of Maryland, any political subdivision thereof or any of their instrumentalities, except any obligation or portion of an obligation (a) insured by an effective municipal bond insurance policy, if a hospital voluntarily closes, or (b) issued to finance a facility that is used primarily (i) to provide outpatient services at a location other than the hospital, or (ii) by physicians who are not employees of the hospital to provide services to nonhospital patients. All of the Bonds constitute public obligations under the provisions of the Act as currently in effect.

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The Act provides that the Bond Indemnification Program shall provide for the payment and refinancing of public obligations of a hospital if:

(1) the hospital is (a) closed in accordance with Section 19-120(l) of the Health- General Article of the Annotated Code of Maryland, as amended, or (b) delicensed in accordance with Section 19-325 of the Health-General Article of the Annotated Code of Maryland, as amended, upon the petition of the Health Care Commission and the Rate Commission after efforts to encourage the hospital to reduce its excess capacity have failed;

(2) a public obligation issued on behalf of the hospital is outstanding;

(3) the hospital plan for closure or delicensure and the related financing plan is acceptable to the Secretary of the State Health Department and the Authority; and

(4) in the case of the Bonds and any other public obligations issued after October 1, 2008 (a) the Rate Commission determines that implementation of the Program is in the public interest, taking into account the amount of system-wide savings to the health care system in Maryland that might be expected as a result of the closure, and (b) the hospital provides to the Health Care Commission a closure plan including the hospital’s plan for the provision of care to its patients and the population in its service area.

The Bond Indemnification Program may also be used to provide for the payment of certain closure costs of a closed or delicensed hospital if the Rate Commission determines, after consideration of the system-wide savings to the State of Maryland health care system expected to result from the closure or delicensure of the hospital, that the payment of such costs is necessary or appropriate to encourage and assist the hospital to close or to implement the Program.

The Act authorizes the Authority to issue bonds or notes to refund any eligible public obligations and to pay closure costs approved by the Rate Commission in accordance with the Act.

Under the Program, the Rate Commission must assess a fee on all Maryland hospitals whose rates have been approved by the Rate Commission in an amount sufficient to pay any eligible public obligations or any bonds that the Authority issues to refund such public obligations and to pay any eligible closure costs. The fee assessed each hospital is proportionate to that hospital’s gross patient revenues compared with the total gross patient revenues of all Maryland hospitals. In the event that the Rate Commission is terminated by law, the Secretary of the State Health Department shall impose the fee.

The Bond Indemnification Program has been implemented three times to provide for the payment of approximately $25,480,000 aggregate principal amount of public obligations of Maryland hospitals closed in accordance with the Program. In connection with the 1991 closure of a hospital, at the request of the health system of which the closed hospital was a part, and in accordance with the Act, the Authority developed a plan to provide for the payment of the obligations which included the assessment by the Rate Commission of fees on Maryland hospitals sufficient to redeem the obligations on various optional redemption dates occurring prior to their maturity. All of the outstanding obligations were paid with these fees and liquidation proceeds from the sale of the assets of the closed hospital.

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In 1992 and 1999, the Authority developed plans to provide for the payment of two issues of public obligations issued on behalf of member hospitals of two health systems in accordance with the Bond Indemnification Program. In each case, the Authority issued its revenue bonds to retire the public obligations on their earliest optional redemption dates, and these bonds were in turn paid from fees assessed Maryland hospitals under the Bond Indemnification Program and, in the case of the 1992 bonds, proceeds of the liquidation of the hospital’s assets. The 1992 bonds and the 1999 bonds have been paid in full.

The Bond Indemnification Program does not provide for the payment of any hospital obligations unless the hospital closes or is delicensed as described above. Accordingly, default in the payment of bonds or other default, including the initiation of bankruptcy proceedings by or against a hospital, would not, in and of itself, require or permit the implementation of the Program. Further, there can be no assurance that the Program will not be modified or eliminated by future legislation amending or repealing the Act. The initiation of bankruptcy or similar proceedings by or against a closed or delicensed hospital could preclude or substantially delay the implementation of the Program with regard to the public obligations of such hospital.

Nonprofit Health Care Environment

As nonprofit tax-exempt organizations, the Corporation and the System Affiliates are subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for charitable purposes. At the same time, the Corporation and the System Affiliates conduct significant business transactions. As a result, the Corporation and the System Affiliates must ensure consistency between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of complex health care organizations.

The operations and practices of nonprofit, tax-exempt hospitals are routinely challenged for inconsistent or inadequate compliance with the regulatory requirements for, and societal expectations of, nonprofit charitable tax-exempt organizations. An overarching concern is that nonprofit hospitals may not be providing community benefits that equal or exceed the benefit received from their tax-exempt status. In addition to required compliance with federal and state statutes and regulations, such as those related to the Medicare and Medicaid programs, the core business practices of health care organizations are routinely examined. Areas which have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation and private use of facilities financed with tax-exempt obligations. Questions regarding the business practices of nonprofit hospitals have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the “Internal Revenue Service” or “IRS”), labor unions, the United States Congress, state legislatures, the press and patients, and in a variety of forums, including hearings, audits and litigation.

In 2004, the IRS began a compliance program to measure compliance by tax-exempt organizations with prohibitions on excessive compensation of and benefits to officers and other insiders. In 2009, the IRS issued its Hospital Compliance Project Final Report, which indicated that the IRS will continue to heavily scrutinize executive compensation arrangements, practices and procedures of tax-exempt hospitals and other tax-exempt organizations and, in certain circumstances, may conduct further investigations or impose fines on such organizations.

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In 2010, the IRS revised the Form 990 return required to be filed annually by tax-exempt organizations to include a new schedule, Schedule H, which hospitals must use to report their community benefit activities, including the cost of providing charitable care and other information pertinent to their tax-exempt status.

The IRS initiative to ensure that an organization’s tax exempt status is used for charitable purposes and not for any private benefit includes a schedule to the Form 990, Schedule K, which is intended to address what the IRS believes is significant noncompliance with recordkeeping and record retention requirements. Schedule K also requires tax-exempt organizations to report on the investment and use of bond proceeds to address IRS concerns regarding compliance with arbitrage rebate requirements and the private use of bond-financed facilities.

The Affordable Care Act expanded these initiatives and imposed additional requirements for tax-exemption and reporting obligations, including obligations to adopt and publicize a financial assistance and emergency medical care policies; limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients; and control billing and collection processes. See “Certain Bondholders’ Risks -- Health Care Reform.” Additionally, tax-exempt hospitals must conduct community health needs assessments and adopt an implementation strategy to meet the health needs identified in the assessment at least once every three years. Failure to satisfy these conditions may result in the imposition of excise taxes and the loss of tax-exempt status.

The foregoing are some examples of certain challenges facing nonprofit health care organizations. These challenges, and any resulting examinations, legislation, regulations, judgments or penalties, could have a material adverse effect on the Corporation or any System Affiliate and, in turn, its ability to make payments under the Loan Agreement, Guaranty Agreement and the 2017A Obligation.

CERTAIN BONDHOLDERS’ RISKS

Payment of the Bonds is dependent primarily upon the ability of the Corporation and the System Affiliates to generate revenues sufficient to provide for the payment of the Bonds while meeting their operating expenses, debt service on other indebtedness and other cash requirements. Future revenues and expenses of the Corporation and the System Affiliates are subject to future events and conditions that cannot be determined at this time.

The paragraphs below discuss certain Bondholders’ risks, but are not intended to be a complete statement of all risks associated with the purchase or holding of the Bonds. The order in which such risks are presented does not necessarily reflect the relative importance of such risks or the likelihood that any of the events or circumstances described below will occur or exist.

General

No representation can be made or assurance given that revenues will be realized by the Corporation or any future Members of the Obligated Group, the Guarantors and other System Affiliates in amounts sufficient to make the payments necessary to meet their obligations. Future

- 34 - revenues and expenses of the System are subject to, among other things, the capabilities of the management of the Corporation and the System Affiliates and future economic conditions and other conditions which are unpredictable, and which may affect the revenues of the System Affiliates and, therefore, payments of principal of and interest on the Bonds, as well as other obligations of the Corporation and the System Affiliates.

Future economic and other conditions that may adversely affect the future financial condition of the Corporation and the System Affiliates and, consequently, their ability to make payments of the principal of and premium, if any, and interest on the Bonds, include (without limitation) decreases in the demand for health care services, technological developments and demographic changes, loss of confidence of physicians and patients in the System Affiliates, malpractice claims and other litigation, competition, changes in regulations and procedures of the Rate Commission or other governmental bodies exercising jurisdiction over the System Affiliates, changes in the methods and rates of payment for health care services, increases in costs and failure to obtain gifts and contributions from donors. There can be no assurance given that the financial condition of the Corporation and the System Affiliates and utilization of the facilities of the System Affiliates will not be adversely affected by future events.

Obligated Group

The Master Indenture provides that other entities may be admitted to the Obligated Group from time to time and that Obligated Group Members may withdraw from the Obligated Group upon the satisfaction of certain conditions. See “Summary of Certain Provisions of the Master Indenture -- Entrance into the Obligated Group” and “-- Cessation of Status as a Member of the Obligated Group” in Appendix C. Thus, there is no assurance that any person other than the Corporation that is or may become an Obligated Group Member will remain a part of the Obligated Group.

Guarantors

The Guaranty Agreement provides that any Guarantor may be released from the provisions of the Guaranty Agreement by complying with the provisions of the Master Indenture relating to the withdrawal of Members from the Obligated Group, and new Guarantors may be added to the Guaranty Agreement by complying with the provisions of the Master Indenture relating to entry of Members into the Obligated Group. See “Summary of Certain Provisions of the Guaranty Agreement” in Appendix C.

Discretion of Board and Management

The Corporation, any future Members and the System Affiliates, including the Guarantors, may enter into transactions that could materially affect the business, organizational structure and control of the Corporation, such future Members, such Guarantors and the System Affiliates, subject to certain limitations contained in the Master Indenture and the Guaranty Agreement. Such transactions could include, for example, divestitures of Guarantors or other System Affiliates, substantial new joint ventures, and mergers, consolidations or other forms of affiliations in which control of the Corporation, any future Member, any Guarantor and any other System Affiliate could be materially changed. Given the pace of change in the health care industry, it is likely that the Corporation will be presented with opportunities to enter into transactions of such magnitude or

- 35 - significance. The ability of the Guarantors to perform under the Guaranty Agreement and the ability of the Corporation, any future Members and the System Affiliates to generate revenues sufficient to pay debt service on the 2017A Obligation is dependent in large measure on the decisions of the Corporation’s Board and management with respect to such opportunities.

General Economic Conditions, Bad Debt and Investment Performance

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), enacted in response to the 2007-08 disruptions in the credit and financial markets, has had a broad impact on the U.S. financial and credit markets, including significant regulatory and compliance changes. In addition, many of the requirements called for in the Dodd- Frank Act have yet to be implemented and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the remaining provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on the System is unclear.

The health care sector has been materially adversely affected by these developments. The consequences of these developments have included, among others, realized and unrealized investment portfolio losses, reduced investment income, limitations on access to the credit markets, difficulties in extending existing or obtaining new liquidity facilities, difficulties in remarketing revenue bonds subject to tender, expenditure of internal liquidity to fund tenders of revenue bonds, expenditure of funds to restructure debt capital and increased borrowing costs.

Some of the challenges that were caused by the market turmoil are further highlighted below. The reader is advised to refer to Appendix A of this Official Statement for specific information about the effects of these factors upon the recent financial performance and financial condition of the Corporation and the System Affiliates, and upon their investment and debt portfolios. In particular, reference is made to information in Appendix A under the caption heading “Management’s Discussion and Analysis of Operations and Financial Condition.”

Impact of Investment Performance. The System has significant holdings in a broad range of investments. Investment income (including both realized and unrealized gains on investments) may contribute significantly to the Corporation’s financial results. Market fluctuations have affected and will likely continue to affect materially the value of those investments and those fluctuations may be and historically have been material. The state of the economy and market disruptions may exacerbate the market fluctuations. Reduction in investment income and the market value of its investments may have a negative impact on the financial condition of the Corporation and the System Affiliates, including their ability to fund capital expenses from cash and investments. See Appendix A for a more detailed description of the System’s investment policy and the System’s investment performance for the fiscal years ended June 30, 2016 and 2015. In addition, the historically low interest rate environment has caused many organizations to reduce the discount rate used to measure liabilities under defined benefit pension plans, resulting in increased liabilities and the need to increase funding levels under these plans. See Appendix B, note 7 for a more detailed description of the System’s retirement plans.

Access to Credit Markets. Adverse conditions in the credit markets may limit the ability of the Corporation to borrow to fund capital expenditures and increase borrowing costs and may

- 36 - result in the postponement or revision of planned and approved capital projects, which may be integral to the financial condition and operations of the Corporation and the System Affiliates.

Inability of Liquidity Providers to Purchase Variable Rate Bonds. Broad economic factors, including the effects of the recent years’ recession, have negatively impacted the operations of financial institutions and likely will continue to do so, including those that provide liquidity support for the Corporation’s variable rate bonds. In addition, the effect of certain federal regulatory changes that have been enacted, including the creation of new federal agencies to identify and respond to risks to the financial stability of the United States, have adversely affected financial institutions and may continue to do so. As a result, no assurance can be given that liquidity facility providers will provide funds to purchase tendered variable rate bonds or honor draws on the liquidity facilities to fund such purchases.

Difficulty Obtaining New Liquidity Facilities or Extensions to Existing Liquidity Facilities. Credit market disruption has caused a number of financial institutions to restrict lending, including the extension of liquidity and credit facilities supporting tax-exempt bonds. No assurance can be given that the Corporation’s existing liquidity facility providers will renew existing liquidity facilities or renew them on terms that the Corporation considers cost-effective, or that the Corporation will be able to obtain alternate liquidity facilities for its variable rate bonds or convert such bonds to a mode for which liquidity facilities are not required.

Federal Debt Limit. The federal government has, through legislation, created a debt “ceiling” or limit on the amount of debt that may be issued by the United States Treasury. In the past several years, political disputes have arisen within the federal government in connection with discussions concerning the authorization for an increase in the federal debt ceiling that have threatened to shut down substantial portions of the federal government. Any failure by Congress to increase the federal debt limit may impact the federal government’s ability to incur additional debt, pay its existing debt instruments and to satisfy its obligations relating to the Medicare and Medicaid programs. Management of the Corporation is unable to determine at this time what impact any future failure to increase the federal debt limit may have on the operations and financial condition of the System, although such impact may be material. Additionally, the market price or marketability of the Bonds in the secondary market may be materially adversely impacted by any failure to increase the federal debt limit.

Federal Budget Cuts. The Budget Control Act of 2011 (the “Budget Control Act”) mandated significant reductions and spending caps on the federal budget for fiscal years 2012 through 2021. The Budget Control Act also created a Joint Select Committee on Deficit Reduction (the “Super Committee”) to develop a plan to further reduce the federal deficit by $1.5 trillion on or before November 23, 2011. As the Super Committee failed to act before the mandated deadline, a 2% reduction in Medicare spending, among other reductions, was to take effect beginning January 1, 2013 in a process known as sequestration.

On January 2, 2013, President Obama signed into law the American Taxpayers Relief Act, which delayed sequestration until April 1, 2013 for Medicare providers and March 1, 2013 for all other reductions. In December 2013, the Bipartisan Budget Act of 2013 was enacted, which extended through federal fiscal year 2023 the 2% reduction in Medicare spending. The Bipartisan Budget Act of 2013 also included restructuring of Medicaid disproportionate share payments (“DSH payments”) reductions by delaying the fiscal year 2014 DSH payment cuts until fiscal year

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2016, but increasing the overall level of reductions and extending cuts through fiscal year 2023. On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014 which further extended numerous Medicare reimbursement provisions, including extending the delay in Medicaid DSH payments reductions by one year and making additional reductions through 2024, preventing the Medicare reimbursement cuts scheduled for physicians treating Medicare patients that were to be effective as of April 1, 2014, replacing the proposed cuts with a 0.5% increase through December 31, 2014 and a 0% increase from January 1 until April 1, 2015.

On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the “Bipartisan Budget Act”), increasing the discretionary spending caps imposed by the Budget Control Act for federal fiscal years 2016 and 2017 and authorizing $80 billion in increased spending over the two years. The Bipartisan Budget Act also extended the 2% reduction to Medicare providers and insurers for another year, to at least March 31, 2025.

It is possible that Congress will take action to eliminate some or all of the reductions in the future and any Congressional action could be made retroactive in order to eliminate some or all of the cuts. However, there is no certainty that Congress will take any action. Absent further Congressional action, these automatic spending cuts will become permanent. Because Congress may make changes to the budget in the future, it is impossible to predict the impact any spending cuts may have upon the Corporation and the System Affiliates. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. Reductions in Medicare or Medicaid spending and any alternatives may have a material adverse effect upon the financial condition of the Corporation and the System Affiliates.

The Cures Act

The 21st Century Cures Act (the “Cures Act”) is intended to create broadened patient access to care, involving patients in new research, and leveraging technology to create efficiencies. The Cures Act will support efforts to improve telehealth services in Medicare and is intended to improve the process for determining which Medicare treatments are covered, potentially leading to increased access to treatments for Medicare beneficiaries. In addition to numerous provisions related to research and clinical trials, the Cures Act includes a number of changes to the Medicare program, some of which are described herein. Certain other Cures Act provisions are summarized other places in this section on Bondholders’ Risks.

Affordable Care Act and Certain Recent Federal and Regulatory Initiatives

The discussion in this section and otherwise in this Official Statement describes risks associated with certain existing federal and state laws, regulations, rules, and governmental administrative policies and determinations to which the Corporation and the System Affiliates and the healthcare industry are subject. While these are regularly subject to change, many of the existing provisions were enacted by or promulgated pursuant to the Affordable Care Act, to which opposition has been expressed by President Trump and the Secretary of HHS, as well as the majority leaders of each chamber of Congress and members of their caucuses. As discussed further below, in May 2017, the U.S. House of Representatives adopted legislation to replace the Affordable Care Act.

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In 2010, the United States Congress enacted the Affordable Care Act. The comprehensive health care reform mandated by the Affordable Care Act was intended to expand the availability of health insurance coverage, control the costs of health care and improve the manner in which health care is delivered. The Affordable Care Act requires all individuals, with certain exceptions, to purchase health insurance or pay a fee; substantially expands Medicaid coverage; provides premium subsidies to certain individuals; imposes certain taxes on individuals and employers; creates insurance pooling mechanisms or state run health insurance exchanges; imposes new requirements on the insurance industry regarding access and coverage; provides for certain cost containment mechanisms and new models of care delivery; and includes provisions designed to reduce Medicare spending and improve the quality of outcomes and health system performance.

Funding cutbacks in Medicare are to be achieved by, among other means, reducing Medicare and Medicaid Disproportionate Share Hospital (DSH) payments and annual market basket updates (used to adjust Medicare payments for inflation) for inpatient hospitals and other Medicare providers. DSH payments cover the increased costs of hospitals that provide a disproportionate amount of care to uninsured patients and low income patients covered by Medicaid. Although these provisions will not directly impact Maryland hospitals as long as the Waiver Model remains in effect, reductions in Medicare payments nationally will limit the amount of revenue that will be made available to Maryland hospitals by the Rate Commission. A number of System Affiliates are located in the District of Columbia and therefore are not covered by the Maryland rate-setting system. See “Regulatory Environment -- Maryland Health Services Cost Review Commission” above.

The Affordable Care Act also establishes a Medicare shared savings program that promotes accountability for the care of Medicare beneficiaries and encourages coordination of care and other efficiencies through entities called Accountable Care Organizations (“ACOs”). See “Alliances and Affiliations with Physicians, Hospitals and Other Healthcare Providers” below.

The Affordable Care Act extends existing pay for performance initiatives for hospitals and creates a value-based purchasing program (VBP) for hospitals that are paid under Medicare’s inpatient prospective payment system (“PPS”). Under the VBP program, incentive payments are available to hospitals that achieve certain quality performance measures during performance periods. Hospitals that fail to report certain quality measures or satisfy the performance standards are subject to a decrease in their Medicare payments. Funding for the VBP program comes from withholding a percentage of annual reimbursement payments to hospitals. In federal fiscal year 2016, the withholding was 1.75% of certain Medicare inpatient payments; in federal fiscal year 2017, the withholding increased to 2.00%. CMS published a final rule addressing standards through federal fiscal year 2019 in August, 2013 and continues to implement the VBP with annual updates to the performance standards and measures. As noted above, under the new Waiver Model, Maryland has a waiver from the VBP contingent on the State’s submission of a report that provides evidence of a similar state program each year and therefore the exemption is not guaranteed to continue. It is unclear what effect the VBP program will have on the revenues of System Affiliates in Washington, D.C.

The ultimate impact of the Affordable Care Act on Maryland’s rate-setting system in general and on the Corporation and its System Affiliates in particular cannot be predicted at this time, and the uncertainty is likely to continue while implementing regulations are finalized and the provisions of the Affordable Care Act are fully implemented. Possible impacts on the System include, without

- 39 - limitation, significant regulatory changes that increase the cost of operations; increased activity by government agencies regarding fraud, waste and abuse; decreased reimbursements for hospital services from third party payors, including Medicare and Medicaid; significant changes to current payment methodologies for hospital services; and changes to costs of providing health insurance coverage to hospital employees. Although many of the reimbursement changes are not expected to directly affect Maryland hospitals, many of the changes will likely impact the Waiver Model, and it is likely that revenue increases approved by the Rate Commission for Maryland hospitals will be constrained as regulators attempt to assure that Medicare spending in Maryland does not grow faster than Medicare spending nationally and generally to assure compliance with the terms of the Waiver Model. See “Regulatory Environment -- Maryland Health Services Cost Review Commission.” Expansion of Medicaid coverage may result in a significant shift in the payor mix of the System. Increased insurance coverage and a reduction in the number of uninsured patients could result in increased demand for the services of the System, straining the existing operating capacity of the facilities of the System, and is likely to create a need to recruit or employ additional physicians and other health services providers to meet increased demand.

The Affordable Care Act also establishes new requirements for any organization that operates at least one hospital facility to qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986. New Section 501(r) of the Code imposes the following new requirements on, among others, hospitals: (i) hospitals are required to conduct a community needs assessment at least every three years and adopt an implementation strategy to meet the community needs identified through such assessment; (ii) hospitals must adopt, implement and publicize a written financial assistance policy and an emergency medical care policy; (iii) hospitals must limit charges to individuals who qualify for financial assistance under the hospitals’ financial assistance policies to no more than the amounts generally billed to individuals who have insurance covering such care and refrain from using “gross charges” when billing such individuals; and (iv) hospitals may not undertake extraordinary collection actions (even if otherwise permitted by law) against individuals without first making reasonable efforts to determine whether the individuals are eligible for assistance under the hospitals’ financial assistance policies. Failure to complete a community health needs assessment in any applicable three-year period can result in a financial penalty or revocation of the hospital’s status as a Section 501(c)(3) organization.

The Affordable Care Act requires the Secretary of the Treasury, in consultation with the Secretary of the Department of Health and Human Services (“HHS”), to submit annually a report to Congress with information regarding the levels of charity care, bad debt expenses and unreimbursed costs of government programs, as well as costs incurred by tax-exempt hospitals for community benefit activities. This statutory requirement is expected to increase IRS surveillance over such organizations and may increase the likelihood of IRS examinations challenging the Section 501(c)(3) status of hospitals, as well as the likelihood that Congress will consider additional requirements for Section 501(c)(3) hospitals in the future.

The Affordable Care Act requires states to either establish and operate a health insurance exchange or participate in a multi-state or federal exchange. Maryland established its own health insurance exchange. Maryland has also elected to pursue Medicaid expansion up to 133% of the federal poverty levels based on modified adjusted gross income. The increased Medicaid enrollment could affect State of Maryland budget allocations for Medicaid services and payment rates to health care providers. The District of Columbia also established a state-based exchange,

- 40 - known as DC HealthLinks and, pursuant to a Section 1115 Waiver, expanded Medicaid eligibility for single adults up to 200% of federal poverty levels.

At this time, it is not possible to project what effect the exchanges will have on competition in the insurance markets, the cost of coverage for employers, reimbursement rates for hospitals and physicians or the number of uninsured patients that the System Affiliates will still need to treat. Several large health insurers have pulled some of their products out of certain exchanges, citing larger than expected losses on those insurance products. In addition, many of the health insurance cooperatives that were operational at the start of the Affordable Care Act’s first open enrollment period in the fall of 2013 are no longer operational. The co-op failures are also due to sicker and costlier patients as well as benefits that were too generous and premiums that were too low. HHS issued new regulations in May 2016 to help the remaining co-ops maintain financial viability. CMS proposed additional new regulations on February 17, 2017 to attract health insurance issuers back to the exchanges and stabilize the individual and small group markets. However, it is unclear whether the new regulations will be finalized or if they will provide the financial stability needed.

Some of the provisions of the Affordable Care Act took effect immediately, while others will take effect or will be phased in over a time period extending as many as 10 years following the date of its enactment. Implementation of the Affordable Care Act also requires the promulgation of regulations likely to have significant effects on the health care industry and third-party payors. In response, third-party payors and suppliers and vendors of goods and services to health care providers are expected to impose new and additional contractual terms and conditions.

While the key provisions of the Affordable Care Act have thus far been upheld by the courts, other parties may bring lawsuits challenging aspects of the Affordable Care Act in the future.

In May 2017, the U.S. House of Representatives adopted legislation to replace the Affordable Care Act. The legislation featured provisions that would, in material part (i) eliminate the individual and large employer mandates to obtain or provide health insurance coverage, respectively; (ii) permit insurers to impose a surcharge up to 30 percent on individuals who go uninsured for more than two months and then purchase coverage; (iii) provide tax credits towards the purchase of health insurance, with a phase-out of tax credits according to income level; (iv) expand health savings accounts; (v) impose a per capita cap on federal funding to state Medicaid programs, or, if elected by a state, transition federal funding to a block grant; and (vi) permit states to seek a waiver of certain federal requirements that would allow such states to define essential health benefits differently from federal standards and that would allow certain commercial health plans to take health status, including pre-existing conditions, into account in setting premiums. The legislation has proceeded to the U.S. Senate and, if the provisions of the proposed legislation are ultimately implemented along with other proposed amendments to the Affordable Care Act, there can be no assurance that any such legislation will not materially adversely affect the System, which material effects may include a potential decrease in the market for health care services or a decrease in the System’s ability to receive reimbursement for health care services provided.

Management cannot predict the long-term effects of the Affordable Care Act or any legislation that may be enacted to amend or replace the Affordable Care Act on the System with any degree of certainty.

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Federal and State Reimbursement Regulation

The System Affiliates are subject to regulatory actions by a number of governmental and private agencies, including those that administer the Medicare and Medicaid programs, the Rate Commission, The Joint Commission (a private nonprofit corporation that accredits health care programs and providers in the United States), other private agencies and federal, state and local agencies. These bodies may promulgate new regulatory provisions from time to time, and it is not possible to predict the effect of any such future promulgations on the System Affiliates. Additionally, actions by the federal government with respect to Medicare and by the federal and state governments with respect to Medicaid that have the effect of reducing the total amount of funds available for either or both of these programs or changing the reimbursement regulations or their interpretation could adversely affect the amount of reimbursement available to the System Affiliates.

The federal government, the largest health care purchaser in the country, uses reimbursement as a key tool to implement health care policies, to allocate health care resources and to control utilization and promote the use and development of health technology. The amount of reimbursement available to the System Affiliates could be adversely affected by various federal cost containment programs designed to reduce federal payments to health care facilities by limiting the amount of reimbursement for health care costs. In particular, for inpatient services, Medicare pays hospitals fixed amounts for specific services based upon patient diagnosis. With certain exceptions, such payments will not be adjusted for actual costs, varying services or length of stay. Maryland currently has a waiver from this federal prospective payment system and, therefore, at present, the System Hospitals located in Maryland are paid for most services in accordance with the Rate Commission’s rate-setting system. See “Regulatory Environment -- Maryland Health Services Cost Review Commission.” However, there can be no assurance that Maryland’s exemption from the federal prospective payment system will be maintained.

The Rate Commission’s Global Budget Revenue program includes incentives for hospitals to control unnecessary utilization and improve population health. Because hospital annual patient service revenue under the Global Budget Revenue program is capped, the program puts hospitals at risk for managing utilization and costs and shifts incentives to focus on appropriate volume and patient health status. Moreover, to constrain cost growth over time, the Rate Commission may reduce hospital revenue budgets in line with volume declines and increase true population health risk incentives to hospitals. Hospitals that are unable to control utilization, reduce inappropriate volume or reduce costs as volumes decline may perform poorly under the Global Budget Revenue program. Future actions by the Rate Commission, changes in Rate Commission regulations, rate approval guidelines, structure or operations or the termination of the Waiver Model may adversely affect the operations of the System’s Maryland Hospitals. See “Regulatory Environment -- Maryland Health Services Cost Review Commission” above. There can be no assurance that the Rate Commission will approve rates in the future sufficient to ensure payment of the outstanding Bonds.

A portion of the System Affiliates’ revenues comes from nonhospital services that are not regulated by the Rate Commission, including the services of physicians and other licensed providers who participate in Medicare. For certain professional services provided to Medicare beneficiaries by its employees, System Affiliates bill under Part B of Medicare, which pays for the professional services of physicians and certain other licensed providers. Under Part B, these services are

- 42 - reimbursed in an amount equal to the lesser of actual charges or the amount determined under a fee schedule known as the “resource-based relative value scale” or “RBRVS.” The RBRVS sets a relative value for each service and that value is then multiplied by a geographic adjustment factor and a nationally-uniform conversion factor to determine the amount Medicare will pay for each service. The relative values for professional services contained in the RBRVS are based on a work component intended to reflect the time and intensity of effort required to provide the service, a practice expense component which includes costs such as office rents, allied health support salaries, equipment and supplies and a component for the cost of malpractice insurance.

There can be no assurance that the current rate-setting system will continue in effect or that the Rate Commission will continue to utilize the current methodology by which it determines rate adjustments or approves rates in the future sufficient to ensure payment by the System’s Maryland Hospitals of any amount payable under the Guaranty Agreement. Future action by the Rate Commission, changes in the Rate Commission regulations, rate approval guidelines, structure or operations, or the loss of the Medicare Waiver may adversely affect the operations of the System’s Maryland Hospitals.

The Medicare Physician Fee Schedule (“MPFS”) covers payments for more than 7,000 types of services. The MPFS is adjusted regularly by CMS. Changes to the MPFS and other regulatory changes affecting reimbursement for physicians and other licensed providers may result in decreased revenue or, if bills are not submitted correctly, in false claims liability for the System Affiliates.

On January 26, 2015, HHS announced a timetable for transitioning Medicare payments from the traditional fee-for-service model to a value-based payment system. This schedule calls for tying 30% of traditional Medicare fee-for-service payments to quality or value through alternative payment models, such as ACOs or bundled payment arrangements, by the end of 2016, increasing to 50% by 2018. In addition, HHS proposed that by 2016, 85% of all traditional Medicare fee-for service payments have a component based on quality or value, increasing to 90% by 2018. HHS announced in March 2016 that it had already met its 30% alternative payment arrangements goal. This transition of Medicare payment from volume to quality and value will place increasing risk on providers and could have a negative effect upon the economic performance of the Corporation and its System Affiliates. The outcomes of these projects and programs, including the likelihood of being made permanent or expanded or their effect on health care organizations’ revenues or financial performance, cannot be predicted.

The Affordable Care Act established a voluntary Medicare bundled payment pilot program, under which Medicare will make a single payment for an episode of care, such as heart bypass surgery, covering some combination of hospital, physician and post hospital care for the episode. CMS has also implemented a mandatory bundled payment demonstration for certain joint replacement procedures in selected urban areas. CMS issued a finalized rule on December 20, 2016 for additional clinical conditions. Private insurers are also developing bundled payment programs. While bundled payments offer opportunities to provide better coordinated care and to save costs, they also entail financial risk if the episode is not well managed.

Future actions by the federal government with respect to Medicare and by the federal and state governments with respect to Medicaid, reducing the total amount of funds available for either or both of these programs or changing the reimbursement regulations or their interpretation, could

- 43 - adversely affect the amount of reimbursement available to the System Affiliates. Revision and expansion of effective regulations or the proposal of additional regulations may affect hospitals and other health care facilities and providers which seek payment under the Medicare and Medicaid programs. See “Medicare and Medicaid Programs” below. Furthermore, loss of accreditation by The Joint Commission could result in loss of Medicare and Medicaid reimbursement. See “Acute Care Facilities -- Licenses and Accreditations” in Appendix A as to the current status of accreditations of the System Hospitals.

Future federal or state legislation or regulations and their impact upon the Members and the System Affiliates cannot be determined at this time. No assurance can be given that any future health care legislation that is enacted will not materially adversely affect the Members or the System Affiliates.

Medicare and Medicaid Programs

As described above, the District of Columbia hospitals are subject to the Medicare and Medicaid payment systems. Medicare and Medicaid are the commonly used names for reimbursement or payment programs governed by certain provisions of the federal Social Security Act. Medicare is an exclusively federal program, and Medicaid is a combined federal and state program. Medicare provides certain health care benefits to beneficiaries who are 65 years of age or older, blind, disabled or qualify for the End Stage Renal Disease Program. Medicare Part A covers inpatient hospital services, some skilled nursing care and some home health care, and Medicare Part B covers physician services and some supplies. Medicaid is designed to pay providers for care given to the medically indigent and others who receive federal aid. Medicaid is funded by federal and state appropriations and administered by the various states.

Medicare

Medicare is a federal governmental health insurance system under which physicians, hospitals and other health care providers are reimbursed or paid directly for services provided to eligible elderly and disabled persons and persons with end-stage renal disease. Medicare is administered by CMS within the federal Department of Health and Human Services. In order to achieve and maintain Medicare certification, a health care provider must meet CMS’s “Conditions of Participation” on an ongoing basis, as determined by the state in which the provider is located and The Joint Commission or the Healthcare Facilities Accreditation Program. The federal government frequently revises the laws, regulations and policies governing Medicare eligibility, coverage, payment and participation under the Medicare program. The Affordable Care Act institutes multiple mechanisms for reducing the costs of the Medicare program. The demonstration and pilot projects authorized and funded by the Affordable Care Act are also likely to precipitate other significant modifications in the future to the Medicare payment system. Management cannot project the extent of these modifications, or what impact such modifications may have on the financial operations of the System. See “Affordable Care Act” above. Also, at this time, it is not known whether future changes to such laws, regulations or policies will have a material adverse financial effect on the System.

The District of Columbia System Hospitals depend significantly on Medicare as a source of revenue. Because of this dependence, changes in the Medicare program may have a material effect on the System. Future reductions in Medicare reimbursement, or the failure of increases in

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Medicare reimbursement to keep pace with increases in the costs of providing care, may have a material adverse financial effect on the System.

A portion of the Medicare revenues of the System is derived from payments made for services rendered to Medicare beneficiaries under prospective payment system (“PPS”), where the amount paid to the provider for an episode of care is established by federal regulation and is not related to the provider’s charges or costs of providing that care. Presently, inpatient and outpatient services, skilled nursing care, and home health care are paid on the basis of a prospective payment system. Under inpatient PPS, fixed payment amounts per inpatient discharge are established based on the patient’s assigned diagnosis related group (“DRG”). DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. All services paid under the PPS for hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”). Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. The capital component of care is paid on a fully prospective basis.

PPS-exempt hospitals and units (inpatient psychiatric, rehabilitation and long-term hospital services) are currently reimbursed for their reasonable costs, subject to a cost per discharge target. These limits are updated annually by an index generally based upon inflationary increases in costs of providing health care services.

From time to time, the factors used in calculating the prospective payments for units of service are modified by CMS, which may reduce revenues for particular services. As part of the federal budgetary process, Congress has regularly amended the Medicare law to reduce increases in payments that are otherwise scheduled to occur, or to provide for reductions in payments for particular services. These actions could adversely affect the revenues of the System. In addition, the costs of providing a unit of care may exceed the revenues realized from Medicare for providing that service.

In the Prospective Payment Final Rule for 2008 and in the Prospective Payment Final Rule for 2009 (together, the “IPPS Rules”), CMS included provisions preventing hospitals from assigning patient cases to DRGs with higher payments where a secondary diagnosis warranting higher payment is one of several specified health conditions and was acquired in the hospital. Specifically, the IPPS Rules identify certain conditions, including certain infections and serious preventable errors (“never events”), for which CMS will not reimburse hospitals unless the conditions were present at the time of admission. CMS has also announced its intent to identify additional conditions for which higher payment will be unavailable. Various HMOs and other private insurers have followed Medicare’s lead in refusing to pay for certain hospital-acquired conditions, so called “never events.” There can be no assurance that these future payment limitations will not adversely affect the revenues of the System. Never events may be more likely to be publicized and may negatively impact a hospital’s reputation, thereby reducing future utilization and potentially increasing the possibility of liability claims.

Eligible hospitals are paid for a portion of their direct and indirect medical education costs. These payments are vulnerable to reduction or elimination. The direct and indirect medical education reimbursement programs have repeatedly emerged as programs to be reduced or eliminated in the legislative efforts to reduce the federal budget deficit. The formulae used to determine payments for medical education do not necessarily reflect the actual costs of such

- 45 - education, and the federal government will continue to evaluate its policy on graduate medical education and teaching hospital payments. There can be no assurance that payments to the System and its Affiliates under the Medicare program will be adequate to cover their direct and indirect costs of providing medical education to interns, residents, fellows and allied health professionals.

Additional payments may be made to hospitals that treat a disproportionately large number of low-income patients (Medicaid and Medicare patients eligible to receive supplemental Social Security income) in the form of DSH payments, but these payments are significantly reduced by the Affordable Care Act.

Additional payments are made to hospitals that treat patients who are costlier to treat than the average patient; these additional payments are referred to as “outlier payments.” Following an audit of aggressive pricing strategies at one of the nation’s largest hospital chains, and a determination that some hospitals might be manipulating current hospital charge data to maximize reimbursement from Medicare under the outlier payment provisions, the Office of the Inspector General of HHS (“OIG”) began investigating past outlier billing practices, and CMS amended the regulations on how outlier payments were to be calculated in the future. The methodology for calculating outlier payments is designed to prevent hospitals from manipulating the outlier formula to maximize reimbursement and allows for recovery of overpayments in certain cases.

The OIG continues to scrutinize outlier payments in an effort to determine whether outlier payments to the hospitals were paid in accordance with Medicare regulations or whether such payments were the result of potentially abusive billing practices. While the Corporation believes that it has calculated its outlier payments appropriately, there can be no assurance that the Corporation or any of its System Affiliates will not become the subject of an investigation or audit with respect to its past outlier payments, or that such an audit would not have a material adverse impact on the Obligated Group. Moreover, there can be no assurance that any future revisions to the formula for calculating outlier payments will not reduce the payments to System and its affiliates.

Effective October 1, 2013, CMS adopted a policy known as the Inpatient Hospital Prepayment Review “Probe & Educate” review process, or the “Two-Midnight” rule. The “Two- Midnight” policy specifies that hospital stays spanning two or more midnights after the beneficiary is properly and formally admitted as an inpatient will be presumed to be “reasonable and necessary” for purposes of inpatient reimbursement. With some exceptions, stays not expected to extend past two midnights should not be admitted and instead be billed as outpatient. CMS delayed enforcement of the “Two-Midnight” rule on a number of occasions. Effective October 1, 2015, responsibility for enforcement of the “Two-Midnight” rule shifted from Medicare administrative contractors to quality improvement organizations (“QIO”), and recovery audit contractors will only conduct reviews for providers that have been referred by the related QIO. The 2016 Outpatient OPPS Final Rule, effective January 1, 2016, revised the “Two-Midnight” rule to allow an exception for Medicare Part A payment on a case-by-case basis for inpatient admissions that do not satisfy the two-midnight benchmark if documentation in the medical records supports that the patient required inpatient care. Following ongoing industry criticism and a legal challenge, in the 2017 IPPS final rule effective October 1, 2016, CMS removed the inpatient payment cuts of 0.2% that were in place from 2014–2016 to offset the estimated increase in IPPS expenditures as a result of the “Two Midnight” rule and provided a temporary increase of 0.6% in payment rates for fiscal year 2017 to help offset the prior cuts. The “Two-Midnight” rule has had an adverse financial impact on

- 46 - hospitals. In December 2016, the OIG issued a report concluding that “vulnerabilities remain” under the CMS “Two-Midnight” rule and that CMS needs to improve oversight of hospital billing under this policy. Therefore, CMS may be increasing scrutiny of short inpatient stays in the near future.

Medicare Advantage

Hospitals also receive payments from health plans under the Medicare Advantage program. The Affordable Care Act includes significant changes to federal payments to Medicare Advantage plans resulting in a transition to benchmark payments tied to the level of fee-for-service spending in the applicable county. Decreased federal payments to the Medicare Advantage plans could in turn affect the scope of coverage of these plans or cause plan sponsors to negotiate lower payments to providers.

Electronic Health Information Systems, Medicare and Medicaid Incentive Payments and Payment Reductions

The American Recovery and Reinvestment Act of 2009 (“ARRA”) provides for Medicare and Medicaid incentive payments that began in 2011 to hospital providers meeting designated deadlines for the installation and use of electronic health information systems. For those hospital providers failing to meet applicable deadlines, Medicare payments will be significantly reduced. Additionally, beginning in 2014, the federal government began auditing hospitals’ and providers’ records related to their attestation of being “meaningful users” in order to obtain the incentive payments. A hospital or provider that fails the audit will have an opportunity to appeal. Ultimately, hospitals or providers that fail on appeal will have to repay any incentive payments they received through those programs. For information regarding System’s electronic medical records system, see “Strategic Initiatives” -- “Information Technology Strategy” in Appendix A.

Physician Reimbursement under Medicare

Certain physician services are reimbursed by Medicare on a national fee schedule called the “resource-based-relative-value scale” (“RB-RVS”). The RB-RVS fee schedule establishes payment amounts for all physician services, including services of provider-based physicians, and is subject to annual updates. The Sustainable Growth Rate (“SGR”), which is a limit on the growth of Medicare payments for physician services, is linked to changes in the U.S. Gross Domestic Product over a ten-year period. SGR targets are compared to actual expenditures in order to determine subsequent physician fee schedule updates. Since 2003, Congress has passed legislation to delay application of the SGR. In April 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) was enacted, which included a so-called “doc fix.” This law replaces the SGR formula with statutorily prescribed physician payment updates and provisions. As a result, payments under the Medicare Physician Fee Schedule for services furnished on or after April 1, 2015 were not cut by 21%. Instead, current payment rates will increase annually by 0.5% through 2019. Thereafter, payment rates will be frozen at 2019 levels through 2025. In addition to the base payment methodology, physicians can earn merit-based payments based on factors including compliance with meaningful use of electronic health records requirements and demonstration of quality-based medicine. While the payment cuts associated with the SGR formula have been eliminated, there is uncertainty regarding the impact of the merit-based and alternative payment models, and it is

- 47 - possible that future legislative action will be taken that would once again trigger physician payment reductions.

MACRA will substantially alter how physicians and other practitioners are paid by Medicare for services furnished to program beneficiaries. Generally, physicians will choose whether to participate in an Advanced Alternative Payment Model or the Merit-based Incentive Payment System. Payments to physicians and other practitioners will be adjusted depending on which pathway is chosen, and based on performance within each pathway. A substantial amount of payments will be linked to that performance: poorly performing practitioners will have Medicare payments reduced; while those who perform well against prescribed measures could have payment increased. These changes will influence physician referral and utilization behaviors, which could affect utilization of hospital services.

Hospital Outpatient Departments

Under the Bipartisan Budget Act, effective January 1, 2017, off-campus provider-based clinics, physician offices, and ambulatory surgical centers (“off-campus hospital outpatient departments”) established or acquired after November 2, 2015 are scheduled to receive reimbursement payments for only the professional fee under the Medicare Physician Fee Schedule or Ambulatory Surgical Center Payment System and will no longer receive an additional facility fee paid under the Medicare Hospital the Outpatient Prospective Payment System (“OPPS”). This decrease in reimbursement payments does not apply to (i) any off-campus hospital outpatient departments that existed and were billing as off-campus hospital outpatient departments for covered off-campus hospital outpatient department services prior to November 2, 2015, (ii) any on-campus hospital outpatient departments, (iii) dedicated emergency departments or (iv) any off-campus organizations, other than off-campus hospital outpatient departments, that are required to satisfy the provider-based regulations including satellite facilities and provider-based entities such as rural health clinics.

Effective January 1, 2016, the OPPS Final Rule requires hospitals to use new modifiers for services provided to Medicare beneficiaries at off-campus hospital outpatient departments. The stated purpose of the new modifiers is to permit CMS to obtain information regarding the effect of the trend of the conversion of physician offices to off-campus hospital outpatient departments. A potential result of this information could be a future reduction in reimbursement for certain services provided at certain types of off-campus hospital outpatient departments. In any event, failure to use the modifiers correctly could jeopardize the provider-based status of associated off-campus locations.

CMS published the final rule implementing the site neutral provisions of the Bipartisan Budget Act on November 1, 2016. Under the final rule, hospitals will have very limited ability to replace or expand their existing off-campus hospital outpatient departments and continue to be reimbursed under the OPPS Final Rule, issued in November 2015 and effective January 1, 2016. The final rule also establishes reduced reimbursement for services provided at new off-campus hospital outpatient departments established after enactment of the Bipartisan Budget Act. It is unclear what will be the financial impact of the site neutral payment provisions.

The Cures Act, enacted in December 2016, expands the categories of projects that would be exempt from the decrease in OPPS reimbursement payments. They include: (i) off-campus

- 48 - outpatient department if the host hospital had submitted a voluntary provider-based attestation to CMS before December 2, 2015, as long as the construction of the new off-campus outpatient department is complete and the hospital is accepting or poised to accept patients; (ii) off-campus outpatient department locations providing services on or after January 1, 2018, that had a “binding written agreement with an outside unrelated party for the actual construction” of the new off- campus outpatient department before November 2, 2015, as long as the host hospital make certain attestations and certifications within 60 days of the enactment of the Cures Act; and (iii) off-campus outpatient departments of certain cancer hospitals that file provider-based attestations within 60 days of the date of enactment of the Cures Act (for departments meeting provider-based requirements between November 2, 2015, and the date of enactment) or within 60 days of the date of meeting provider-based requirements.

Medicaid

Medicaid is a health insurance program for certain low-income and needy individuals that is jointly funded by the federal government and the states. Pursuant to broad federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration, and scope of services; sets the payment rates for services; and administers its own programs.

Under the Medicaid program, the federal government supplements funds provided by the various states for medical assistance to the medically indigent. Payment for medical and health services is made to providers in amounts determined in accordance with procedures and standards established by state law under federal guidelines. Fiscal considerations of both federal and state governments in establishing their budgets will directly affect the funds available to the providers for payment of services rendered to Medicaid beneficiaries.

Some states also participate in Medicaid waiver programs, which allow states to adjust eligibility criteria beyond what the federal requirements allow. Maryland’s Medicaid waiver program, known as HealthChoice, covers childless adults with incomes up to 133% of the federal poverty level. The Corporation’s Maryland Hospitals have been approved by the Rate Commission to participate in the HealthChoice program through MedStar Family Choice, a risk bearing entity.

The District of Columbia expanded its Medicaid program under the Affordable Care Act. It currently operates a Medicaid waiver program for Childless Adults that extends health coverage to non-pregnant, non-disabled adults ages 21 through 64 years who are residents of the District of Columbia with household incomes that are above 138 percent but do not exceed 200 percent of the federal poverty level.

The Affordable Care Act made changes to Medicaid funding and substantially increased the potential number of Medicaid beneficiaries. While the federal government is responsible for funding the incremental cost of certain categories of Medicaid eligibility expansion under the Affordable Care Act, changes in Medicaid benefits and other coverage requirements under the Affordable Care Act increase costs to the states and the District of Columbia. As Medicaid program costs continue to rise, the federal and state governments, including the District of Columbia and Maryland, continue to explore options for a long-term solution to the funding difficulties with Medicaid. Certain additional proposals being examined may ultimately result in reduced federal Medicaid funding to the states, including the District of Columbia, which could adversely impact the amount received by the System. Management of the Corporation cannot predict the effect of

- 49 - these changes to the Medicaid program on the operations, results from operations or the financial condition of the System. See also “Affordable Care Act and Certain Recent Federal and Regulatory Initiatives” for a discussion of certain proposed potential changes to the Medicaid program.

Section 340B Drug Pricing Program

Hospitals that participate in the prescription drug discount program established under Section 340B of the federal Public Health Service Act (the “340B Program”) are able to purchase certain outpatient drugs for their patients at reduced cost. The Health Resources and Services Administration within the Department of Health and Human Services (“HRSA”), through the Office of Pharmacy Affairs, administers the 340B Program. HRSA issued a final rule on January 5, 2017 regarding 340B Program pricing and manufacturer civil monetary penalties, which it will begin enforcing on October 1, 2017. A majority of the System Hospitals participate in the 340B Program and any restrictions on the ability of hospitals to utilize 340B Program drugs for their patients may have an adverse effect on these System Hospitals.

Medicare and Medicaid Audits

System Affiliates participating in Medicare and Medicaid are subject to audits and retroactive audit adjustments with respect to reimbursement claimed under those programs, and the representations upon which such reimbursements are claimed. There can be no assurance that any such future adjustments will not be material or that the reserves, if any, of the System Affiliates for such purpose will be adequate to cover any such adjustments. Both Medicare and Medicaid regulations also provide for withholding payments in certain circumstances. Any such withholding with respect to a System Affiliate could have a material adverse effect on the financial condition and results of operations of the Corporation and the System Affiliates. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withholding provisions that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of the Corporation and the System Affiliates. No assurance can be given that in the future a Medicare payment or other payment will not be withheld that would materially and adversely affect the financial condition or results of operations of the Corporation and the System Affiliates.

Under both the Medicare and the Medicaid programs, certain health care providers, including hospitals, are required to report certain financial information on a periodic basis, and with respect to certain types of classifications of information, penalties are imposed for inaccurate reports. These penalties may be material and could include criminal, civil or administrative liability for making false claims and exclusion from participation in the federal healthcare programs. Under certain circumstances, payments based on improper claims or overpayments that are not refunded can implicate the federal Civil False Claims Act (the “False Claims Act”) or other federal statutes, subjecting the provider to civil or criminal sanctions. The United States Department of Justice has initiated a number of national investigations involving proceedings under the False Claims Act relating to alleged improper billing practices by hospitals. These actions have resulted in substantial settlement amounts being paid in certain cases.

CMS has implemented a Recovery Audit Contractor (“RAC”) program on a nationwide basis where CMS contracts with private contractors to conduct pre- and post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program. The Affordable

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Care Act expanded the RAC program’s scope to include managed Medicare plans and Medicaid claims. CMS also employs Medicaid Integrity Contractors to perform post-payment audits of Medicaid claims and identify overpayments. These programs tend to result in retroactively reduced payment and higher administration costs to hospitals.

Authorized by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Medicare Integrity Program (“MIP”) was established to deter fraud and abuse in the Medicare program. Funded separately from the general administrative contractor program, the MIP allows CMS to enter into contracts with outside entities and insure the “integrity” of the Medicare program. CMS contracts with Medicare Zone Program Integrity Contractors (“ZPICs”), formerly known as program safeguard contractors, to review claims and medical charts, both on a prepayment and post-payment basis, conduct cost report audits and identify cases of suspected fraud. ZPICs have the authority to deny and recover payments and to refer cases to the OIG. CMS is also planning to enable ZPICs to compile claims data from multiple sources in order to analyze the complete claims histories of beneficiaries for inconsistencies.

In light of the complexity of the regulations relating to the Medicare program, and the threat of ongoing investigations as described above, there can be no assurance that the System Affiliates will not continue to be the subject of any such investigation.

In addition, CMS has instituted a Medicaid Integrity Program, modeled on the MIP. Medicaid Integrity Program contractors assist state Medicaid agencies by analyzing Medicaid claims data to identify high-risk areas and potential vulnerabilities and conducting post-payment field audits and desk reviews audits of Medicaid provider payments.

Medicare and Medicaid audits may result in reduced reimbursement or repayment obligations related to past alleged overpayments, may delay payments to providers pending resolution of the appeals process and may result in OIG investigations that could lead to monetary or other penalties. The Affordable Care Act explicitly gives the Department of Health and Human Services the authority to suspend Medicare and Medicaid payments to a provider or supplier during a pending investigation of fraud. The Affordable Care Act also amended certain provisions of the False Claims Act to include retention of overpayments as a violation and added provisions respecting the timing of the obligation to identify, report and reimburse overpayments. The effect of these changes on existing programs and systems of the System cannot be predicted.

Medicaid Funding in Maryland

Medicaid is a joint federal-state reimbursement program that is administered in each state by that state’s health or public welfare agency. Medicaid programs vary from state to state. In each state’s program, Medicaid generally pays for covered health services provided to certain categorically qualified or indigent individuals.

In 2009, the Maryland General Assembly imposed a tax on hospital net patient revenues to fund a deficit in the State of Maryland’s Medicaid program. Although the assessment was intended to be temporary, it has been continued. A majority of the assessments for individual hospitals is built into the hospitals’ rate structures. There can be no assurance that the Rate Commission will continue to provide funding to cover these assessments.

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It cannot be determined at this time the impact of the Waiver Model on the State of Maryland’s Medicaid program as the State implements the Waiver Model and its Medicaid plan to ensure compliance with the Agreement.

State Children’s Health Insurance Program

The State Children’s Health Insurance Program (“SCHIP”) is a federally funded insurance program for children whose families are financially ineligible for Medicaid, but cannot afford commercial health insurance. The CMS administers SCHIP, but each state creates its own program based upon minimum federal guidelines. SCHIP insurance is provided through private health plans contracting with the state.

Each state must submit its SCHIP plan to CMS for review to determine if it meets the federal requirements. If it does not meet the federal requirements, a state can lose its federal funding for the program. Any such loss of funding or federal or state budget cuts to the program could have an adverse effect on provider revenues.

On May 6, 2016, CMS published a final rule to modernize and enhance the provision of quality care to Medicaid managed care and SCHIP beneficiaries. The final rule aligns Medicaid and SCHIP managed care requirements with other major health coverage programs; enhances the beneficiary experience of care and strengthens beneficiary protections; strengthens the actuarial soundness payment provisions and program integrity provisions; promotes quality of care; and supports efforts to reform the delivery systems that serve Medicaid and SCHIP beneficiaries. It is uncertain what impact the final rule will have on the System.

Under MACRA, federal funding for SCHIP was extended through September 30, 2017. When such funding expires there can be no assurances that funding for an increase will be reestablished at either a state or federal level, or that professional and /or facility reimbursement rates will not subsequently be reduced in efforts to manage costs.

Patient Transfers

In response to concerns regarding inappropriate hospital transfers of emergency room patients based on the patient’s ability to pay for the services provided, Congress enacted the Emergency Medical Treatment and Active Labor Act (“EMTALA”) in 1986. This law requires most hospitals to provide assessments and stabilizing treatment to all individuals who seek emergency care and imposes certain requirements that hospitals must meet before transferring a patient to another facility. Physicians who refuse to assess or care for patients covered by EMTALA are also subject to sanctions. Failure of a hospital to meet its responsibilities under EMTALA could result in termination of its provider agreements and civil monetary penalties, and repeated or flagrant violation of EMTALA by a physician could result in the physician’s exclusion from the Medicare and Medicaid programs, all of which could adversely affect the financial condition of the System. EMTALA and its implementing regulations are complex, and a hospital’s compliance is dependent, in part, upon the volition of medical staff members. EMTALA also requires hospital departments that are located anywhere on the hospital’s main campus to comply with EMTALA, even if such departments are not located within the hospital itself. Allegations that a System Affiliate has violated EMTALA could have a material adverse effect on the future operations or financial condition of the System.

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Waiver Co-Payments and Deductibles

The System Affiliates may at times waive certain Medicare coinsurance and deductible amounts. Certain waiver programs may be considered to be in violation of certain rules and policies applicable to the Medicare program and may be subject to enforcement action. If an agency or court were to conclude that a waiver by a System Affiliate violates applicable law, there is a possibility that the System Affiliate involved could be assessed fines, which could be substantial, that certain Medicare payments might be withheld or, in a serious case, that the System Affiliate could be excluded from the Medicare program. While management is not aware of any challenge or investigation with respect to such matters, there can be no assurance that such challenge or investigation will not occur in the future.

Health Insurance Portability and Accountability Act

Congress enacted HIPAA as part of a broad health care reform effort. Among other things, HIPAA established a program administered jointly by the Secretary of HHS and the United States Attorney General designed to coordinate federal, state and local law enforcement programs to control fraud and abuse in connection with the federal health care programs. In addition, Congress greatly increased funding for health care fraud enforcement activity, enabling the OIG to substantially expand its investigative staff and authorizing the Federal Bureau of Investigation to quadruple the number of agents assigned to health care fraud. The result has been a dramatic increase in the number of civil, criminal and administrative prosecutions for alleged violations of the laws relating to payment under the federal health care programs, including the Anti-Kickback Law and the False Claims Act.

HIPAA added two prohibited practices, the commission of which may lead to civil monetary penalties: (1) the practice or pattern of presenting a claim for an item or service on a reimbursement code that the person knows or should know will result in greater payment than appropriate (“upcoding”), and (2) engaging in a practice of submitting claims for payment for medically unnecessary services. Violation of such prohibited practices could result in civil monetary penalties which could be substantial.

HIPAA also included administrative simplification provisions intended to facilitate the processing of health care payments by encouraging the electronic exchange of information and the use of standardized formats for health care information. Congress recognized, however, that standardization of information formats and greater use of electronic technology present additional privacy and security risks due to the increased likelihood that databases of personally identifiable health care information will be created and the ease with which vast amounts of such data can be transmitted. Therefore, HIPAA requires the establishment of distinct privacy and security protections for individually identifiable health information.

Regulations of the HHS designed to protect patient medical records and other personal health information maintained by health care providers, hospitals, health plans, health insurers and health care clearinghouses provide specific federal penalties for noncompliance with HIPAA. Non- criminal violations of the applicable standards may result in civil monetary penalties while criminal penalties are available under HIPAA for certain types of violations of the statute that are committed knowingly.

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Like other major health systems, certain System Affiliates may be the subject of the OIG, U.S. Attorney General or Justice Department investigations and any System Affiliate may be the subject of such investigations in the future. Failure to comply with the complex Medicare and Medicaid billing laws can result in exclusion from the Medicare programs as well as civil and criminal penalties. A substantial failure of a System Affiliate to meet its responsibilities under the law could materially adversely affect the financial condition of such System Affiliate.

The Cures Act and Health Information Technology and Privacy

The Cures Act contains a number of provisions regarding health information technology and health care privacy, including: (i) the privacy of protected health information used and disclosed as part of research; (ii) permitted uses and disclosures of mental health and substance abuse treatment information; and (iii) the interoperability of certified electronic health record technology (“CEHRT”) networks and patient access to their information in CEHRTs. The legislation calls for a number of studies and for guidance from HHS implementing and clarifying Cures Act provisions. Certain of the Cures Act provisions and anticipated regulations are intended to reduce regulatory or administrative burdens related to CEHRTs in the Medicare CEHRT incentive program and other Medicare programs. The impact of these recent and anticipated regulatory, policy and legislative changes on the operations of the System cannot be predicted.

Health Information Technology for Economic and Clinical Health Act

ARRA appropriated funds for the development and implementation of health information technology standards and the adoption of electronic health care records. ARRA also includes the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which contains a number of provisions that affect HIPAA’s privacy regulations that provide generally that covered entities must keep a person’s personal health information private. The HITECH Act limits a covered entity’s discretion in determining what health care information about a person may be properly disclosed under the HIPAA privacy regulations. The HITECH Act also significantly expanded the HIPAA privacy and security provisions applicable to covered entities and their business associates. The law includes an individual notice requirement when there is a breach of unsecured electronic personal health information, increases civil monetary and criminal penalties for HIPAA violations, and authorizes state attorneys general to enforce its provisions. The HITECH Act also provides that 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 HHS for this private recovery, although HHS has not yet issued rulemaking to effectuate this statutory provision. Each covered entity must report any breach involving over 500 individuals in a state to HHS and the local media. All other breaches must be reported annually to HHS. The financial costs of continuing compliance with HIPAA and its administrative simplification regulations are substantial and have increased as a result of ARRA amendments.

Covered entities that use an “electronic health record” are required by the HITECH Act to account for disclosures of information, payment and health care operations. In addition, if a covered entity maintains an electronic health record, individuals have a right to receive a copy of the protected health information maintained in the record in an electronic format.

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The HITECH Act requires covered entities to comply with a patient’s request to restrict disclosure of information to a health plan if the disclosure’s purpose is to carry out payment or health care operations (not treatment) or if the information pertains solely to an item or service for which the provider was paid in full from sources other than such health plan. The HITECH Act also includes a prohibition on the payment or receipt of remuneration in exchange for protected health information without specific patient authorization, except in limited circumstances, and places additional restrictions on the use and disclosures of protected health information for marketing and fundraising communications.

The HITECH Act requires covered entities to notify affected individuals, HHS and sometimes the media of any unauthorized disclosure of protected health information, depending on the nature of the breach, the type of unauthorized disclosure and its scope.

The HITECH Act increases the civil monetary penalties associated with violations of HIPAA and provides state attorneys general with authority to enforce the HIPAA privacy and security regulations in some cases, through a monetary damages assessment or an injunction against the violator. However, because there has been limited regulatory guidance about the meaning and scope of certain requirements, no assurance can be given that the Corporation and its System Affiliates would be found to be in full compliance with those requirements or that they will be HIPAA compliant in the future. Moreover, future regulations to implement the HITECH Act may increase the cost to the Corporation and its System Affiliates of compliance with HIPAA and the HITECH Act.

Security Breaches and Unauthorized Releases of Personal Information

Federal, state and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals’ personal information, including patient health information. In addition to regulations promulgated under HITECH, many states, including Maryland, have enacted their own laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement. Failure to comply with restrictions on patient privacy or to maintain robust information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could damage a health care provider’s reputation and materially adversely affect business operations.

Cybersecurity Risks

Similar to other large organizations, System Affiliates rely on electronic systems and technologies to conduct their operations. System Affiliates maintain a security posture designed to deter “cyber-attacks,” and are committed to deterring attacks on its electronic systems and responding to such attacks to minimize their impact on operations. There have been numerous attempts to gain unauthorized access to electronic systems of large organizations for the purposes of

- 55 - misappropriating assets or personal, operational, financial or other sensitive information, or causing operational disruption. These attempts, which are increasing, include highly sophisticated efforts to electronically circumvent security measures or freeze assets as well as more traditional intelligence gathering aimed at obtaining information necessary to gain access.

In March 2016, the System’s information technology (IT) systems were subject to a malware attack. As a precaution and to ensure no further corruption, the Corporation brought down all of the System’s IT systems. Led by the Corporation’s internal and external IT partners, all systems were returned to normal operating conditions within a relatively short period of time. The Corporation has no evidence that patient or associate data was compromised due to the malware attack. The malware attack did not have a material adverse effect on the Systems’ results of operations or financial condition.

No assurances can be given that the System Affiliates’ security measures will prevent further cyber-attacks on their electronic systems, and no assurances can be given that any cyber- attacks, if successful, will not have a material adverse effect on the results of operations or financial condition of the Corporation and its System Affiliates.

Federal, State and Local Legislation

The System Affiliates are subject to a wide variety of federal, state and local regulatory actions and legislative and policy changes that could have a significant impact on the System Affiliates. Federal, state and local legislative bodies have broad discretion in altering or eliminating programs that contribute significantly to the revenues of the System Affiliates, including the Medicare and Medicaid programs. In addition, such entities may enact legislation which imposes significant new burdens on the operations of the System Affiliates. There can be no assurance that such legislative bodies will not make legislative policy changes (or direct governmental agencies to promulgate regulatory changes) that have adverse effects upon the ability of the System Affiliates to generate revenues or upon the favorable utilization of their facilities.

Corporate Compliance

Because penalties for noncompliance with various requirements imposed upon the Corporation for violation of Medicare, Medicaid and other healthcare laws and regulations may be substantial, the Corporation has implemented a comprehensive compliance plan consistent with the model compliance plan offered by the OIG (“Compliance Plan”). The purpose of a Compliance Plan is to detect and deter violations of law. One of the major goals is to identify and address issues involving the submission of claims to governmental payors such as Medicare and Medicaid and to assure that those claims comply with statutes, regulations and other guidance provided by the programs. Integral components of the Compliance Plan include education, adoption of written standards, policies and procedures, auditing and monitoring, and encouraging employees to identify potential issues. It is possible that the Compliance Plan may bring to the attention of the Corporation issues with respect to prior practices and payments. Depending upon the nature of the issue and whether an overpayment has occurred, voluntary or involuntary refunds to governmental payors may result. Although one goal of the Compliance Plan is to identify violations at an early stage or prevent inappropriate actions, there can be no assurance that the Compliance Plan will detect all potential violations and improprieties.

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Managed Care and Commercial Payors

A significant portion of the revenues of the System Affiliates are received from health maintenance organizations, preferred provider organizations or other managed care arrangements, including Medicaid managed care health plans. These arrangements differ significantly from traditional indemnity insurers. Managed care plans generally accept uniform per-person payments, with fees based on the number of enrollees, and in return agree to provide all, or substantially all, of an enrollee’s health care needs without additional charges. Managed care payors rely upon case management to reduce or eliminate unnecessary utilization, including discouraging admissions to a hospital unless absolutely necessary. Case management efforts of managed care payors may in the future adversely affect utilization of the facilities of the System Affiliates. In addition, some Medicaid managed care health plans may from time to time experience financial difficulties. The insolvency of such plans or their failure to pay amounts owed to the System Affiliates in a timely manner could have an adverse effect on the financial condition of the Corporation and the other System Affiliates. As managed care enrollments increase, managed care payors become significant purchasers of health care services and often select health providers offering the most cost effective services. Hospitals may be adversely affected by the ability of these payors to negotiate low payment rates and to exclude hospitals from participation in their programs. In general, Maryland hospitals currently are not allowed to grant discounts from rates approved by the Rate Commission to specific payors, but the Rate Commission does grant a uniform discount to managed care payors meeting certain criteria. Not all of the System Affiliates are covered by the Maryland rate-setting system and there can be no assurance that the Maryland rate-setting system will be maintained or that current Rate Commission methodology will continue to be used.

High deductible insurance plans have also become more common in recent years, and the Affordable Care Act has encouraged the increase in high deductible insurance plans as the health care exchanges include a variety of plans, several of which offer lower monthly premiums in return for higher deductibles and copayments. Many plans offered on the exchanges and an increasing number of employer group health plans have high deductibles. High deductible plans may contribute to lower elective inpatient admissions as patients may forgo or choose less expensive medical treatment to avoid having to pay the costs of the admissions as a result of the high deductibles. There is also a potential concern that some patients with high deductible plans will not be able to pay their medical bills as they may not be able to cover costs that are not covered by their insurance plans as a result of the high deductible. This factor may increase bad debt expense for health care providers.

Certain health maintenance and preferred provider organization contracts of the System Affiliates can be terminated by the third-party payor at any time without the necessity of showing cause upon short notice. Termination could have an adverse effect on the financial performance of the Corporation and the System Affiliates. In addition, contracts between hospitals and third-party payors often have contractual audit, setoff and withholding provisions that may cause substantial, retroactive adjustments. Such contractual adjustments also could have a material adverse effect on the financial condition and results of operations of the Corporation and the System Affiliates. No assurance can be given that in the future payment will not be withheld that would materially and adversely affect the financial condition or results of operations of the Corporation and the System Affiliates.

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Uninsured Patients

Future increases in unemployment in the areas served by the System Affiliates could adversely affect revenues and increase costs. Those who lack health insurance may delay elective procedures. They also may delay screening and preventive or basic care and may ultimately require more extensive services as a result. In addition, in times of greater unemployment and economic hardship, the amount of uncompensated care provided by the System Affiliates would be expected to increase. Federal law requires hospitals to provide certain medical treatment to individuals who come to hospitals, regardless of the ability of the individuals to pay. The Maryland hospital rate- setting system currently includes a provision for charity care and bad debt, but not all of the System Affiliates are covered by the Maryland rate-setting system and there is no assurance that the current rate-setting system will continue in effect or that the Rate Commission will continue to utilize the current methodology by which it approves rates.

Although the Affordable Care Act may reduce uncompensated care by providing coverage to a larger portion of the population, there will continue to be individuals who lack insurance and will be unable to afford care. In addition, the Medicaid program is dependent on the continued availability of federal and state funding, which could be curtailed in the future in response to growing budget deficits at all governmental levels. The continued availability, comprehensiveness of coverage and adequacy of reimbursement for care for the indigent and disabled cannot be assured.

Pension and Benefit Funds

As large employers, hospitals may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers’ compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes which could have a material adverse effect on the System Affiliates. See Appendix A -- “Management’s Discussion and Analysis of Operations and Financial Condition – Retirement Plans.”

Cost and Availability of Medical Malpractice Insurance

System Affiliates are subject to malpractice suits arising out of the services they provide. Although System Affiliates maintain insurance coverage, to the extent that coverage is inadequate to cover judgments against them, such claims may be required to be discharged by payments from the System Affiliates’ own funds. Further, if insurance coverage maintained by others with whom the System Affiliates have joint and several liability is inadequate, the System Affiliates (or their insurers to the extent of applicable coverage) may incur additional liability for such claims. Although legislation has been enacted in the State of Maryland to mitigate the impact of malpractice claims, there can be no assurance that medical malpractice insurance will continue to be available at reasonable rates. Moreover, there is no guarantee that such legislation will not be amended in a manner that adversely affects health care providers such as the System Affiliates, or that the legislation will continue to withstand legal challenges. Further increases in the cost or limitations on the availability of malpractice insurance could adversely affect the operating results of the Corporation and its System Affiliates. In addition, increases in medical malpractice premiums could result in a shortage of medical professionals and may disrupt the delivery of health care. For

- 58 - information relating to the insurance coverage of the System Affiliates, see “Insurance” in Appendix A.

Environmental Laws and Regulations

Health care facilities are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations that address, among other things, hospital operations and facilities or properties owned or operated by hospitals. In their role as owners and operators of properties or facilities, hospitals may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, as well as any such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. For these reasons, hospital operations are particularly susceptible to the practical, financial and legal risks associated with compliance with such laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations and increase their cost; may result in legal liability, damages, injunctions and fines; and may trigger investigations, administrative proceedings, penalties and other governmental agency actions.

There can be no assurance that System Affiliates will not encounter such risks in the future, or that such risks will not result in material adverse consequences to the operations or financial condition of the System Affiliates. At the present time, management of the Corporation is not aware of any pending or threatened claim, investigation or enforcement action regarding any environmental issues which, if determined adversely would have a material adverse effect on the results of operations or financial condition of the System Affiliates.

Tax Exemptions

Tax-Exempt Status of Interest on the Bonds

The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of proceeds of the Bonds and the facilities financed or refinanced with such proceeds, limitations on the investment of amounts deemed to be proceeds of the Bonds prior to expenditure, a requirement that certain investment earnings on amounts deemed to be proceeds of the Bonds be paid periodically to the United States and a requirement that the Authority file an information report with the IRS.

The Authority and the Corporation have made certain covenants regarding actions required to maintain the excludability from gross income for federal income tax purposes of interest on the Bonds. Failure to comply with the requirements stated in the Code and related regulations and rulings may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. If interest on the Bonds were declared includable in gross income for purposes of federal income taxation, no additional amounts would be payable on the Bonds to compensate the holders or former holders thereof for the taxes which they may be required to pay, and the Bonds do not provide for a mandatory redemption in such event.

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The IRS has increased the number of audits of tax-exempt bonds in the charitable organization sector in recent years and, as described above under “Regulatory Environment -- Nonprofit Health Care Environment,” IRS officials have indicated that more resources will be invested in these audits. Tax-exempt organizations must complete a number of schedules to IRS Form 990 - Return of Organizations Exempt From Income Tax, including: Schedule H, which requires hospitals and health systems to report how they provide community benefit and specify certain billing and collection practices; Schedule K, which requires detailed information related to outstanding tax-exempt bond issues, including information regarding operating, management and research contracts, as well as private use compliance; and Schedule J, which requires reporting of compensation information for the organizations’ officers, directors, trustees, key employees, and other highly compensated employees. There can be no assurance that responses by the Corporation to Form 990 will not lead to an IRS audit.

No ruling with respect to the tax-exempt status of the Bonds has been or will be sought from the IRS, and the opinion of Bond Counsel to the Authority as to the excludability from gross income of the interest on the Bonds for federal income tax purposes is not binding on the IRS or the courts. See “Tax Matters.” In addition, if the Bonds were to be audited by the IRS, the market for and the market value of the Bonds could be adversely affected during the pendency of the examination and thereafter, even if the outcome of the audit were to be favorable.

Tax-Exempt Status of Tax-Exempt System Affiliates

The tax-exempt status of the Bonds depends upon the maintenance by the Corporation and certain of the System Affiliates of their status as organizations described in Section 501(c)(3) of the Code (each a “Tax-Exempt System Affiliate”). In addition, if a Tax-Exempt System Affiliate were to lose its tax-exempt status, its property and its revenues could become subject to federal, state and local income taxation. Loss of the tax-exempt status of a Tax-Exempt System Affiliate also could result in loss of the tax-exempt status of other debt issued on behalf of such Tax-Exempt System Affiliate, and defaults in covenants regarding such debt would likely result. For these reasons, loss of the tax-exempt status of a Tax-Exempt System Affiliate could have a material adverse effect on the financial condition of the System Affiliates, taken as a whole.

The maintenance of the federal tax-exempt status of an organization is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and educational purposes and their avoidance of transactions which may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities which do not conduct large-scale technical operations and business activities, they often do not adequately address the myriad of operations and transactions entered into by modern health care organizations.

One of the tools available to the IRS to discipline a tax-exempt entity for private inurement or unlawful private benefit is revocation of the entity’s tax-exempt status. Although the IRS has not often revoked the tax-exempt status of an organization, it could do so in the future.

Neither the Corporation nor any System Affiliate is presently the subject of an IRS audit. A previous audit of their pension plans was resolved satisfactorily concluding that the pension plans were in compliance with tax law requirements. However, there is no assurance that the Corporation

- 60 - or the System Affiliates will not be the subject of an audit in the future. Management believes that the System Affiliates have properly complied with the tax laws. Nevertheless, because of the complexity of the tax laws and the presence of issues about which reasonable persons can differ, an audit could result in additional taxes, interest and penalties. An audit could ultimately affect the tax-exempt status of a System Affiliate as well as the exclusion from gross income for federal income tax purposes of the interest payable on the Bonds and other tax-exempt debt issued on behalf of the System Affiliates.

State Income Tax Exemption and Local Property Tax Exemption

It is likely that the loss by a Tax-Exempt System Affiliate of federal tax exemption would also result in a challenge to the State of Maryland or District of Columbia tax exemption of such Tax-Exempt System Affiliate. Depending on the circumstances, such event could be adverse and material.

In recent years, state, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where such authorities are dissatisfied with the amount of services provided to indigents, the real property tax exemption of the health care providers has been questioned. The real property owned by tax-exempt entities and used for hospital and other tax- exempt purposes of the System Affiliates is currently exempt from real property taxation.

Unrelated Business Income

In recent years, the IRS and state, county and local taxing authorities also have been undertaking audits and reviews of the operations of tax-exempt hospitals with respect to their exempt activities and the generation of unrelated business taxable income (“UBTI”). Tax-Exempt System Affiliates participate in activities which generate UBTI. Management believes it has properly accounted for and reported UBTI; nevertheless, an investigation or audit could lead to a challenge which could result in taxes, interest and penalties with respect to unreported UBTI and in some cases could affect the tax-exempt status of Tax-Exempt System Affiliates as well as the exclusion from gross income for federal income tax purposes of the interest payable on the Bonds and other tax-exempt debt issued on behalf of the System Affiliates.

Legislative Developments

Legislative proposals currently under consideration or proposed after issuance and delivery of the Bonds could adversely affect the market value of the Bonds. Further, if enacted into law, any such proposal could cause the interest on the Bonds to be subject, directly or indirectly, to federal income taxation and could otherwise alter or amend one or more of the provisions of federal tax law described below under “Tax Matters” or their consequences. Prospective purchasers of the Bonds should consult with their tax advisors as to the status and potential effect of pending and future legislative proposals, as to which Bond Counsel expresses no opinion.

Alliances and Affiliations with Physicians, Hospitals and Other Healthcare Providers

Many hospitals and health systems have pursued strategic alliances with physicians and other providers. These integration strategies involve multiple forms, including management service

- 61 - organizations (“MSOs”), physician-hospital organizations (“PHOs”), and ownership of physician practices. More recent integration models include joint ventures for delivery of services and assumption of risk. The Affordable Care Act encourages the development of health care delivery models that are designed to enhance quality, improve outcomes and reduce cost and that will effectively require greater integration between and collaboration among hospitals and physicians by allowing the formation of ACOs that meet quality thresholds to share in the savings achieved for the Medicare Program. The Affordable Care Act requires the Secretary of HHS to implement a shared savings program through ACOs requiring integration between hospitals and physicians that will deliver health care services to Medicare beneficiaries, and to implement a demonstration project to develop ACOs for pediatric patients under the Medicaid program. Participation in the Medicare ACOs is voluntary. ACOs that achieve quality performance standards will be eligible to share in a portion of the amounts saved by the Medicare program and, depending on their participation status, may share in a portion of any losses suffered by the Medicare program.

To qualify as an ACO, organizations must agree to be accountable for the overall care of their Medicare beneficiaries, have adequate participation of primary care physicians, define processes to promote evidence-based medicine, report on quality and costs, and coordinate care. In November 2011 and June 2015, the Department of Health and Human Services issued a final rule to implement the ACO provisions of the Affordable Care Act. In June 2016, CMS issued a rule that aims to revise the benchmark rebasing calculations for ACOs. While these revised benchmark rebasing calculations may be particularly attractive for high performing ACOs, the delayed onset of these revised benchmark calculations (e.g., the revised methodology would not apply for the earliest ACOs until the start of their third participation agreement in 2019) leaves the Medicare Savings Program ACO landscape somewhat uncertain. Also, the Federal Trade Commission and Department of Justice issued a joint proposed statement of antitrust enforcement policy as applied to ACOs; CMS and the OIG issued a joint notice on waivers of the Anti-kickback Statute, Stark law and the Civil Money Penalty laws as applied to ACOs; and the IRS issued a notice and fact sheet addressing the impact on tax-exempt organizations participating in ACOs. The outcomes of these final regulations and guidance, and the impact they will have upon the health care marketplace, is unknown and cannot be predicted. Commercial health insurance companies are also adopting incentive payment programs modeled after the Medicare ACOs.

Often, the sponsoring hospital or health system will be the primary capital source for such alliances. Depending on the size and organizational characteristics of a particular development, these capital requirements may be substantial. While there are many benefits which may be derived from such alliances, most are relatively new developments with uncertain outcomes, and, therefore, it is uncertain whether the benefits and savings will be adequate to recoup the initial investment. CMS is also developing and implementing more advanced ACO payment models, such as the Next Generation ACO Model, which require ACOs to assume greater risk for attributed beneficiaries.

These types of alliances are generally designed to respond to existing trends in the delivery of medical care, to increase physician availability to the community or to enhance the managed care capability of the affiliated hospital and physicians. However, these goals may not be achieved, and, if the development is not successful, it may produce materially adverse results that are counterproductive to some or all of the above-stated goals.

All such integrated delivery developments carry with them the potential for legal or regulatory risks in varying degrees. Such developments may call into question compliance with the

- 62 - anti-referral laws and relevant antitrust laws (discussed below under “Referral Laws” and “Antitrust”). Such developments may also subject the System Affiliates to state insurance department regulation. Questions of federal or state tax exemption may arise in certain types of developments or as a result of formation, operation or future modification of such developments (see “Tax Exemptions -- Tax-Exempt Status of System” above). MSOs which operate at a deficit over an extended period of time may raise significant risks of investigation or challenge regarding tax exemption or compliance with the anti-referral laws. In addition, depending on the type of development, a wide range of governmental billing and reimbursement issues may arise, including questions of the authorization of the entity to bill or collect revenue for or on behalf of the physicians involved. Other legal and regulatory risks may arise, relating to employment, pension and benefits, and corporate practice of medicine, particularly in the current atmosphere of frequent and often unpredictable changes in federal and state legal requirements regarding health care. There can be no assurance that such issues and risks will not lead to material adverse consequences in the future.

Affiliation, Merger, Acquisition and Disposition

As with many multi-hospital systems, the Corporation’s overall strategic planning and development process may include the evaluation and pursuit of potential merger and affiliation candidates. Discussions with respect to affiliation, merger, acquisition, disposition or change of use, including those which may affect System Affiliates, may be held in the future. These are most often conducted with acute care hospitals or hospital systems or physician practice groups and most often relate to hospitals or physician practice groups joining the System. As a result, it is possible that the organizations and assets which currently make up the System Affiliates will change from time to time and it is possible that new hospitals will be added as System Affiliates in the future.

As part of its on-going planning and property management functions, the Corporation reviews the use, compatibility and business viability of many of the Corporation’s operations, including those of the System Affiliates, and from time to time the Corporation may pursue changes in the use of, or disposition of, various assets of the System Affiliates, including hospital facilities. Likewise, the Corporation occasionally receives offers from, or conducts discussions with, third parties about the potential sale of some of the operations and properties which are a part of the System. Under the Master Indenture, the Members may dispose of a System Affiliate upon compliance with the provisions of the Master Indenture.

Currently, certain System Affiliates also have operating affiliations and joint ventures with other nonprofit and for profit corporations. In certain instances, such affiliates may conduct operations which are of strategic importance to the applicable System Affiliate, or their operations may subject the System Affiliate to potential legal or financial liabilities. In certain cases, System Affiliates fund the affiliates on a start-up or ongoing basis, and this funding may be significant.

Other Acquisitions and Affiliations

In addition to relationships with hospitals and physicians, the Corporation and the System Affiliates may consider, and may pursue, investments, ventures, affiliations, development and acquisition of other health care-related entities. These may include home health care, long-term care entities or operations, infusion providers, pharmaceutical providers, and other health care

- 63 - enterprises which support the overall operations and mission of the Corporation and the System Affiliates.

In addition, the Corporation and the System Affiliates may pursue such transactions with health insurers, HMOs, preferred provider organizations, third-party administrators and other health insurance-related businesses. Because of the integration occurring throughout the health care field, the Corporation will consider such arrangements where there is a perceived strategic or operational benefit for the Corporation or one or more System Affiliates.

All such initiatives may involve significant capital commitments and capital and operating risk (including, potentially, insurance risk) in a business in which the Corporation or the involved System Affiliate may have less expertise than in hospital operations. There can be no assurance that these projects, if pursued, will not lead to material adverse consequences.

Antitrust

Enforcement of the antitrust laws against health care providers is becoming more common, and antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, third-party contracting, physician relations, and joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state antitrust laws to health care is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various times, System Affiliates may be subject to an investigation by a governmental agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state agency or a private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state agencies, as well as by private litigants.

The ability to consummate mergers, acquisitions or affiliations may also be impaired by the antitrust laws, potentially limiting the ability of health care providers to fulfill their strategic plans. Liability in any of these or other antitrust areas of liability may be substantial, depending on the facts and circumstances of each case.

Other Regulatory and Contractual Matters

The Corporation and the System Affiliates are subject to additional extensive federal, state and local regulations governing licensure and operations. Failure by the Corporation or the System Affiliates to meet applicable standards could result in the loss of licensure, the delay in or loss of reimbursement or the loss of an ability to deliver services. There can be no assurance that federal, state or local governments will not impose additional restrictions on the operations of the Corporation and the System Affiliates that might adversely affect their businesses, financial condition and results of operations. See “Regulatory Environment” for additional risks related to governmental regulation.

Anti-Fraud and Abuse Laws

The federal anti-kickback law (the “Anti-Kickback Law”) makes it a felony to knowingly and willfully offer, pay, solicit or receive remuneration, directly or indirectly, in order to induce business that is reimbursable under any federal health care program. The statute has been

- 64 - interpreted to cover any arrangement where one purpose of the remuneration is to obtain referrals or to induce further referrals. The Affordable Care Act amended the intent requirement to provide that a person need not have actual knowledge of the Anti-Kickback Law or specific intent to commit a kickback violation to violate the statute, and it added penalties for the failure to grant timely access to HHS. Violation of the Anti-Kickback Law may result in imprisonment and fines, which could be substantial. In addition, HHS, through the OIG, has the authority to impose civil assessments and fines and to exclude hospitals engaged in prohibited activities from the Medicare, Medicaid, TRICARE (a health care program providing benefits to dependents of members of the uniformed services) and other federal health care programs for not less than five years. The Anti-Kickback Law also authorizes the imposition of penalties against any person who contracts with a provider that the person knows or should know is excluded from the federal health care programs. Although the Anti-Kickback Law applies only to federal health care programs, a number of states, including Maryland, have passed similar statutes that contain similar types of prohibitions that are applicable to all other health plans or third party payors. 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. However, these safe harbors are narrow and do not cover a wide range of common economic relationships involving hospitals. The regulations do not purport to comprehensively describe all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources. While the failure to comply with a statutory exception or regulatory safe harbor does not mean that an arrangement is unlawful, such failure may increase the likelihood of a regulatory challenge or the potential for investigation. To date, a limited number of final safe harbors have been established.

HIPAA created a new program operated jointly by HHS and the U.S. Attorney General to coordinate federal, state and local law enforcement with respect to fraud and abuse, including violations of the Anti-Kickback Law.

The Corporation and its System Affiliates seek to comply with the Anti-Kickback Law and have implemented mechanisms designed to assure compliance. Nevertheless, because of the breadth of the Anti-Kickback Law and the limitations of the safe harbor regulations, there can be no assurance that the Corporation or a System Affiliate will not be found to have violated the Anti- Kickback Law.

Stark Law

Another federal law (known as the “Stark Law”) prohibits a physician who has a financial relationship, or whose immediate family has a financial relationship, with an entity (including a hospital) from referring federal healthcare program patients to such entity for the furnishing of designated health services, with limited statutory and regulatory exceptions. Designated health services under the Stark Law include physical therapy services, speech-language pathology 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. No finding of intent to violate the Stark Law is required. Violations of the Stark Law, even if inadvertent, carry substantial penalties, including denial of payment for the services provided in violation of the prohibition,

- 65 - refunds of amounts collected in connection with prohibited referrals, exclusion from the federal healthcare programs and civil penalties, which could be significant. Knowing violations of the Stark Law may also serve as the basis for liability under the False Claims Act. The types of financial arrangements between a physician and an entity that trigger the self-referral prohibitions of the Stark Law are broad, and include ownership and investment interests and compensation arrangements. Arrangements that violate the Stark Law and do not fall within a statutory or regulatory exception are not subject to a case-by-case review, unlike violations of the Anti- Kickback Law. Rather, such arrangements are prohibited in all cases by the Stark Law.

CMS has established a voluntary self-disclosure program under which hospitals and other entities may report Stark violations and seek a reduction in potential refund obligations. However, the program is relatively new and therefore it is difficult to determine at this point in time whether it will provide significant monetary relief to hospitals that discover inadvertent Stark law violations and make a voluntary disclosure to the agency. The limited publicly available information with respect to the self-disclosure program and the short period it has been available make it difficult to predict how CMS will react to any specific voluntary disclosure of a Stark violation. The Corporation and the System Affiliates have made and in the future may make self-disclosures under this program as appropriate from time to time. Any submission pursuant to the self-disclosure program does not waive or limit the ability of the OIG or Department of Justice to seek or prosecute violations of the Anti-Kickback Law or impose civil monetary penalties.

Maryland, like many other states, has enacted a statute (the “Maryland Patient Referral Law” or “MPRL”) that is generally parallel to the Stark Law. The Maryland statute applies to all patients, not just those insured by a federal health care program as is the case under the Stark Law, and to all health care providers, not just physicians.

Because of the complexity of the Stark Law and the Maryland Patient Referral Law, there can be no assurance that the Corporation or a System Affiliate will not be found to have violated the Stark Law or the MPRL. Penalties for such violations, which may include exclusion of the Corporation or a System Affiliate from the Medicare and Medicaid programs and, for physicians and other practitioners, the loss of their license to practice, could have a material adverse effect on the future results of operations and financial condition of the Corporation or System Affiliate, as could any significant penalties, demands for refunds or denials of payment.

False Claims Act and Civil Monetary Penalties Laws

There are three principal federal statutes that address the issue of “false claims.” First, the False Claims Act imposes civil liability (including substantial monetary penalties and damages) on any person or entity that (1) knowingly presents or causes to be presented a false or fraudulent claim for payment to the United States government; (2) knowingly makes, uses or causes to be made or used a false record or statement to obtain payment; or (3) engages in a conspiracy to defraud the federal government by getting a false or fraudulent claim allowed or paid. Specific intent to defraud the federal government is not required to act with knowledge. This statute authorizes private persons to file qui tam actions (sometimes called “whistleblower” actions) on behalf of the United States of America. The government may choose to intervene and jointly litigate qui tam actions. These private persons, also known as “relators,” can collect between 15% and 30% of the proceeds of any fines or damages paid, in the event their cases are successful, depending on whether the government intervenes.

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False Claims Act investigations and cases have become common in the health care field and may cover a range of activity from submission of intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Penalties under the False Claims Act are severe and may include damages equal to three times the amount of the alleged false claims, as well as substantial civil monetary penalties. As a result, violations or alleged violations of the False Claims Act frequently result in settlements that require multi-million dollar payments and costly corporate integrity agreements. In June 2016 the United States Department of Justice issued a rule that more than doubles civil monetary penalties under the False Claims Act. These increases took effect on August 1, 2016 and apply to False Claims Act violations after November 2, 2015.

Under the Affordable Care Act, the False Claims Act has been expanded to include overpayments that are discovered by a health care provider and are not promptly refunded to the applicable federal health care program, even if the claims relating to the overpayment were initially submitted without any knowledge that they were false. The final rule which took effect on March 14, 2016 requires that providers report and return identified overpayments by the later of 60 days after identification, or the date the corresponding cost report is due, if applicable. If the overpayment is not so reported and returned, it becomes an “obligation” under the False Claims Act. This expansion of the False Claims Act exposes hospitals and other health care providers to liability under the False Claims Act for a considerably broader range of claims than in the past. There was initially great uncertainty in the industry as to when an overpayment is technically “identified” and the ability of a provider to determine the total amount of an overpayment and satisfy its repayment obligation within the required time period. The March 14, 2016 final rule clarified that an overpayment is considered to have been identified when the person has or should have, through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount of the overpayment. That final rule also established a six year lookback period, meaning overpayments must be reported and returned only if a person identifies the overpayment within six years of the date the overpayment was received.

In June 2016, the United States Supreme Court announced its decision in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7 (U.S. June 16, 2016). Prior to Escobar, lower courts had split on the issue of whether the False Claims Act extended to so-called “implied certification” of compliance with laws, and whether such compliance was limited to express conditions of payment or extended to conditions of participation. The United States Supreme Court affirmed the theory of “implied certification” and rejected the distinction between conditions of payment and conditions of participation for these purposes, ruling that the relevant inquiry is whether the alleged noncompliance, if known to the government, would have in fact been material to the government’s determination as to whether to pay the claim. There is considerable uncertainty as to the application of the Escobar holding, but depending on how it is interpreted by the lower courts, it could result in an expanded scope of potential False Claims Act liability for noncompliance with applicable laws, regulations and subregulatory guidance.

The Civil Monetary Penalties Law (“CMP”) authorizes the imposition of substantial civil monetary penalties against an entity which engages in activities such as, but not limited to, (1) knowingly presenting or causing to be presented to a federal or state officer, employee or agent a claim for services not provided as claimed or which is otherwise false or fraudulent in any way; (2) knowingly giving or causing to be given false or misleading information reasonably expected to influence the decision to discharge a hospital patient covered under Medicare; (3) offering or giving

- 67 - remuneration to any beneficiary of a federal health care program likely to influence the receipt of reimbursable items or services; (4) arranging for reimbursable services with an entity which is excluded from participation from a federal health care program; (5) knowingly or willfully soliciting or receiving remuneration for a referral of a federal health care program beneficiary; or (6) using a payment intended for a federal health care program beneficiary for another use. The Secretary of HHS, acting through the OIG, also has both mandatory and permissive authority to exclude individuals and entities from participation in federal health care programs pursuant to this statute as well as to impose penalties on providers that contract with individuals or entities that the provider knows is excluded from the federal health care programs.

Finally, it is a federal criminal offense to: (1) knowingly and willfully execute or attempt to execute any scheme to defraud any healthcare benefit program; or (2) obtain, by means of false or fraudulent pretenses, representations or promises any money or property owned or controlled by any healthcare benefit program. Penalties for a violation of this federal law include fines and imprisonment and forfeiture of any property derived from proceeds traceable to the offense.

A number of states (including Maryland) have passed similar statutes expanding the prohibition against the submission of false claims to nonfederal third party payors.

Although the False Claims Act has been in effect for many years, in recent years there has been a significant increase in the number of allegations filed under the False Claims Act, a large number of which involve the health care and pharmaceutical industries. This is due in part to the ability of relators, acting on the government’s behalf, to collect a sizable percentage of the verdict or settlement. In 2009, the Fraud Enforcement and Recovery Act (“FERA”) was enacted, which authorized increased funding for fraud investigation and prosecution and expanded the scope of the False Claims Act.

The threats of large monetary penalties and exclusion from participation in Medicare, Medicaid and other federal health care programs, and the significant costs of mounting a defense, create serious pressures on providers that are targets of false claims actions or investigations to settle. Therefore, an action under the False Claims Act, FERA or CMP could have an adverse financial impact on the Corporation and the System Affiliates, whether or not the particular claims are valid.

Physician Recruitment

The IRS and HHS have issued various pronouncements that could limit physician recruiting and retention arrangements. In an IRS General Counsel Memorandum concerning hospital- physician joint ventures, the IRS ruled that tax-exempt hospitals that provide recruiting and retention incentives to physicians risk loss of tax-exempt status unless the incentives are necessary to obtain an overriding public benefit; improvement of a charitable hospital’s financial condition does not necessarily constitute such a purpose. The IRS has also issued guidelines for its agents to follow in conducting audits that emphasize these restrictions, and has established special audit teams and procedures to ensure compliance. The OIG has taken the position that any arrangement between a federal healthcare program-certified facility and a physician that is intended to encourage the physician to refer patients may violate the federal Anti-Kickback Law unless a statutory or regulatory exception applies. While the OIG has promulgated a practitioner recruitment regulatory safe harbor, the safe harbor is limited to practice recruitment in areas that are health professional

- 68 - shortage areas and to the recruitment of new physicians who are relocating their practices. Therefore, the safe harbor does not cover physician recruitment and retention arrangements.

The Stark Law also is implicated by physician recruiting and retention arrangements. An exception applies to payments from a hospital to a physician to induce the physician to relocate to the hospital’s service area and join the hospital’s medical staff, provided several requirements are met. No assurance can be given that future regulations under the Stark Law will not adversely affect the Corporation and a System Affiliate.

Joint Ventures

The OIG has expressed concern in various advisory bulletins that many types of joint venture arrangements involving hospitals may implicate the Anti-Kickback Law, since the parties to joint ventures are typically in a position to refer patients of federal health care programs.

In 2003, the OIG issued a Special Advisory Bulletin on so-called “contractual joint ventures,” a subset of joint venture arrangements that the OIG believes is proliferating and that raises Anti-Kickback Law concerns. According to the OIG, contractual joint venture arrangements are arrangements where a provider such as a hospital expands into a new line of business by contracting with an entity that already provides the items or services.

As with any analysis under the Anti-Kickback Law, the government reviews the totality of the facts and circumstances presented by a proposed joint venture arrangement and concludes how much risk it poses under the Anti-Kickback Law, and whether, based on that risk, it would subject the parties to sanctions under the statute.

Deficit Reduction Act: Compliance Policy and Employee Training Requirements

The Deficit Reduction Act also established requirements for states participating in the Medicaid program to impose obligations on health care providers and others that receive at least $5 million annually in Medicaid payments to establish written policies and procedures designed to educate their employees (and certain contractors and agents) by providing detailed information about: (1) the federal False Claims Act and remedies under the law, (2) administrative remedies for false claims and statements established by the Federal Program Fraud Civil Remedies Act of 1986, (3) any state law false claims act and its remedies, (4) the whistleblower protections provided under such laws, (5) the role of such laws in preventing and detecting fraud, waste and abuse, and (6) the provider (or other party’s) policies and procedures that are in place for the prevention and detection of fraud, waste and abuse. Providers and other covered parties that do not adequately update their compliance policies, handbooks and other training materials or otherwise abide by these requirements run the risk of losing Medicaid reimbursement and risk potential liability under the False Claims Act and other federal and state fraud and abuse laws.

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Risks in Health Care Delivery

Utilization

A number of factors have contributed to a reduction of hospital utilization in recent years. Changes in physicians’ practice patterns have in some cases resulted in fewer inpatient admissions and shorter lengths of stay for those who are admitted. In addition, third-party payors, such as Medicare, Medicaid, Blue Cross and other insurers and health maintenance organizations, have sought to contain their costs by reviewing and questioning the need for certain procedures, inpatient admissions and hospital stays. Implementation of various aspects of the Affordable Care Act, including the development of accountable care organizations, may also impact hospital utilization.

Utilization of the facilities of the System Affiliates could be adversely affected by a decline in the population of their service areas, a change in the age composition of the population, a decline in the economic conditions of their service areas or other demographic shifts. Adverse economic conditions, particularly increased unemployment, in the service areas of the System Affiliates could reduce the number of potential patients carrying adequate health insurance coverage and decrease the number of patients who are able to pay fully for the cost of their care at the facilities of the System Affiliates.

Although the GBR model currently moderates the financial consequences to Maryland hospitals of utilization reductions, the long-term effect of reduced hospital utilization cannot be predicted at this time.

Competition

A significant portion of the System Affiliates’ revenues is derived from the treatment of patients at their facilities by members of their medical staffs. Physicians on the medical staff have the option of treating a particular patient at the facilities of the System Affiliates or at other health care facilities with which the physicians may be affiliated. Although the referral practices of physicians who are employed by System Affiliates may be governed by the terms of their employment agreements, physicians, even if employed, typically retain the right to direct patients in accordance with their understanding of the patient’s best interests. The revenues of the System Affiliates could decrease if medical staff members treat patients at, or refer or direct patients to, other health care providers or facilities, or if medical staff members employed by System Affiliates leave their employment and become employed by, or choose to refer their patients to, competitors of System Affiliates.

In addition to competition from other hospitals and inpatient facilities, increased competition from a wide variety of potential sources, including, but not limited to, ambulatory surgery facilities, radiology facilities and other outpatient health care facilities, clinics, physicians, home health care agencies, private pathology laboratories, drug and alcohol abuse programs and others, may adversely and increasingly affect the utilization and revenues of the System Affiliates. Existing and potential competitors may not be subject to various regulations and restrictions applicable to System Affiliates, and may be more flexible in their ability to adapt to competitive opportunities and risks. Certain new competitors specifically target hospital patients as their prime source of revenue growth. Certain of these forms of health care delivery are designed to offer comparable services at lower prices and the federal government and private third-party payors may increase their efforts to

- 70 - encourage the development and use of such programs. Competition may, in the future, arise from new sources not currently prevalent, such as telemedicine providers, or from other sources that have not yet been identified.

Also, payors are increasingly entering into narrow network contracts that exclude from participation in the network all providers who are not in the narrow network. Payors also enter into exclusive contracts with certain providers from time to time. In addition, increasingly, providers are pursuing ownership interest in health insurance companies that may exclude non-owner providers from certain products. The net effect of these practices, singularly or in the aggregate, may be to foreclose and exclude the Corporation or the System Affiliates from a material population of individuals who can choose or access the Corporation or the System Affiliates for their care and could have a material adverse effect on the System.

Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of the hospitals in the future or otherwise lead the way to new avenues of competition. These advances may add greatly to the costs of providing health care services with potentially no or little offsetting increase in reimbursement from payors and may also render obsolete certain of the health services provided by health care providers. In some cases, hospital investment in facilities and equipment for capital-intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology.

Throughout the past decade, market forces, including changes as a result of the Affordable Care Act and other reimbursement issues, have resulted in an increased trend toward consolidation of health care facilities, through either merger or acquisition, into larger hospitals or health systems. As a result of such consolidation, these hospitals and health systems are able to reduce costs and offer a wider variety of and greater access to core and specialty services. Many hospitals in Maryland have become members of larger systems. These changes may affect market share and may have a negative effect on the operations of the System Affiliates and utilization of their facilities, thereby potentially reducing revenues.

Labor Relations

Hospitals are large employers with a wide diversity of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective bargaining agreements with one or more labor organizations. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an adverse impact on operations, revenue and reputation. Certain of the System Affiliates have employees covered by collective bargaining agreements. See Appendix A -- “Employees.”

Physician Contracting and Relations

Certain System Affiliates have entered into a wide variety of relationships with physicians. Many of these relationships may be of material importance to the operations of the System Affiliates, and, in an increasingly complex legal and regulatory environment, these relationships pose a variety of legal and business risks.

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The primary relationship between a hospital and physicians who practice in it is through the hospital’s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges, or who have such membership or privileges curtailed, denied or revoked often file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties. All hospitals, including the System Affiliates, are subject to such risks.

Certain contracts entered into with physicians or physician groups create exclusive relationships. With increased competition among health care providers and the increasing frequency of the application of antitrust principles in health care, such exclusive relationships are subject to challenge, generally by other physicians competing with those who have the exclusive relationship. Absent facts which may arise from a specific challenge or controversy, the validity of such agreements cannot in many cases be accurately determined, nor can the materiality of the loss of the exclusive relationship to a hospital or the damages, if any, which might be assessed against the parties to it. Certain System Affiliates presently have exclusive relationships of the type described above. As of the date hereof, management of the Corporation is not aware of specific controversies which management believes might lead to the loss of an exclusive contractual relationship, or to an award of damages, that would be material with respect to the operation or financial condition of the System Affiliates.

The success of the Corporation and the System Affiliates will be partially dependent upon their ability to attract physicians to join the physician organizations and to participate in their networks, and upon the ability of the physicians, including the employed physicians, to perform their obligations and deliver high quality patient care in a cost-effective manner. There can be no assurance that the Corporation or the System Affiliates will be able to attract and retain the requisite number of physicians, or that physicians will deliver high quality health care services. Without paneling a sufficient number and type of providers, the Corporation and the System Affiliates could fail to be competitive, could fail to keep or attract payor contracts, or could be prohibited from operating until its panel provided adequate access to patients. Such occurrences could have a material adverse effect on the business or operations of the System.

Technology and Services

Scientific and technological advances, new procedures, drugs and appliances, preventive medicine, occupational health and safety and outpatient health care delivery may reduce utilization and revenues of the System Affiliates in the future. Technological advances in recent years have accelerated the trend toward the use by hospitals of sophisticated, and costly, equipment and services for diagnosis and treatment. The acquisition and operation of certain equipment or services may continue to be a significant factor in hospital utilization, but the ability of the System Affiliates to offer such equipment or services may be subject to the availability of equipment or specialists, governmental approval or the ability to finance such acquisitions or operations. The American Recovery and Reinvestment Act of 2009 allocated $20 billion to health care information technology, and the Affordable Care Act mandated that certain health care providers implement electronic medical records by 2014 or be subject to reductions in reimbursement from federal

- 72 - programs. The costs to acquire and implement an electronic medical records system are significant but it is widely believed that such systems will lead to greater efficiencies in the provision of patient care and improved quality of care.

The ability to adequately price and bill healthcare services and to accurately report financial results depends on the integrity of the data stored within information systems, as well as the operability of such systems. Information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. There can be no assurance that the information systems of the System Affiliates will adequately address these challenges.

Electronic media are also increasingly being used in clinical operations, including the conversion from paper to electronic medical records, computerization of order entry functions and the implementation of clinical decision-support software. The reliance on information technology for these purposes imposes new expectations on physicians and other workforce members to be adept in using and managing electronic systems. It also introduces risks related to patient safety and to the privacy, accessibility and preservation of health information. See “Health Insurance Portability and Accountability Act” and “Health Information Technology for Economic and Clinical Health Act” above. Technology malfunctions and any failure to understand and use information systems properly could result in the dissemination of or reliance on inaccurate information, as well as in disputes with patients, physicians and other health care professionals. Health information systems may also be subject to different or higher standards or greater regulation than other information technology or the paper-based systems previously used by healthcare providers, which may increase the cost, complexity and risks of operations. All of these risks may have adverse consequences for hospitals and healthcare providers.

Enforcement Affecting Clinical Research

In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also stepped up enforcement of laws and regulations governing the conduct of clinical trials at hospitals. The Department of Health and Human Services elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibility for monitoring federally funded research. In addition, the National Institutes of Health significantly increased the number of facility inspections that these agencies perform. The Food and Drug Administration (“FDA”) also has authority over the conduct of clinical trials performed in hospitals when these trials are conducted on behalf of sponsors seeking FDA approval to market the drug or device that is the subject of the research. Moreover, the OIG, in its “Work Plans,” has included several enforcement initiatives related to reimbursement for experimental drugs and devices (including kickback concerns) and has issued compliance program guidance directed at recipients of extramural research awards from the National Institutes of Health and other agencies of the U.S. Public Health Service. There have been a number of government investigations and settlements involving hospital use of federal grant funding in connection with clinical trials and also a settlement involving the submission of claims to Medicare for services provided in a clinical trial. These agencies’ enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs, and errors in billing of the Medicare Program for care provided to patients enrolled in clinical trials that is not eligible for Medicare reimbursement can subject the System Affiliates to sanctions as well as repayment

- 73 - obligations. In January 2017, HHS issued new final regulations governing clinical research activities, and it is difficult to determine at this time how those new rules will affect potential liability of health care providers engaging in clinical research. In addition to risks under the False Claims Act, should there be a finding of improper conduct on the part of the Corporation and the System Affiliates related to research, it is possible that the government could suspend the Corporation or the System Affiliates’ research operations or terminate the Corporation or the System Affiliates’ ability to participate in government-sponsored research programs.

The Cures Act contains many provisions related to research and clinical trials, including making significant changes to the way that FDA approves new drugs and medical devices. Among other things, the legislation calls on FDA to consider new types of data, such as patient experience data, in its drug approval process. The legislation also permits drug manufacturers to utilize new types of clinical trial designs in order to collect data in the drug approval process. The intent of many of the statute’s provisions is to speed the approval of new drugs and medical devices. Whether the Cures Act realizes these goals will depend on the adoption of new FDA regulations, policy guidance, and FDA approval practices. Also see “Bondholders’ Risks -- The Cures Act and Health Information Technology and Privacy.” Furthermore, final revisions to the Federal Policy for the Protection of Human Subjects (known as the “Common Rule”) were issued on January 19, 2017. These revisions are intended to reduce burden, delay and ambiguity for investigators and better protect human subjects involved in research. The impact of these recent and anticipated regulatory, policy and legislative changes on the operations of the System related to research cannot be predicted.

Class Actions

Hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability and peer review litigation with physicians, among others. In recent years, class action litigation has emerged as a potentially significant source of liability for hospitals and health systems.

One frequent basis of class action litigation has been hospital billing and collections practices. Federal law and the laws of many states (including Maryland) impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces, such as hospitals, are susceptible to actual and alleged violations of these standards, and there has been a proliferation of lawsuits over these issues in recent years. Another basis of recent class actions relate to breaches of privacy. Class actions may also be used for a variety of other causes of action.

Class action lawsuits can involve multi-million dollar claims, judgments and settlements. Further, the subject matter of class action suits may involve uninsured risks. Since such actions often involve large potential classes of plaintiffs, a major class action decided or settled adversely to any System Affiliate could have a material adverse impact on the financial condition and results of operations of the Corporation and the System Affiliates.

Personnel Shortages

From time to time, the health care industry suffers from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. In addition, aging

- 74 - medical staffs and difficulties in recruitment to the medical profession are predicted to result in physician shortages. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. As hospitals and other health care providers transition to a population health model of care delivery, there is expected to be a greater need for care coordinators and such need may outpace the supply of qualified personnel. In addition, state budget cuts to university programs may impact the training available for nursing personnel and other health care professionals. Competition for physicians and other health care professionals, coupled with increased recruiting and retention costs, will increase hospital operating costs, possibly significantly, and growth may be constrained. This trend is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for physicians and employees, coupled with increased recruiting and retention costs, may increase hospital operating costs, possibly significantly. This trend could have a material adverse impact on hospitals. As reimbursement amounts are reduced to health care facilities and organizations that employ or contract with physicians, nurses and other health care professionals, pressure to control and possibly reduce wage and benefit costs may further strain the supply of those professionals.

The health care industry is facing a nationwide shortage of nursing and allied health care professionals, including registered nurses. A shortage of nursing staff and allied health care professionals could result in escalating labor costs, delays in providing care, and patient care management issues, among other adverse effects. The shortage of nurses and allied health care professionals may be exacerbated if the increase in access to coverage provided under the Affordable Care Act leads to an increase in demand for medical care or a greater reliance on nursing staff and allied health care professionals. The Affordable Care Act includes numerous workforce programs that should have an impact on existing and projected shortages of nurses and allied health care professionals and increase their availability. There can be no assurance that a shortage of nurses and allied health care professionals will not adversely affect the operations or financial condition of the Corporation and the System Affiliates.

Action by Purchasers of Hospital Services and Consumers

Major purchasers of hospital services also could take action to restrain hospital charges or charge increases. As a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services. Decreased utilization could result, and hospitals’ revenues may be negatively impacted. In addition, consumers and groups on behalf of consumers are increasing pressure for hospitals and other health care providers to be transparent and provide information about cost and quality of services that may affect future consumer choices about where to receive health care services.

Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures

Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of healthcare services provided by hospitals and providers. The Affordable Care Act shifts the basis of payments from the volume of services to the value of services, based on

- 75 - various health outcome measures. Published rankings such as Medicare’s “Hospital Compare” quality ranking systems, “score cards,” “pay for performance” and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals, the members of their medical staffs and other providers and influence the behavior of consumers and providers such as the System Affiliates. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital or a provider negatively may adversely affect its reputation and financial condition.

Licensing, Surveys, Investigations and Accreditations

Each of the System Hospitals and certain of the facilities operated by the System Affiliates are certified as providers for Medicare services, and such System Affiliates intend to continue to participate in the Medicare program. The requirements for Medicare certification are subject to change, and in order to remain qualified for the program, it may be necessary for the System Affiliates to effect changes from time to time in their facilities, equipment, personnel, billing processes, policies and services.

Health facilities, including those of the System Affiliates, are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements relating to Medicare and Medicaid participation and payment, state licensing agencies, private payors and The Joint Commission. Renewal and continuance of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require or include affirmative action or response by a System Affiliate. These activities generally are conducted in the normal course of business of health facilities. Nevertheless, an adverse action could result in a loss or reduction in a System Affiliate’s scope of licensure, certification or accreditation, or could reduce the payment received or require repayment of amounts previously remitted.

Management of the Corporation currently anticipates no difficulty renewing or continuing currently held licenses, certifications or accreditations, nor does it anticipate a reduction in third- party payments from such events that would materially adversely affect the operations or financial condition of the System Affiliates. See Appendix A -- “Acute Care Facilities -- Licenses and Accreditations” as to the current status of the licenses and accreditations of the System Affiliates. Nevertheless, actions in any of these areas could result in the loss of utilization or revenues, or the System Affiliates’ inability to operate all or a portion of their health facilities, and, consequently, could have a material adverse effect on the System Affiliates’ ability to make the debt service payments relating to the Bonds.

Limitations on Enforceability of Rights and Remedies

The Master Trustee’s security interest in the Pledged Revenues created by the Master Indenture and the Deeds of Trust is subject to, among other things, Permitted Encumbrances and the following:

(i) statutory liens or rights arising in favor of the Authority and the Bond Trustee by virtue of the operation of the Act;

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(ii) other statutory liens;

(iii) rights arising in favor of the United States of America or any agency thereof;

(iv) prohibitions against assignment contained in state or federal law, including those governing Medicare and Medicaid, and the absence of an express provision permitting assignment of receivables due under the contracts with third party payors;

(v) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction;

(vi) state and federal insolvency or bankruptcy laws affecting Pledged Revenues earned by any Member or Guarantor within the statutorily prescribed preference period prior to any effectual institution of bankruptcy proceedings by or against such Member or Guarantor and thereafter;

(vii) rights of third parties in any Pledged Revenues not in the possession of the Master Trustee; and

(viii) the requirement that appropriate financing statements be filed and continued in accordance with the Uniform Commercial Code as in effect from time to time.

The legal right and practical ability of the Authority and Bond Trustee to enforce their rights and remedies against the Corporation under the Loan Agreement and the 2017A Obligation and of the Master Trustee to enforce its rights and remedies against the Corporation, any future Member of the Obligated Group or any Guarantor under the Master Indenture, the Guaranty Agreement and the Deeds of Trust will depend upon the exercise of various remedies specified by such documents which may in many instances require judicial actions that are often subject to discretion and delay or that otherwise may not be readily available or may be limited.

Limitations Relating to Remedies under the Deeds of Trust

Recovery Value. The Deeds of Trust encumber substantial portions of the facilities of the System Hospitals. The Mortgaged Property consists of special purpose facilities with limited alternative possible uses based upon design and construction of the buildings, zoning and other factors. No appraisal has been undertaken to determine the fair market value of the Mortgaged Property. There can be no assurance that if any event of default were to occur under the Master Indenture, the Guaranty Agreement or any Deed of Trust (i) any part or all of the Mortgaged Property could be foreclosed upon and sold for an amount sufficient to pay the outstanding principal of and interest on the outstanding Obligations, or (ii) any bid would be received for the Mortgaged Property. Even if received, such bid would be unlikely to fully pay the outstanding principal of and interest on the outstanding Obligations.

Priority of the Liens. The liens created under the Deeds of Trust constitute security interests in the Mortgaged Property, subject to Permitted Encumbrances. The liens are subordinate

- 77 - to and independent of liens for general property taxes, special taxes and assessments. Additional special taxes or assessments may be imposed on the Mortgaged Property by the cities or counties in which each is located and any other public agencies having jurisdiction. Such future special taxes or assessments would have priority over the liens created under the Deeds of Trust. Additionally, the System Hospitals may create Permitted Encumbrances which have priority over the liens created under the Deeds of Trust. The MedStar Washington Hospital Center campus is subject to the lien of a Permitted Encumbrance in the amount of $21,504,039 in favor of the United States government. This encumbrance was created in the deed of the hospital property from the United States government to MedStar Washington Hospital Center in February 1960. There is no repayment date for this lien stated in the deed. Under enabling legislation, it appears that repayment could be required after a determination that the property is no longer required for hospital services or the property is disposed of, in which event all or a portion of the amount secured by the lien may be payable to the government. This lien is subordinated to the Deed of Trust on the Washington Hospital Center campus.

Title Insurance and Property Descriptions. In 2004, the System Hospitals delivered to the Master Trustee simultaneously with issuance of the 2004 Authority Bonds, ALTA Lenders Title Policies insuring the priority of the liens created by the Deeds of Trust. The policies provide coverage in the aggregate amount of $20,000,000 for the benefit of the Master Trustee. In 2013, the MedStar Southern Maryland Hospital Center, Inc. delivered to the Master Trustee simultaneously with the issuance of the 2013B Authority Bonds, an ALTA lenders title policy insuring the priority of the lien created by the deed of trust for MedStar Southern Maryland Hospital Center. This policy provides coverage in the aggregate amount of $33,600,000. The lenders title policies provide financial insurance against a recorded monetary lien against the Mortgaged Property that is not revealed by the title insurance policies (an “Undisclosed Lien”). The title policies contain a number of exceptions, including an exception for claims based on any inaccuracies in the property description that would have been disclosed in a survey. New surveys were not conducted in connection with the execution and delivery of the Deeds of Trust. There is no assurance that the title policies would provide adequate insurance coverage if there is an Undisclosed Lien on the Mortgaged Property.

Hazardous Substances. While governmental taxes, assessments and charges are common claims against the value of property, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized is a claim with regard to hazardous substances. In general, the System Hospitals may be required by law to remedy conditions of the Mortgaged Property relating to release of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as “CERCLA” or the “Superfund Act,” is the most well-known and widely applicable of these laws. Under many of these laws, the owner (or operator) is obligated to remedy a hazardous substance condition on property, whether or not the owner (or operator) had or has anything to do with the creation or handling of the hazardous substance. Consequently, if any part of the Mortgaged Property is affected by a hazardous substance, the marketability and value of the parcel may be reduced by the cost of remedying the condition. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling the hazardous substance. Any of these circumstances could significantly affect the value of the Mortgaged Property that would be realized upon a delinquency and foreclosure.

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Amendments. As discussed above, the Corporation intends to amend the Guaranty Agreement to remove the requirement that obligations of the Guarantors under the Guaranty Agreement be secured by real property liens under the Deeds of Trust. On or after the effective date of such amendment, the Corporation may remove some or all of the Deeds of Trust that are currently in place. See “Security and Sources of Payment for the Bonds -- Deeds of Trust; Amendment Regarding Deeds of Trust.”

Bankruptcy

The Bond Indenture, the Loan Agreement, the Master Indenture, the Obligations, the Guaranty Agreement, the Deeds of Trust and the Bonds are subject to bankruptcy, insolvency, moratorium, reorganization and other state and federal laws affecting the enforcement of creditors’ rights and to general principles of equity. For additional detail, reference is made to the Bankruptcy Code, 11 U.S.C. §101 et seq. A claim for payment of the principal of or interest on the Bonds could be made subject to any statutes that may be constitutionally enacted by the United States Congress or the Maryland General Assembly affecting the time and manner of payment or imposing other constraints upon enforcement.

In the event of bankruptcy of the Corporation, any future Member or any Guarantor, the rights and remedies of the Bondholders are subject to various provisions of the federal Bankruptcy Code. If the Corporation, any future Member or any Guarantor were to file a petition in bankruptcy, payments made by the Corporation or that Member or Guarantor during the 90-day (or perhaps in certain circumstances one-year) period immediately preceding the filing of such petition may be avoidable as preferential transfers to the extent such payments allow the recipients thereof to receive more than they would have received in the event of the liquidation of the Corporation or such Member or Guarantor. Such a bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Corporation, any future Member or Guarantor and its property, and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property as well as various other actions to enforce, maintain or enhance the rights of the Bond Trustee and the Master Trustee. If the bankruptcy court so ordered, the property of the Corporation, such Member or Guarantor, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of the Corporation, such Member or Guarantor. The rights of the Bond Trustee and Master Trustee to enforce the Loan Agreement, the Guaranty Agreement, the Deeds of Trust and the Master Indenture could be delayed during the pendency of the rehabilitation proceeding.

The Corporation, such Member or Guarantor could file a plan for the adjustment of its debts in any such proceeding which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are conditions that the plan be feasible and be accepted by each class of impaired claims thereunder. Each class of claims has accepted the plan if at least two- thirds in dollar amount and more than one-half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly.

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In the event of bankruptcy of the Corporation, any future Member or any Guarantor, there is no assurance that certain covenants, including tax covenants, contained in the Loan Agreement, the Guaranty Agreement and certain other documents would survive. Accordingly, a bankruptcy trustee could take action which would adversely affect the exclusion of interest on the Bonds from gross income of the Bondholders for federal income tax purposes. Further, the obligation of any Member to make payments of debt service on the 2017A Obligation may not be enforceable under applicable state insolvency, fraudulent conveyance, bankruptcy, trust and other laws.

The state of insolvency, fraudulent conveyance and bankruptcy laws relating to the enforceability of obligations issued by one corporation in favor of the creditors of another, including the obligation of any Member or Guarantor to make debt service payments on behalf of another Member or Guarantor or of a System Affiliate to make debt service payments on behalf of the Corporation or any future Member is unsettled, and the ability to enforce such obligations under the Master Indenture and the Guaranty Agreement against any Member or Guarantor, respectively, or any System Affiliate which would be rendered insolvent thereby could be subject to challenge. In particular, such obligations may be voidable under the Bankruptcy Code or applicable state fraudulent conveyance statutes if the obligation is incurred without “fair” and “fairly equivalent” consideration to the obligor and if the incurrence of the obligation thereby renders the Member, Guarantor or System Affiliate insolvent. The standards for determining the fairness of consideration and the manner of determining insolvency are not clear and may vary under the United States Bankruptcy Code and state fraudulent conveyance statutes and judicial opinions with respect to them.

Additional Limitations on Enforceability

In addition to the limitations described above under “Bankruptcy,” the joint and several obligation described herein of each Member and Guarantor to make payments, or to cause System Affiliates to make payments, of debt service on an Obligation, the proceeds of which Obligation were not loaned or otherwise made available to such Guarantor or System Affiliate, may not be enforceable to the extent that such payments (i) will be made on an Obligation issued for a purpose that is not consistent with the charitable purposes of the entity from which such payment is requested or is subject to the application of charitable trust principles which may vary from jurisdiction to jurisdiction; (ii) will be made from any property that is donor restricted or that is subject to a direct or express trust that does not permit the use of such property for such payments; (iii) would result in the cessation or discontinuation of any material portion of the services previously provided by the entity from which such payment is requested; or (iv) will be made pursuant to any loan violating applicable usury laws. Due to the absence of clear legal precedent in this area, the extent to which any of the limitations described above would be applicable to any Guarantor or System Affiliate cannot be determined and could be substantial.

There exists, in addition to the foregoing, common law authority and authority under various state statutes pursuant to which courts may terminate the existence of a not for profit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry out such purposes. Such court action may arise on the court’s own motion or pursuant to a petition of a state attorney general or such other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses.

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As described above under “Bankruptcy,” in determining whether various covenants and tests contained in the Master Indenture are met, the System Affiliates will be combined, notwithstanding uncertainties as to the enforceability of certain obligations of the Members contained in the Master Indenture which bear on the availability of the revenues of the System Affiliates for payment of debt service on the Obligations, including the 2017A Obligation.

In addition to the limitations on enforceability described above, the realization of rights under the Master Indenture, the Bond Indenture, the Loan Agreement, the Guaranty Agreement and the Deeds of Trust upon a default by an Obligated Group Member depends upon the exercise of various remedies specified in such agreements. These remedies may require judicial action which is often subject to discretion and delay. Under existing law, certain of the remedies specified in the Master Indenture, the Bond Indenture, the Loan Agreement, the Guaranty Agreement and the Deeds of Trust may not be readily available or may be limited. For example, a court may decide not to order the specific performance of the covenants contained in the Master Indenture, the Bond Indenture, the Loan Agreement, the Guaranty Agreement or the Deeds of Trust. Accordingly, the ability of the Authority or the Trustee to exercise remedies under such agreements upon an Event of Default could be impaired by the need for judicial or regulatory approval.

In addition, the bankruptcy of a health plan or physician group that is a party to a significant managed care arrangement with the Corporation or one or more of the System Affiliates could have material adverse effects on the Corporation, the Guarantors or the System Affiliates.

General Litigation and Insurance

Litigation

In common with other multi-institutional systems, there are, at any point in time, a number of medical malpractice actions filed or pending involving System Affiliates. Generally, these will be paid or settled from insurance or self-insurance coverage, and some will not be pursued by plaintiffs. However, certain actions may seek punitive or other damages, which may not be covered by insurance. Litigation also arises from the corporate and business activities of the System Affiliates and certain affiliates, from their status as major employers, and as a result of medical staff peer review or the denial of medical staff privileges. A Supreme Court decision now allows physicians who are subject to adverse peer review proceedings to file federal antitrust actions against hospitals and seek treble damages. Many of these risks are covered by insurance or self- insurance, but some are not. In the unlikely event that a substantial number of uncovered claims were to be determined adversely to the System Affiliates who are defendants in such claims, and substantial monetary damages were to be awarded in each, there could be a material adverse effect on the System Affiliates’ financial condition. See “Legal Matters” in Appendix A.

Insurance

For a description of insurance carried by the Corporation, see “Insurance” in Appendix A.

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Amendment of Legal Documents

Certain amendments of the Master Indenture, the Bond Indenture, the Loan Agreement, the Guaranty Agreement and the Deeds of Trust may be made without notice to or the consent of the Bondholders, or in some cases with the consent of the holders of a majority in aggregate principal amount of the Obligations or the Bonds. See “Summary of Certain Provisions of the Master Indenture -- Supplemental Master Indentures Not Requiring Consent of Obligation Holders,” “-- Supplemental Master Indentures Requiring Consent of Obligation Holders” and “Summary of Certain Provisions of the Bond Indenture -- Amendments or Modifications of Bond Indenture and Loan Agreement” in Appendix C. Such amendments may adversely affect the security for the Bonds.

Ratings

There is no assurance that the ratings assigned to the Bonds at the time of issuance will not be reduced or withdrawn at any time. Any such reduction or withdrawal could adversely affect the market price or the marketability of the Bonds in the secondary market. See “Ratings.”

Secondary Market

There can be no assurance that there will be a secondary market for the purchase or sale of the Bonds. None of the Underwriters nor any other financial institution is obligated to make a market in the Bonds, and any financial institution that does so may discontinue its market-making activities at any time without notice. From time to time there may be no market for the Bonds depending upon prevailing market conditions, the financial condition or market position of firms who may make the secondary market and the financial condition and results of operations of the System Affiliates. The Bonds should therefore be considered long-term investments in which funds are committed to maturity.

Prepayment Risks

The Bonds are subject to redemption, without premium, in advance of their stated maturities under certain circumstances. See “The Bonds -- Redemption Provisions -- Extraordinary Optional Redemption.” Upon the occurrence of certain events of default, the payment of the principal of and interest on the Bonds may be accelerated. See “Summary of Certain Provisions of the Bond Indenture -- Events of Default and Remedies” in Appendix C. The Bonds are also subject to optional redemption prior to maturity on the dates and at the prices specified under “The Bonds -- Redemption Provisions -- Optional Redemption.” Thus, there can be no assurance that the Bonds will remain outstanding until their stated maturities.

Financial Information

Certain financial information regarding the Corporation and the System Affiliates is set forth in Appendices A, B and B-1. There can be no assurance that the financial results achieved in the future will be similar to the results indicated. Future results will vary from the results indicated and the variations may be material. Therefore, the operating results indicated cannot be taken as a

- 82 - representation that the Corporation and the System Affiliates will be able to generate sufficient revenues in the future to fulfill the obligations under the Master Indenture.

Risks Related to Variable Rate Obligations

Certain outstanding securities issued for the benefit of the Corporation are variable interest rate obligations, the interest rates on which could rise. Such interest rates vary on a periodic basis and may be converted to a fixed interest rate. This protection against rising interest rates is limited, however, because the Corporation would be required to continue to pay interest at the variable rate until it is permitted to convert the obligations to a fixed rate pursuant to the terms of the applicable transaction documents. Prior credit market turmoil in the auction rate markets and dislocation among various bond insurers and swap providers triggered suddenly high interest costs to many healthcare organizations.

Risks Related to Construction of the Project

The Project is subject to the risk of delays due to a variety of factors including, among others, delays in obtaining the necessary permits, licenses and other governmental approvals, site difficulties, labor disputes, delays in delivery and shortage of materials, weather conditions, fire and other casualties and default by the Corporation, the General Contractor, any other contractor or subcontractors. If completion of the Project is delayed beyond the estimated construction period, receipt of certain revenues projected from the operation of the Project may be delayed.

On June 8, 2017, the District of Columbia Zoning Commission issued a unanimous bench ruling approving the construction of the MGUH Project. The Zoning Commission’s ruling was made without objection following a public hearing in which the MGUH Project was supported on the record by the Georgetown Community Partnership (an advisory group created by the Zoning Commission in 2012), the affected Advisory Neighborhood Commissions (locally elected advisory groups), the Citizens Association of Georgetown (a neighborhood civic association), the Burleith Citizens Association (a neighborhood association), and others who might otherwise have had standing to object to the MGUH Project. The MGUH Project is also supported by the Old Georgetown Board and the Commission on Fine Arts (federally chartered agencies with purview over historic preservation and aesthetics). Over the past two years, the Corporation has regularly engaged with all of these organizations and the neighbors surrounding the MedStar Georgetown University Hospital Campus to share the MGUH Project plans and to seek feedback. This intensively collaborative process allowed concerns to be voiced and addressed, and ultimately resulted in the strong support of these organizations. There are no known opponents to the MGUH Project. A Zoning Commission decision may be appealed by an individual or organization with standing to challenge the decision, and appellate review is limited to whether the findings and decision are supported by substantial evidence on the record. Such a review may be requested for up to 30 days following publication of a final order. Pending a decision on appeal, the Zoning Commission approval remains in effect. In light of the Corporation’s work to identify and engage all who might be affected by the MGUH Project, the strong support from the organizations listed above, and the lack of any opposition on the record, the Corporation believes that the possibility of a challenge to the Zoning Commission’s approval is extremely remote. While there is no prescribed timeframe for a final order, the Corporation is working to expedite this process and will begin the MGUH Project promptly in accordance with the MGUH Project timeline without waiting for the appeal period to run.

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Management of the Corporation believes that the proceeds of the Bonds, together with other funds of the Corporation and the System Affiliates, will be sufficient to finance the costs of the Project. The cost of construction of the Project may be affected by factors beyond the control of the Corporation, the General Contractor or any other contractor, or subcontractors constructing any portion of the Project, including, but not limited to, labor disputes, delays in delivery and shortage of materials, site difficulties, adverse weather conditions, subcontractor defaults, fire and casualty and unknown contingencies. The Corporation expects to enter into the Construction Agreement with a guaranteed maximum price provision in connection with the MGUH Project. The Corporation, however, cannot make any assurances that it will be able to enter into the Construction Agreement with a guaranteed maximum price that does not substantially exceed the amount of the Corporation’s projected cost of the MGUH Project or on other terms acceptable to the Corporation.

Hedging Transactions

The Corporation has entered into an interest rate swap agreement and the Corporation and the System Affiliates from time to time in the future may enter into additional hedging arrangements to hedge the interest payable or manage interest cost on indebtedness, assets or any other derivative arrangements. See Appendix A -- “Management’s Discussion and Analysis of Operations and Financial Condition -- Interest Rate Swap Agreement.” Changes in the market value of such agreements could have a negative impact upon the operating results and financial condition of the Corporation and the System Affiliates, and such impact could be material. The existing interest rate swap agreement is and any future hedging agreement may be subject to early termination upon the occurrence of certain events. If either the Corporation or a System Affiliate or the counterparty terminates any hedge agreement when such agreement has a negative value to the Corporation or System Affiliate, the Corporation or System Affiliate could be obligated to make a substantial termination payment, which could materially adversely affect the financial condition of the Corporation and System Affiliates.

Other Factors

Additional factors which may affect future operations, and therefore revenues, of the System Affiliates include the following, among others:

(1) Changes in key management personnel.

(2) The fact that MedStar Washington Hospital Center and MedStar Georgetown University Hospital are teaching hospitals is of considerable importance in attracting patients and highly qualified and skilled physicians, which ability may be adversely affected in the event of any adverse change in the relationship of these System Hospitals with the School of Medicine of Georgetown University or loss of approved status for their residency programs.

(3) Reductions in utilization of health care facilities as a result of preventive medicine, improved occupational health and safety, development and utilization of medical and scientific research and technological advances and other developments.

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(4) Future legislation and regulations affecting hospitals, governmental and commercial medical insurance and the health care industry in general, including reductions in federal or state funding of Medicare, Medicaid or other government- financed health care reimbursement programs.

(5) Changes in reimbursement procedures or in contracts under the Blue Cross program or other public or private insurance programs.

(6) Increased costs of attracting and retaining or decreased availability of a sufficient number of physicians, registered nurses and other allied health professionals.

(7) Increased costs resulting from further unionization of the employees of the Corporation or System Affiliates or the utilization by a non-union employee of the Corporation or any System Affiliate of proceedings available under the National Labor Relations Act. See “Employees” in Appendix A.

(8) The health care facilities owned by the Corporation and System Affiliates are comprised of special-purpose facilities that are not suitable for industrial or commercial use; consequently, it could be difficult to find a buyer or lessee for such health care facilities if the Corporation or System Affiliates seek to sell any of their facilities.

(9) Depletion of the Medicare Trust Fund or state funds available for the payment of Medicaid reimbursement or any failure of third-party payors to pay amounts owed to any System Affiliate in a timely manner could have a materially adverse impact upon such System Affiliate.

(10) The development of advantageous business relationships may be adversely affected by federal and state anti-trust laws and regulations.

(11) Increases in costs, including costs associated with, among other things, salaries, wages and fringe benefits, supplies, innovative technology and sophisticated equipment, insurance, energy and other utilities, the attraction and retention of physicians and nurses, compliance with or violation of laws and regulations concerning environmental quality, work safety, accommodating persons with disabilities and other matters and other costs that could result in a sizable increase in expenditures without a corresponding increase in revenues.

(12) Inability of the Corporation or any System Affiliate to obtain future governmental approvals to undertake additional projects necessary to remain competitive as to rates, charges and the quality and scope of care or any limitation on the availability of tax-exempt or other financing for future projects.

(13) The operations of the Corporation or the System Affiliates and the generation of revenues from their facilities could be impaired by the occurrence of natural disasters, including floods, hurricanes, tornadoes and earthquakes, or the occurrence of criminal or terrorist acts or other calamities could damage the facilities

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of the Corporation or any System Affiliate and interrupt utility service to their facilities, or the occurrence of a pandemic or an epidemic or other public health emergency or crisis, including an unexpected widespread outbreak of a contagious virus such as Ebola, Zika, or H1N1, may put stress on the capacity of part or all of the facilities of the System Affiliates, could require that resources be diverted from one part of the operations of the System to another part, or could impair the operation of part or all of the facilities of the System.

(14) Imposition of wage and price controls for the health care industry, such as those that were imposed and adversely affected health care facilities in the early 1970s.

The paragraphs above discuss certain Bondholders’ risks, but are not intended to be a complete enumeration of all risks associated with the purchase or holding of the Bonds.

UNDERWRITING

The Bonds are being purchased by J.P. Morgan Securities LLC (“JPMS”), as representative on behalf of itself and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Loop Capital Markets LLC (“LCM”), RBC Capital Markets, LLC, U.S. Bancorp Investments, Inc. (“USBII”) and Wells Fargo Bank, National Association (collectively, the “Underwriters”). The Underwriters have jointly and severally agreed to purchase the Bonds at an underwriters’ discount of $______from the initial public offering price of the Bonds. The obligation of the Underwriters to purchase the Bonds is subject to certain conditions set forth in the Bond Purchase Contract between the Authority and the Underwriters and approved by the Corporation (the “Bond Purchase Contract”). The Bond Purchase Contract provides that the Underwriters will purchase all the Bonds, if any are purchased. The Corporation has agreed to indemnify the Underwriters and the Authority against certain liabilities, including certain liabilities under federal and state securities laws.

The Underwriters may offer and sell Bonds to certain dealers (including dealers depositing Bonds into investment trusts, certain of which may be sponsored or managed by an Underwriter) and others at prices lower than the offering price of the Bonds.

JPMS, one of the Underwriters of the Bonds, has entered into negotiated dealer agreements (each, a “Dealer Agreement”) with each of Charles Schwab & Co., Inc. (“CS&Co.”) and LPL Financial LLC (“LPL”) for the retail distribution of certain securities offerings, including the Bonds, at the original issue prices. Pursuant to each Dealer Agreement (if applicable to this transaction), each of CS&Co. and LPL will purchase Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Bonds that such firm sells.

Citigroup Global Markets Inc., an underwriter of the Bonds, has entered into a retail distribution agreement with UBS Financial Services Inc. (“UBSFS”). Under this distribution agreement, Citigroup Global Markets Inc. may distribute municipal securities to retail investors through the financial advisor network of UBSFS. As part of this arrangement, Citigroup Global Markets Inc. may compensate UBSFS for its selling efforts with respect to the Bonds.

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US Bancorp is the marketing name of U.S. Bancorp and its subsidiaries, including USBII, which is serving as one of the Underwriter of the Bonds, and U.S. Bank National Association which is serving as Bond Trustee and Master Trustee.

Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association, which conducts its municipal securities sales, trading and underwriting operations through the Wells Fargo Bank, NA Municipal Products Group, a separately identifiable department of Wells Fargo Bank, National Association, registered with the Securities and Exchange Commission as a municipal securities dealer pursuant to Section 15B(a) of the Securities Exchange Act of 1934. Wells Fargo Bank, National Association, acting through its Municipal Products Group (“WFBNA”), one of the Underwriters of the Bonds, has entered into an agreement (the “WFA Distribution Agreement”) with its affiliate, Wells Fargo Clearing Services, LLC (which uses the trade name “Wells Fargo Advisors”) (“WFA”), for the distribution of certain municipal securities offerings, including the Bonds. Pursuant to the WFA Distribution Agreement, WFBNA will share a portion of its underwriting or remarketing agent compensation, as applicable, with respect to the Bonds with WFA. WFBNA has also entered into an agreement (the “WFSLLC Distribution Agreement”) with its affiliate Wells Fargo Securities, LLC (“WFSLLC”), for the distribution of municipal securities offerings, including the Bonds. Pursuant to the WFSLLC Distribution Agreement, WFBNA pays a portion of WFSLLC’s expenses based on its municipal securities transactions. WFBNA, WFSLLC, and WFA are each wholly-owned subsidiaries of Wells Fargo & Company.

RATINGS

Fitch Ratings (“Fitch”), Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings (“S&P”) have assigned the Bonds ratings of “A,” “A2” and “A,” respectively. The Corporation furnished to the rating agencies certain materials and information respecting the Bonds and the Corporation and the System Affiliates. Generally, the rating agencies base their ratings on such materials and information and on investigations, studies and assumptions by the rating agencies. These ratings reflect only the views of Fitch, Moody’s and S&P, respectively. A securities rating is not a recommendation to buy, hold or sell securities.

No assurance can be given that such ratings will remain in effect for any given period of time or that they may not be reduced or withdrawn by the rating agencies, or any of them, if in the judgment of such rating agencies circumstances so warrant. Any downward change in or withdrawal of such ratings, or any of them, could adversely affect the market price of the Bonds.

The rating of “A” assigned by Fitch to the Bonds is described as follows:

“High credit quality. ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.”

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The rating of “A2” assigned by Moody’s to the Bonds is described as follows:

“Obligations rated ‘A’ are considered upper-medium grade and are subject to low credit risk. Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 2 indicates a mid-range ranking.”

The rating of “A” assigned by S&P to the Bonds is described as follows:

“An obligation rated ‘A’ demonstrates a strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.”

TAX MATTERS

The following is only a general summary of certain provisions of the Code as enacted and in effect on the date hereof and does not purport to be complete; holders of the Bonds should consult their own tax advisors as to the effects, if any, of the Code (and any proposed or subsequently enacted amendments to the Code) in their particular circumstances.

Tax Exemptions

McKennon Shelton & Henn LLP, Bond Counsel to the Authority, is of the opinion that, under existing statutes, regulations and decisions, (i) assuming compliance with certain covenants described herein, the interest on the Bonds is excludable from gross income for purposes of federal income taxation and (ii) by the terms of the Act, the interest on the Bonds, their transfer and any income derived from the Bonds, including profits made in their sale or transfer, are forever exempt from all Maryland state and local taxes. No opinion is expressed as to estate or inheritance taxes or any other taxes not levied or assessed directly on the Bonds, their transfer or the income therefrom.

Under the provisions of the Code, there are certain restrictions that must be met subsequent to the delivery of the Bonds in order for interest on the Bonds to remain excludable from gross income for federal income tax purposes, including restrictions that must be complied with throughout the term of the Bonds. These include the following: (i) a requirement that certain earnings received from the investment of amounts deemed to be proceeds of the Bonds be rebated to the United States of America under certain circumstances (or that certain payments in lieu of rebate be made); (ii) other requirements applicable to the investment of the proceeds of the Bonds; and (iii) other requirements applicable to the use of the proceeds of the Bonds and the facilities financed or refinanced with proceeds of the Bonds. Failure to comply with one or more of these requirements could result in the inclusion of the interest payable on the Bonds in gross income for federal income tax purposes, effective from the date of their issuance. The Authority and the Corporation have made certain covenants regarding actions required to maintain the excludability of interest on the Bonds from gross income for federal income tax purposes. It is the opinion of Bond Counsel that, assuming compliance with such covenants, the interest on the Bonds will remain excludable from gross income for federal income tax purposes under the provisions of the Code.

Further, Bond Counsel is of the opinion that interest on the Bonds is not included in the alternative minimum taxable income of individuals, corporations or other taxpayers as an

- 88 - enumerated item of tax preference or other specific adjustment. However, for purposes of calculating the corporate alternative minimum tax, a corporation subject to such tax will be required to increase its alternative minimum taxable income by 75% of the amount by which its “adjusted current earnings” exceed its alternative minimum taxable income (computed without regard to this current earnings adjustment and the alternative minimum tax net operating loss deduction). For such purposes, “adjusted current earnings” would include, among other items, interest income from the Bonds. In addition, interest income on the Bonds will be subject to the branch profits tax imposed by the Code on certain foreign corporations engaged in a trade or business in the United States.

In rendering its opinion, McKennon Shelton & Henn LLP will rely on the Corporation’s Tax and Section 148 Certificate and Agreement with respect to certain material facts within the knowledge of the Corporation relevant to the tax-exempt status of interest on the Bonds and will assume the correctness of the opinion of Ballard Spahr LLP with respect to the tax-exempt status of the Corporation and certain of its affiliates, in each case without independent investigation.

See Appendix E hereto for the proposed form of opinion of Bond Counsel.

Tax Accounting Treatment of Discount Bonds

Certain maturities of the Bonds may be issued at an initial public offering price which is less than the amount payable on such Bonds at maturity (the “Discount Bonds”). The difference between the initial offering price at which a substantial amount of the Discount Bonds of each maturity was sold and the principal amount of such Discount Bonds payable at maturity constitutes original issue discount. In the case of any holder of Discount Bonds, the amount of such original issue discount which is treated as having accrued with respect to such Discount Bonds is added to the original cost basis of the holder in determining, for federal income tax purposes, gain or loss upon disposition (including sale, early redemption or purchase or repayment at maturity). For federal income tax purposes (i) any holder of a Discount Bond will recognize gain or loss upon the disposition of such Discount Bond (including sale, early redemption or purchase or payment at maturity) in an amount equal to the difference between (a) the amount received upon such disposition and (b) the sum of (1) the holder’s original cost basis in such Discount Bond, and (2) the amount of original issue discount attributable to the period during which the holder held such Discount Bond, and (ii) the amount of the basis adjustment described in clause (i)(b)(2) will not be included in the gross income of the holder.

Original issue discount on Discount Bonds will be attributed to permissible compounding periods during the life of any Discount Bonds in accordance with a constant rate of interest accrual method. The yield to maturity of the Discount Bonds of each maturity is determined using permissible compounding periods. In general, the length of a permissible compounding period cannot exceed the length of the interval between debt service payments on the Discount Bonds and must begin or end on the date of such payments. Such yield then is used to determine an amount of accrued interest for each permissible compounding period. For this purpose, interest is treated as compounding periodically at the end of each applicable compounding period. The amount of original issue discount which is treated as having accrued in respect of a Discount Bond for any particular compounding period is equal to the excess of (i) the product of (a) the yield on the Discount Bond (adjusted as necessary for an initial short period) divided by the number of compounding periods in a year multiplied by (b) the amount that would be the tax basis of such

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Discount Bond at the beginning of such period if held by an original purchaser who purchased at the initial public offering price, over (ii) the amount actually payable as interest on such Discount Bond during such period. The tax basis of a Discount Bond, if held by an original purchaser, can be determined by adding to the initial public offering price of such Discount Bond the original issue discount that is treated as having accrued during all prior compounding periods. If a Discount Bond is sold or otherwise disposed of between compounding dates, then interest which would have accrued for that compounding period for federal income tax purposes is to be apportioned in equal amounts among the days in such compounding period.

Holders of Discount Bonds should note that, under applicable regulations, the yield and maturity of a Discount Bond is determined without regard to commercially reasonable sinking fund payments and any original issue discount remaining unaccrued at the time that a Discount Bond is redeemed or purchased in advance of stated maturity will be treated as taxable gain. Moreover, tax regulations prescribe special conventions for determining the yield and maturity of certain debt instruments that provide for alternative payment schedules upon the occurrence of certain contingencies.

The yields (and related prices) provided by the Underwriters shown on the cover of this Official Statement may not reflect the initial issue prices for purposes of determining the original issue discount for federal income tax purposes.

The foregoing summarizes certain federal income tax consequences of original issue discount with respect to the Discount Bonds but does not purport to deal with all aspects of federal income taxation that may be relevant to particular investors or circumstances, including those set out above. Prospective purchasers of Discount Bonds should consider possible state and local income, excise or franchise tax consequences arising from original issue discount on Discount Bonds. In addition, prospective corporate purchasers should consider possible federal tax consequences arising from original issue discount on such Discount Bonds under the alternative minimum tax or the branch profits tax. The amount of original issue discount considered to have accrued may be reportable in the year of accrual for state and local tax purposes or for purposes of the alternative minimum tax or the branch profits tax without a corresponding receipt of cash with which to pay any tax liability attributable to such discount. Purchasers with questions concerning the detailed tax consequences of transactions in the Discount Bonds should consult their tax advisors.

Additional Federal Income Tax Considerations

Certain Federal Tax Consequences of Ownership

There are other federal income tax consequences of ownership of obligations such as the Bonds under certain circumstances, including the following: (i) deductions are disallowed for certain expenses of taxpayers allocable to interest on tax-exempt obligations, as well as interest on indebtedness incurred or continued to purchase or carry tax-exempt obligations and interest expense of financial institutions allocable to tax-exempt interest; (ii) for property and casualty insurance companies, the amount of the deduction for losses incurred must be reduced by 15% of the sum of tax-exempt interest received or accrued and the deductible portion of dividends received by such companies; (iii) interest income which is exempt from tax must be taken into account for the purpose of determining whether, and what amount of, social security or railroad retirement benefits

- 90 - are includable in gross income for federal income taxation purposes; (iv) for S corporations having Subchapter C earnings and profits, the receipt of certain levels of passive investment income, including interest on tax-exempt obligations such as the Bonds, can result in the imposition of tax on such passive investment income and, in some cases, loss of S corporation status; and (v) net gain realized upon the sale or other disposition of property such as the Bonds generally must be taken into account when computing the 3.8% Medicare tax with respect to net investment income imposed on certain high income individuals and specified trusts and estates.

Purchase, Sale and Retirement of Bonds

Except as noted below with respect to accrued market discount, the sale or other disposition of a Bond may result in capital gain or loss to its holder. A holder’s initial tax basis in a Bond will be its cost. Upon the sale or retirement of a Bond, for federal income tax purposes a holder will recognize capital gain or loss upon the disposition of such Bond (including sale, early redemption or purchase or payment at maturity) in an amount equal to the difference between (a) the amount received upon such disposition and (b) the tax basis in such Bond, determined by adding to the original cost basis in such Bond the amount of original issue discount that is treated as having accrued as described above under “Tax Accounting Treatment of Discount Bonds.” Such gain or loss will be long-term capital gain or loss if at the time of the sale or retirement the Bond has been held for more than one year. Under present law both long and short-term capital gains of corporations are taxed at the rates applicable to ordinary income. For noncorporate taxpayers, however, short-term capital gains are taxed at the rates applicable to ordinary income, while net capital gains are taxed at lower rates. Net capital gains are the excess of net long-term capital gains (gains on capital assets held for more than one year) over net short-term capital losses.

If a holder acquires a Bond at a discount from its principal amount (or in the case of a Bond issued at an original issue discount, at a price that produces a yield to maturity higher than the yield to maturity at which such Bond was first issued), the holder will be deemed to have acquired the Bond at “market discount,” unless the amount of market discount is de minimis, as described in the following paragraph. If a holder that acquires a Bond with market discount subsequently realizes a gain upon the disposition of the Bond, such gain shall be treated as taxable ordinary income to the extent such gain does not exceed the accrued market discount attributable to the period during which the holder held such Bond, and any gain realized in excess of such market discount will be treated as capital gain. Potential purchasers should consult their tax advisors as to the proper method of accruing market discount.

In the case of a Bond not issued at an original issue discount, market discount will be de minimis if the excess of such Bond’s stated redemption or purchase price at maturity over the holder’s cost of acquiring such Bond is less than 0.25% of the stated redemption or purchase price at maturity multiplied by the number of complete years between the date the holder acquires such Bond and its stated maturity date. In the case of a Bond issued with original issue discount, market discount will be de minimis if the excess of such Bond’s revised issue price over the holder’s cost of acquiring such Bond is less than 0.25% of the revised issue price multiplied by the number of complete years between the date the holder acquires such Bond and its stated maturity date. For this purpose, a Bond’s “revised issue price” is the sum of (i) its original issue price and (ii) the aggregate amount of original issue discount that is treated as having accrued with respect to such Bond during the period between its original issue date and the date of acquisition by the holder.

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Tax Accounting Treatment of Premium Bonds

A Bond will be considered to have been issued at a premium if, and to the extent that, the holder’s tax basis in such Bond exceeds the amount payable at maturity (or, in the case of a Bond callable prior to maturity, the amount payable on the earlier call date). Under regulations applicable to the Bonds, the amount of the premium accrual is determined with reference to the amount payable on that call date (including for this purpose the maturity date) which produces the lowest yield to maturity on the Bond. The holder will be required to reduce his tax basis in the Bond for purposes of determining gain or loss upon disposition of such Bond by the amount of amortizable bond premium that accrues, determined in the manner prescribed in the regulations. Generally, no deduction (or other tax benefit) is allowable in respect of any amount of amortizable bond premium on the Bonds.

Purchasers with questions concerning the detailed tax consequences of transactions in the Bonds issued at a premium should consult their tax advisors.

Legislative Developments

Legislative proposals recently under consideration or proposed after issuance and delivery of the Bonds could adversely affect the market value of the Bonds. Further, if enacted into law, any such proposal could cause the interest on the Bonds to be subject, directly or indirectly, to federal income taxation and could otherwise alter or amend one or more of the provisions of federal tax law described above or their consequences. Prospective purchasers of the Bonds should consult with their tax advisors as to the status and potential effect of legislative proposals, as to which Bond Counsel expresses no opinion.

LEGALITY OF BONDS FOR INVESTMENT AND DEPOSIT

The Act provides that the Bonds are securities in which all public officers and public bodies of the State of Maryland and its political subdivisions, all insurance companies, state banks and trust companies, savings banks, savings and loan associations, investment companies, executors, administrators, trustees and other fiduciaries in the State of Maryland may properly and legally invest funds.

The Bonds, under the Act, may be deposited with and received by any State or municipal officer or any agency or political subdivision of the State of Maryland for any purpose for which the deposit of bonds or obligations of the State of Maryland may be authorized by law.

STATE NOT LIABLE ON BONDS

The Bonds are special obligations of the Authority payable solely from the Revenues and other amounts pledged therefor under the Bond Indenture, and neither the faith and credit nor the taxing power of the State of Maryland, of any political subdivision thereof or of the Authority, is pledged to the payment of the principal of or interest on the Bonds.

The sources of revenues or moneys of the Authority are limited to those provided by the Act, and the issuance of the Bonds does not directly or indirectly or contingently obligate, morally

- 92 - or otherwise, the State of Maryland, any political subdivision thereof or the Authority to levy or to pledge any form of taxation whatever therefor or to make any appropriation for their payment. The Authority has no taxing power.

CORPORATE EXISTENCE OF THE AUTHORITY

The Act states that the Authority and its corporate existence shall continue until terminated by law, provided that no such law shall take effect so long as the Authority shall have bonds, notes or other obligations outstanding, unless adequate provision has been made for the payment thereof. Upon termination of the existence of the Authority, all its rights and properties shall pass to and be vested in the State of Maryland.

LEGAL MATTERS

McKennon Shelton & Henn LLP is acting as Bond Counsel to the Authority in connection with the issuance of the Bonds. The proposed form of opinion of Bond Counsel appears as Appendix E. Certain legal matters will be passed upon for the Underwriters by Orrick, Herrington & Sutcliffe LLP, and for the Corporation by the Executive Vice President and General Counsel to the Corporation and Ballard Spahr LLP, special outside counsel to the Corporation.

FINANCIAL ADVISORS

PFM Financial Advisors LLC (“PFM”) has served as financial advisor to the Authority in connection with the issuance of the Bonds. PFM is not obligated to undertake, and has not undertaken, either to make an independent verification of or to assume responsibility for, the accuracy, completeness or fairness of the information contained in this Official Statement. PFM is an independent financial advisory firm and is not engaged in the business of underwriting, trading or distributing securities.

The Corporation has retained Kaufman, Hall & Associates, LLC, Skokie, Illinois, as financial advisor in connection with the issuance of the Bonds. Although Kaufman, Hall & Associates, LLC has assisted in the preparation of this Official Statement, Kaufman, Hall & Associates, LLC was not and is not obligated to undertake, and has not undertaken to make, an independent verification and assumes no responsibility for the accuracy, completeness or fairness of the information contained in this Official Statement.

INDEPENDENT AUDITORS

The consolidated financial statements of MedStar Health, Inc. and its subsidiaries as of June 30, 2015 and 2016 and for each of the years then ended included in Appendix B to this Official Statement have been audited by KPMG LLP, independent auditors as stated in their report appearing therein.

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CERTAIN RELATIONSHIPS

William Couper, a member of the Corporation’s Board of Directors, is a retired President of the Mid-Atlantic region at Bank of America, N.A. Timothy Storch, a member of the Board of Directors of MedStar St. Mary’s Hospital, is a Senior Vice President of Bank of America, N.A. Bank of America, N.A. is an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is one of the managing Underwriters.

McKennon Shelton & Henn LLP serves as general counsel to the Authority and is acting as Bond Counsel in connection with the issuance of the Bonds.

The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for the Corporation for which they received or will receive customary fees and expenses. In addition, affiliates of some of the Underwriters are lenders, and in some cases agents or managers for the lenders, under the Corporation’s credit facilities.

In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of, or issued for the benefit of, the Corporation.

CONTINUING DISCLOSURE

In accordance with Rule 15c2-12 promulgated by the Securities and Exchange Commission, the Corporation has undertaken for the benefit of the Holders of the Bonds to provide certain financial information and operating data, audited financial statements and notices of the occurrence of certain events. The specific nature of the information to be provided is set forth in the form of Continuing Disclosure Agreement attached hereto as Appendix D.

The Corporation has previously entered into continuing disclosure undertakings in connection with the issuance of bonds issued for the benefit of the Corporation. During the last five years, except as otherwise set forth herein, the Corporation has complied with all its continuing disclosure undertakings. As required by the undertakings, during that period, except as described below, the Corporation provided all required documents to its appointed dissemination agent. During certain years, however, the dissemination agent failed to file some portions of the Corporation’s Annual Report with the Municipal Securities Rulemaking Board’s EMMA system, as required by the undertakings. As soon as the Corporation became aware of the incomplete filings, the Corporation caused the complete reports to be filed and implemented procedures to monitor the dissemination agent’s future compliance with the undertakings.

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The Corporation has also discovered that notices were not filed for several rating changes for insured bonds and one instance of a rating change for uninsured bonds. The Corporation also did not timely file notices of certain rating changes relating to certain liquidity backed bonds. The Corporation has determined that such filings were not material. Event notices were not filed by the Corporation relating to the affiliation with Southern Maryland Hospital in 2012 however such affiliation was noted in the September 30, 2012 quarterly report and later in the official statement relating to the 2013A Authority Bonds. The Corporation has covenanted, and intends, to continue to fully comply with its continuing disclosure undertakings in the future.

MISCELLANEOUS

The references herein to the Act, the Bond Indenture, the Loan Agreement, the Master Indenture, the 2017A Obligation, the Guaranty Agreement, the Deeds of Trust and other materials are brief outlines of certain provisions thereof. Such outlines do not purport to be complete and, for full and complete statements of such provisions, reference is made to such instruments, documents and other materials, copies of which are on file at the offices of the Authority.

The information contained in this Official Statement has been compiled or prepared from information obtained from the Corporation and official and other sources deemed to be reliable and, while not guaranteed as to completeness or accuracy, is believed to be correct as of this date. Any statements involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact.

The Authority has either provided or reviewed the information under the headings “The Authority,” “State Not Liable on Bonds” and “Corporate Existence of the Authority” as it relates to the Authority and will not be responsible for any other statements or information in this Official Statement.

The attached Appendices are integral parts of this Official Statement and should be read in their entirety together with all of the foregoing information.

The Corporation has reviewed the information contained herein which relates to the Corporation and its System Affiliates and has approved this Official Statement.

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The execution and delivery of this Official Statement by the Chairman or other authorized Member and the Executive Director of the Authority have been duly authorized by the Authority.

MARYLAND HEALTH AND HIGHER EDUCATIONAL FACILITIES AUTHORITY

By: Arnold Williams Chairman

By: Annette Anselmi Executive Director

Approved: June ___, 2017

MEDSTAR HEALTH, INC.

By: Michael J. Curran Executive Vice President, Chief Administrative and Financial Officer

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MEDSTAR HEALTH, INC. AND THE SYSTEM

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Distributed Care Delivery Network MedStar Health System Sites

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Page

INTRODUCTION ...... A-1

CORPORATE ORGANIZATION AND SYSTEM AFFILIATES ...... A-2 Corporate Organization ...... A-2 System Overview ...... A-3 System Affiliates ...... A-4 Reserved Powers of MedStar ...... A-4 System-Wide Functions ...... A-5 Board of Directors ...... A-6 Certain Relationships ...... A-7 Executive Management ...... A-8

ACUTE CARE FACILITIES ...... A-11 The Hospitals...... A-12 Medical Staff ...... A-15 Licenses and Accreditations ...... A-15 Academic Affiliations ...... A-15

NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES ...... A-16 Physician Networks ...... A-16 Health Plans ...... A-16 Home Health Care ...... A-17 Post Acute Facilities ...... A-17 MedStar Ambulatory Services ...... A-18 Radiation Oncology ...... A-18 Air and Ground Transportation ...... A-19 Retail Pharmacies ...... A-19 Innovation and Research Activities ...... A-19

MARKET FORCES AND ENVIRONMENT ...... A-19 Regional Focus / Service Area ...... A-19 Market Regulation ...... A-20 Service Area Competition ...... A-21 Reimbursement ...... A-22

HISTORICAL UTILIZATION ...... A-24

SUMMARY FINANCIAL INFORMATION ...... A-25

A-ii TABLE OF CONTENTS

Page

Summary of Operations...... A-25 Capitalization ...... A-26 Debt Service Coverage ...... A-26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION ...... A-27 Overview ...... A-27 Nine-Month Period Ended March 31, 2017 Compared to Three-Month Period Ended March 31, 2017 ...... A-27 Fiscal Year Ended June 30, 2016 Compared to Fiscal Year Ended June 30, 2015 ...... A-28 Retirement Plans ...... A-29 Liquidity and Capital Resources ...... A-30 Investment Policy...... A-30 Investment Performance...... A-31 Lines of Credit and Bank Facilities ...... A-31 Debt and Interest Rate Swap Management Policy ...... A-31 Interest Rate Swap Agreement ...... A-32 Agreements with Georgetown University ...... A-32

STRATEGIC INITIATIVES ...... A-33 MedStar 2020 ...... A-33 Acute Care Strategy ...... A-34 Ambulatory Care and Physician Alignment ...... A-35 Post Acute Care Strategy ...... A-36 Digital Strategy ...... A-36 Population Health ...... A-37 Quality and Safety Improvements ...... A-37 Supply Chain Initiatives ...... A-39 MedStar Leader of the Future ...... A-39 MedStar 2020 Performance Transformation ...... A-39 Innovation and Research ...... A-40 Enterprise Risk Management ...... A-41 Information Technology Strategy ...... A-41 MedStar Georgetown University Hospital Surgical Pavilion Project ...... A-42 Capital Expenditures and Other Major Capital Projects ...... A-43

A-iii TABLE OF CONTENTS

Page

RESTRICTED FUNDS ...... A-43

EMPLOYEES ...... A-43

VOLUNTEERS ...... A-43

COMMUNITY BENEFITS...... A-44 SBIRT Program ...... A-44 Population Health Workforce Support for Disadvantaged Areas Program ...... A-44 Living Well Program ...... A-45 Get Connected to Health ...... A-45 KIDS Mobile Medical Clinic (KMMC) ...... A-45 Rx For Success ...... A-45 National Diabetes Prevention Program (DPP) ...... A-45 Shepherd’s Clinic ...... A-45

INSURANCE ...... A-46 Professional and General Liability ...... A-46 Comprehensive Property Insurance ...... A-46 Workers’ Compensation ...... A-46 Other Insurance ...... A-46

LEGAL MATTERS ...... A-46

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MEDSTAR HEALTH, INC. AND THE SYSTEM

INTRODUCTION

MedStar Health, Inc. (MedStar or the Company), a Maryland non-stock membership corporation, is the controlling entity of an integrated regional healthcare system (the System) offering a wide variety of healthcare services to people living and working in Maryland and the Washington, D.C., region. MedStar’s approximately 30,000 employees and 6,415 affiliated physicians support the System’s patient-first philosophy that combines care, compassion and clinical excellence with an emphasis on customer service.

MedStar operates a distributed care delivery network combining the best aspects of academic medicine, research and innovation with a complete spectrum of clinical services to advance patient care. As the largest healthcare provider in Maryland and the Washington, D.C., region, MedStar offers over 294 access points for patient care, including 10 hospitals and an extensive network of ambulatory facilities and physician practice sites. The System’s comprehensive offering of health-related services, the MedStar Institute for Innovation and the MedStar Health Research Institute, are recognized regionally and nationally for excellence in medical care and the advancement of innovation and research.

The System: Principal Operating Entities

Hospitals Other Principal Operating Entities • MedStar Franklin Square Medical Center • Georgetown Physician Group • MedStar Georgetown University Hospital • HH MedStar Health • MedStar Good Samaritan Hospital • MedStar Ambulatory Services • MedStar Harbor Hospital • MedStar Enterprises • MedStar Montgomery Medical Center • MedStar Family Choice • MedStar National Rehabilitation Network • MedStar Health Research Institute • MedStar Southern Maryland Hospital Center • MedStar Institute for Innovation • MedStar St. Mary's Hospital • MedStar Medical Group • MedStar Union Memorial Hospital • MedStar Pharmacies • MedStar Washington Hospital Center • MedStar Physician Partners • MedStar Prompt Care • MedStar Visiting Nurse Association • Parkway Ventures • RadAmerica II • VNA

Through its hospitals, ambulatory facilities, physician organizations, and other healthcare related businesses, the System offers a broad continuum of healthcare services including acute care (secondary, tertiary and quaternary), primary care, emergency care, urgent care, ambulatory surgery, rehabilitation (hospital-based and outpatient), post acute care, home care, health promotion and wellness, and medical research and education. The System offers specialized services that include cardiac surgery, neurosciences, orthopaedics, organ transplantation, neonatal intensive care, cancer care, shock/trauma, burn care and hand surgery. The System operates one of the largest home health businesses in the region with approximately 300,000 annual visits and a Medicaid and Medicare managed care plan with approximately 154,000 covered lives as of March 31, 2017.

Many of MedStar’s hospitals are recognized regionally and nationally for excellence in care. According to U.S. News & World Report Best Hospital rankings for 2016-2017 all four of MedStar’s hospitals in Baltimore were ranked among the top ten hospitals in the Baltimore metro region. In addition, MedStar Georgetown University Hospital, MedStar Southern Maryland Hospital Center and MedStar Washington Hospital Center were ranked first, second and third, respectively, in the Washington D.C. metro region.

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The MedStar Heart & Vascular Institute at MedStar Washington Hospital Center and MedStar Union Memorial Hospital was rated as one of the top five cardiac surgery programs by volume in the United States by the Society of Thoracic Surgeons. MedStar Washington Hospital Center also earned the highest 4-star rating by the American College of Cardiology based on data publicly reported in the National Cardiovascular Data registry.

MedStar Union Memorial Hospital was recognized in 2016 by HealthGrades with its Distinguished Hospital Award for Clinical Excellence, rating it in the top 5% in the nation with the lowest risk-adjusted mortality and complication rates across at least 21 of 32 common conditions and procedures.

MedStar Georgetown University Hospital operates the only comprehensive cancer center designated by the National Cancer Institute in Washington, D.C.

MedStar Washington Hospital Center’s Trauma Program is a Level 1 trauma center according to the American College of Surgeons, the highest national recognition a trauma center can receive.

The Curtis National Hand Center at MedStar Union Memorial Hospital has grown to be one of the largest hand centers in the world, offering 14 surgeons, a prominent fellowship program, a complete research department, and the most certified hand therapists in the nation.

The System sponsors a wide array of accredited educational programs including physician residency/fellowship programs and clinical training opportunities for medical students in the Washington, D.C., and Baltimore metropolitan areas. MedStar has one of the largest graduate medical education programs in the country with more than 1,100 residents and fellows participating in 90 accredited residency and fellowship programs. MedStar is the educational and clinical partner of Georgetown University.

CORPORATE ORGANIZATION AND SYSTEM AFFILIATES

Corporate Organization

MedStar is the sole member or stockholder of, or retains reserved corporate powers over, the System’s hospitals and affiliates. The following organizational chart outlines the current structure of the major components of the System.

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MedStar Health, Inc. MedStar Institute for Innovation

MedStar Franklin Square HH MedStar Health, Inc. Medical Center *

MedStar Ambulatory Services, MedStar Good Samaritan Inc. Hospital * . MedStar Medical Group, LLC

MedStar Harbor Hospital Parkway Ventures, Inc.

MedStar Union Memorial Hospital * MedStar Family Choice, Inc.*

MedStar Georgetown University Hospital * MedStar Pharmacies, Inc.

Georgetown Physicians Group MedStar Physician Partners Greenspring Financial Insurance Limited MedStar Montgomery RadAmerica II, LLC Medical Center

MedStar Health Research MedStar Prompt Care Institute, Inc. MedStar National Rehabilitation Network

VNA, Inc. MedStar Southern Maryland Hospital Center, Inc MedStar Visiting MedStar St. Mary’s Nurse Association Hospital

MedStar Washington Hospital Center *

MedStar Enterprises, Inc .

*Represents Material System Affiliates (i.e., generates 5% or more of the System’s revenues) as defined in the Master Indenture. See “CORPORATE ORGANIZATION AND SYSTEM AFFILIATES – System Affiliates” for more information, including a list of guarantors.

System Overview

MedStar offers the largest network of healthcare services in the Baltimore – Washington, D.C. region, including an acute care network with nine acute care hospitals (of ten total hospitals); ambulatory facilities, including two ambulatory care centers (approximately 100,000 square feet), five ambulatory surgery centers, eight multi-specialty centers, and fifteen urgent care centers; post-acute care facilities, including a rehabilitation hospital, 51 outpatient rehabilitation sites and seven hospital-based rehabilitation sites; home health with approximately 300,000 annual visits; a broad physician network, approximately 2,040 employed physicians and 167 employed physician office sites; Medicaid and Medicare managed care organizations with approximately 154,000 covered lives; and other ancillary healthcare businesses. See the map included in this Appendix A which illustrates the System’s distributed care delivery network.

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System Affiliates

MedStar Franklin Square Medical Center, MedStar Georgetown University Hospital, MedStar Good Samaritan Hospital, MedStar Union Memorial Hospital, MedStar Washington Hospital Center, and MedStar Family Choice, Inc. are Material System Affiliates, as defined under the Master Indenture. All entities referenced above, except for MedStar Family Choice, Inc., are Guarantors under the Guaranty Agreement dated as of February 1, 2004, as amended.1 See “APPENDIX C – SUMMARIES OF PRINCIPAL LEGAL DOCUMENTS – Summary of Certain Provisions of the Master Indenture – Definitions”. Although MedStar Harbor Hospital, MedStar Montgomery Medical Center, MedStar National Rehabilitation Network, MedStar Southern Maryland Hospital Center, MedStar St. Mary’s Hospital, HH MedStar Health, Inc., Parkway Ventures, Inc., MedStar Visiting Nurse Association, and MedStar Enterprises, Inc., are not Material System Affiliates, they are Guarantors under the Guaranty Agreement. For the fiscal year-to-date thru March 31, 2017, the Guarantors represented 81.4% of the System’s revenues (prior to eliminating accounting entries).

MedStar also has other nonprofit and taxable subsidiaries and affiliates providing primary care, urgent care, post acute care services, pharmacy, infusion services, radiation therapy, rehabilitation and other services to outpatients. These entities are not parties to the Guaranty Agreement.

Each hospital has a board of directors that is elected by or subject to the approval of the Board of Directors of MedStar (MedStar Board). The hospital boards exercise authority for credentialing of physicians and other healthcare providers and provide oversight for the quality and utilization review of the healthcare services provided by the hospitals. The hospital boards are also involved in fundraising and community affairs in their local service areas.

Reserved Powers of MedStar

MedStar is the sole member of each hospital corporation in the System and has the right, either directly or indirectly, to elect or approve board members for each of these organizations and their affiliates. MedStar has reserved powers, directly or indirectly, for the financial management, resource allocation and strategic planning for all affiliates of the System. Subject to delegations which it may make to the board of a hospital or other subsidiary or affiliate, MedStar has authority, directly or indirectly, over subsidiary and affiliate entities in the following general categories:

• Corporate actions, including: election of individuals to fill vacancies on the board of directors of each affiliate from individuals nominated by the board of the affiliate; approval of nominees for board officers of each affiliate; approval of the dissolution, liquidation, merger or consolidation of any affiliate; removal of any director from any

1 Although MedStar Family Choice, Inc. (MFC), a Medicaid and Medicare managed care organization, constitutes a Material System Affiliate since it generated in excess of 5.0% of the System's revenues during the past fiscal year, the Master Trust Indenture was amended in 2015 to exclude MFC from becoming a Guarantor given the regulatory restrictions placed on its assets by Maryland and the District of Columbia, making MFC presently unable to satisfy the obligations of a Guarantor under the Guaranty Agreement. A second amendment to the Master Trust Indenture will be made to eliminate any Material System Affiliate that constitutes a regulated insurance entity (including MFC) from ever becoming a Guarantor. This amendment will require the consent of the majority of the holders of outstanding Obligations under the Master Trust Indenture as well as a majority of the holders of the bonds secured by the Obligations. The foregoing required consents will be obtained in the manner discussed under “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Amendments of Master Indenture” in the forepart of this Official Statement. See “NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES – Health Plans” herein for a description of the operations of MFC.

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affiliate; and approval of any amendment to the articles of incorporation or bylaws of any affiliate.

• Planning and Operations, including: approval and implementation of a strategic and financial plan for the System, and approval of the strategic annual operating and financial objectives and plans of each affiliate; development of operational plans and strategies, including the development and implementation of extensive quality and safety initiatives; negotiation of supply chain contracts and implementation of cost management initiatives.

• Financial management and resource allocation, including: adoption of annual operating and capital budgets; approval of the sale, transfer, or encumbrance of real property; approval of proposed contracts or commitments, including capital, above a threshold level; approval of lending of funds, investment management, banking relationships, and the issuance of debt or guarantees; approval of investment in other business entities; selection of the independent auditor; approval of transfers of assets; approval of financial policies and actions for the centralized investment of all funds within the System; and approval of accounting and monitoring of the expenditure of endowment funds.

• Contracts and debt instruments binding affiliates, including: contracts and agreements obligating affiliates consistent with appropriate System policies; rate agreements for the Maryland hospitals; managed care and third party payor agreements; transfer of ownership of property among affiliates, subject to applicable financing documents, loan instruments, master trust indentures, wills or trusts and other applicable debt or gift instruments; authorization and approval of the issuance of tax-exempt bonds and other debt and the execution and delivery of mortgages and other security instruments securing such bonds or other debt in the name of any affiliate individually, or as a member of an obligated group; authorization and approval of all necessary actions in connection with other debt instruments on behalf of the affiliates; and management, investment and disbursement of proceeds of bond issues or other debt on behalf of the affiliate in compliance with the applicable debt documents.

System-Wide Functions

MedStar has established a variety of corporate functions at a Systemwide level, including: quality and safety, financial services, information systems, legal services, risk management, compliance, privacy, business and system development, planning, marketing, external affairs, philanthropy services, managed care, internal audit, and academic affairs.

MedStar’s corporate quality and safety team coordinates the development and implementation of safety initiatives across the organization. This team works with clinicians across the System to identify opportunities to develop processes, implement changes, and enhance communications in order to improve patient outcomes (see “STRATEGIC INITIATIVES – MedStar 2020 – Quality and Safety Improvements”).

Legal and regulatory compliance programs have also been established by MedStar. The System’s compliance program is managed at the corporate level, providing compliance oversight to MedStar’s subsidiaries and affiliates, spanning such key areas as third party reimbursement, fraud and abuse, antitrust, tax, regulatory, privacy and human resources. The Audit and Compliance Committee of the MedStar Board has been given ultimate responsibility for oversight of Systemwide audit and compliance efforts.

MedStar utilizes a centralized operating and capital budget process. A forecast and strategic plan is prepared that aligns the System’s clinical initiatives, community marketplace demands, and MedStar’s strategic objectives with available financial resources. Capital investments are made within a framework established by management and approved by the MedStar Board. Priority approval of capital spending is given to projects required for safety or routine purposes and to expenditures that generate income measured

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by return on investment, protect existing assets, or enhance technology, subject to maintaining key financial ratios including days cash on hand, cash to debt, debt to capitalization and debt service coverage. Along with corporate accounting and reporting and selected business analysis and financial planning, MedStar provides treasury services including investment, debt and tax management on a centralized basis. MedStar maintains its Professional Support Services staff in White Marsh, Maryland which provides back office functions of hospital billing for all ten MedStar hospitals. Services provided also include payroll, accounts payable, purchasing, fixed assets, general ledger, and inventory for the ten MedStar hospitals and many of MedStar’s other principal operating entities. In addition, MedStar maintains a physician billing center in Arlington, Virginia which provides billing and collection services for employed and contracted providers of all ten MedStar hospitals and many of the ambulatory providers employed and contracted by the MedStar Medical Group.

Board of Directors

While MedStar’s hospitals have boards of directors, MedStar is governed by the MedStar Board of Directors. Major oversight functions and powers are reserved to the MedStar Board through MedStar’s bylaws. These reserved powers are outlined above in the section entitled “Reserved Powers of MedStar.” The MedStar Board carries out its functions and exercises its powers through Board meetings and through the meetings of ten committees: Strategic Planning; Quality, Safety and Professional Affairs; Finance; Governance; Audit and Compliance; Investment; Pension and Benefits; Executive Compensation; Philanthropy; and Executive.

The MedStar Board of Directors is currently composed of 17 members. The President and Chief Executive Officer of MedStar and the President of Georgetown University serve as ex-officio voting members. The remaining 15 members of the Board are elected through a self- perpetuating nomination and election process, as specified in the MedStar bylaws, whereby members may serve up to three terms, with each term lasting three years, and Board Officers (Chair and Vice-Chair(s)) permitted to serve up to 14 years. Candidates for nomination for vacancies on the Board are selected based on their business experience and community service, with some preference given to individuals with prior hospital board service within the System. MedStar’s bylaws require physician representation at the Board level. Five of the current Board members are physicians. The current directors are shown in the chart below.

MEDSTAR HEALTH, INC. BOARD OF DIRECTORS

Name Occupation Maximum Term Expiration Rosie Allen-Herring President and Chief Executive Officer, United Way of the 2023 National Capitol Area

Anthony J. Buzzelli Vice Chairman, Deloitte, Retired 2020

William Couper Retired President of Mid Atlantic-Bank of America 2022

James A. D’Orta, M.D. Chairman, IMC, Inc. 2024

John J. DeGioia, Ph.D. President, Georgetown University Ex officio

Marc N. Duber Executive Vice President and Chief Operating Officer, The 2019 Bernstein Companies

Mark T. Jensen, Esquire Co-Founder, Bowie & Jensen, LLC 2019

Christopher G. Kalhorn, M.D., Associate Professor of Neurosurgery and Director of 2023 FACS, FAANS Epilepsy Surgery, Functional Neurosurgery and Pediatric

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Name Occupation Maximum Term Expiration Neurosurgery, MedStar Georgetown University Hospital

Roberta M. Loker Loan Officer, Primary Residential Mortgage, Inc. 2018

Vincent J. Martorana, DPM Section Chief, Podiatric Surgery, MedStar Franklin Square 2023 Medical Center

William J. Oetgen, Jr., M.D., Executive Vice President, Science, Education & Quality, 2019 MBA, FACC, FACP (Co-Vice American College of Cardiology; Clinical Professor of Chair) Medicine, Georgetown University School of Medicine

Robert B. Ourisman President, Ourisman Automotive 2024

William R. Roberts (Chair) President and Chief Executive Officer, WR Roberts 2019 Company

Kenneth A. Samet, FACHE President and Chief Executive Officer, MedStar Health, Inc. Ex officio

Allen J. Taylor, M.D., FACC, Chief of Cardiology at MedStar Heart and Vascular Institute, 2023 FAHA MedStar Georgetown University Hospital and MedStar Washington Hospital Center

Sara E. Watkins Senior Vice President, Capacity Partners 2017

Hon. Togo D. West Jr. (Co- Chairman, TLI Leadership Group 2021 Vice Chair)

Certain Relationships

The MedStar Board has adopted a Conflict of Interests and Interactions with Industry policy and a Business Ethics and Confidentiality policy. These policies require disclosure of any actual or potential conflict by any Board member or officer who has a financial interest (1) in any transaction or arrangement with MedStar or its affiliates, or (2) in competition with MedStar. The Governance Committee of the MedStar Board oversees the implementation of these policies. The following relationships are noteworthy under this policy:

Dr. DeGioia is president and a Member of the Board of Directors of Georgetown University, which is a party to several agreements with MedStar. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION – Agreements with Georgetown University” below.

Mr. Duber has a partial ownership interest in a property in which commercial space is leased to a MedStar affiliate.

Dr. Martorana has an ownership interest in Podiatry Associates, PA, which provides certain goods and services to MedStar Franklin Square Medical Center.

Dr. Oetgen is the Executive Vice President for Science, Education, and Quality of the American College of Cardiology which has contractual relationships with MedStar Washington Hospital Center and MedStar Union Memorial Hospital.

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Dr. D’Orta serves as an advisor to Mytonomy, Inc., a privately held company that develops patient education systems and technology and which does business with MedStar. Dr. D’Orta also provides consulting services to Invuity, Inc. which develops and sells medical products related to illumination and visualization of surgical cavities and which provides certain products to MedStar.

Secretary West serves on the Board of Bristol-Meyers Squibb Company, a pharmaceutical company that provides pharmaceutical supplies to MedStar.

Executive Management

The following are the executive officers of the System:

Kenneth A. Samet, FACHE, President and Chief Executive Officer (59) - MedStar’s Leadership Team is led by Kenneth A. Samet, who was named President and Chief Executive Officer (CEO) for MedStar on January 1, 2008. Mr. Samet served as the President and Chief Operating Officer (COO) of MedStar from 2003 to 2008, and was responsible for all operational aspects of the companies that comprise the System. From 2000 to 2003, Mr. Samet served as Executive Vice President and COO of MedStar. He has dedicated his career to health care since receiving his master’s degree in health services administration from the University of Michigan in 1982. Mr. Samet served as president of Washington Hospital Center from 1990 to 2000. From the mid-1980s to 1990, he held a variety of executive leadership positions with the Medlantic Healthcare Group, which merged with Helix Health in 1998 to create MedStar Health. Mr. Samet is presently a member of the Board of Directors at Georgetown University, the Greater Baltimore Committee, the Economic Club of Washington, United Way of the National Capital Area and Goodwill of Greater Washington; and serves on the Executive Committee of the Board of the Greater Washington Board of Trade. He has held leadership positions on the Boards of the American Hospital Association, District of Columbia Hospital Association and Maryland Hospital Association and served on the Board of Visitors for the University of Maryland School of Nursing. Mr. Samet is also a past Board member and Chair of the Academic Affairs Committee of the Old Dominion University Board of Visitors, where he received his bachelor’s degree in business administration in 1980 and an honorary doctorate of humane letters in 2012 following his commencement address to the school's graduating class. In 1996, the American College of Healthcare Executives named him the national Young Healthcare Administrator of the Year. Most recently, Mr. Samet was honored with the Anti-Defamation League 2015 Achievement Award which recognizes leaders who have demonstrated a lifelong commitment to justice, pluralism and understanding.

Michael J. Curran, Executive Vice President, Chief Administrative and Financial Officer (60) - Michael J. Curran is Executive Vice President, Chief Administrative and Financial Officer for MedStar and is responsible for the administrative and financial aspects of the companies that comprise the System. An executive transition is currently in process effective July 1, 2017. Mr. Curran is expected to retain his Executive Vice President, Chief Administrative Officer role. See bio for Susan K. Nelson who will assume the role of Executive Vice President, Chief Financial Officer, following the transition. Mr. Curran presently has oversight of operations for finance, information systems, facilities, property, supply chain management, and internal audit, as well as performance improvement efforts. He also currently manages MedStar’s financial models in support of its strategic plan and decision support tools used to help direct operations. Joining MedStar in 2002 as the Executive Vice President and Chief Financial Officer, Mr. Curran brought more than 20 years of senior level experience in the healthcare industry. Prior to his position at MedStar, he served as the Chief Financial Officer and Treasurer of the Jefferson Health System, the largest healthcare delivery network in the Philadelphia region. Mr. Curran began his career with the international accounting firm Deloitte & Touche. As a certified public accountant, Mr. Curran also holds a master’s degree in organization dynamics from the University of Pennsylvania and a bachelor of science degree in accounting from St. Joseph’s University in Philadelphia. He is a member of the American Institute of Certified Public Accountants and the Healthcare Financial Management Association. He also serves on the Council on Financial Policy of the Maryland Hospital Association. Presently, Mr. Curran is a member of the Board of Directors of Chesapeake Regional Information System for Our Patients (CRISP) and Vizient Central Atlantic. He is also a member of the Board of Directors of the MNS Supply Chain Network and recently served as the chairman of its Board. He previously served on the Board of Directors

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of the Glenelg Country School in Howard County, Maryland, American Red Cross Regional Board of Directors, the Juvenile Diabetes Research Foundation Board of Directors and as vice chairman for the Board of the Elwyn Institute.

M. Joy Drass, M.D., Executive Vice President, and Chief Operating Officer (69) - Dr. Joy Drass serves as Executive Vice President, and Chief Operating Officer for MedStar. In this role, she provides executive oversight of all MedStar hospitals, integrated ancillary operations (lab, pharmacy and imaging), nursing and human resources. She also has executive responsibility for MedStar Medical Group and the System’s physician enterprise activities. Prior to her current role, Dr. Drass served as Executive Vice President, Operations Washington Region for five years, president of MedStar Georgetown University Hospital for nine years, after serving as vice president for professional services and associate medical director at MedStar Washington Hospital Center. Dr. Drass received her medical degree from Georgetown University Medical School. She worked for 13 years as an intensivist in the surgical intensive care unit and the MedStar (Medical Shock Trauma Acute Resuscitation) trauma unit at MedStar Washington Hospital Center. In addition to her medical credentials, Dr. Drass received a master's degree in business administration from the University of Pennsylvania Wharton School of Business. She has served as chair of the District of Columbia Hospital Association Board of Directors and numerous other Washington, D.C. based task forces and committees.

Stephen R. T. Evans, MD, Executive Vice President, Medical Affairs & Chief Medical Officer (62) - Stephen R. T. Evans, MD, serves as Executive Vice President, Medical Affairs & Chief Medical Officer for MedStar. In this position, Dr. Evans oversees the medical education, research, clinical quality, and risk management initiatives for the System, as well as the academic partnership with Georgetown University School of Medicine and MedStar’s other academic affiliations. From 2009 to 2012, Dr. Evans served as Vice President of Medical Affairs at MedStar Georgetown University Hospital. He was responsible for strengthening relationships between the medical staff and the hospital, leading the identification and development of new programs, and acting as a liaison between administration, hospital staff and medical staff. In addition, Dr. Evans oversaw and supported the medical staff structure, assuring high-quality patient care and compliance with regulatory and accreditation requirements. Dr. Evans joined MedStar Georgetown University Hospital in 1990 as an Assistant Professor of Surgery, and later served as chair of the Department of Surgery for over seven years until 2009 when he was promoted to Vice President of Medical Affairs. Dr. Evans received his medical degree from the University of South Florida College of Medicine. He completed residencies in both General Surgery and Obstetrics and Gynecology at Brigham and Women's Hospital, MedStar Georgetown University Hospital, Harvard Medical School, and a fellowship at Georgetown Lombardi Comprehensive Cancer Center. As a specialist in General Surgery, Dr. Evans is certified by the American Board of Surgery, and previously held board certifications in American Board of Surgical Critical Care, American Board of Obstetrics and Gynecology, and American Board of Obstetrics and Gynecology Critical Care. Dr. Evans served as Chair of the American Board of Surgery in 2015-2016. He is an elected member of several distinguished national surgical societies including the American Surgical Association.

Oliver M. Johnson, II, Executive Vice President and General Counsel (54) - Oliver M. Johnson is Executive Vice President and General Counsel for MedStar and oversees all legal, privacy and compliance matters for the System. Mr. Johnson has 30 years of legal, regulatory and business experience, including 18 years of U.S. and international experience in pharmaceutical, vaccine, biotechnology and healthcare industries. Prior to assuming his current role, he worked at Merck & Co., Inc. of Whitehouse Station, New Jersey as counsel for its global marketing services division. From 2004 to 2008, he served as counsel for the company's vaccine division following his service as Merck's first chief privacy officer. Mr. Johnson also served as board chair-elect for Abington Health, Inc., a multi-hospital integrated healthcare system in Abington, Pennsylvania. He has been a trustee of the Community Partnership School in Philadelphia, and of St. Benedict's Preparatory School and St. Vincent Academy in Newark, New Jersey. He also served under gubernatorial appointments to the Pennsylvania State Real Estate Commission and the Pennsylvania State Board of Medicine, of which he was vice-chair. Mr. Johnson received his Bachelor of Arts degree from Williams College and a juris doctorate degree from the Georgetown University Law Center.

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Maureen P. McCausland, DNSc, RN, FAAN, Senior Vice President and Chief Nursing Officer (67) - Dr. Maureen P. McCausland is Senior Vice President and Chief Nursing Officer for MedStar. She serves as senior nursing executive and is responsible for System-wide oversight and leadership of professional nursing practice, nursing resource utilization, standards of nursing care, nursing outcomes, nursing education, and nursing research. In addition, MedStar Chief Nursing Officers have a dual report to her. Dr. McCausland joined MedStar with 30 years of experience as a hospital and nursing executive. Prior to her current role, Dr. McCausland served as Senior Vice President of Nursing and Patient Care Services at the University of Wisconsin Hospital and Clinics and Chief Nurse Executive of the University of Pennsylvania Health System and Associate Dean for Nursing Practice at the University of Pennsylvania School of Nursing. Additionally, Dr. McCausland is a fellow in the American Academy of Nursing, was a Johnson & Johnson Wharton fellow and a senior fellow at the Leonard Davis Institute for Health Economics at the University of Pennsylvania. She holds a Doctor of Nursing Science degree from Boston University and received her master's and undergraduate degrees in nursing from Boston College. She currently is a member of the American Organization of Nurse Executives, American Nurses Association where she is a member of the Audit Committee, American Academy of Nursing and the Sigma Theta Tau International Honor Society of Nursing. She is a member of the Board of the Friends of the National Institute of Nursing Research at the NIH. She currently serves as the Secretary/ Treasurer. She also serves as a member of The Joint Commission Advisory Council.

Kevin P. Kowalski, Senior Vice President, Marketing & Strategy (49) - Kevin P. Kowalski is Senior Vice President of Marketing and Strategy for MedStar Health. In this role, he serves as the chief brand steward for the organization with accountability for brand positioning and strategy. He leads a distributed team of public affairs and marketing professionals in patient acquisition and is responsible for the development and execution of MedStar’s digital strategy. He also leads the development of multi-year strategic plans and annual business plans for the organization. With nearly 30 years’ experience in marketing and brand management in hospitality, consumer products and services, Mr. Kowalski brings significant background to build on MedStar’s strong existing patient and customer relationships, geographic footprint and culture of innovation. Prior to joining MedStar in May 2016, Mr. Kowalski was Chief Marketing Officer at Terminix where he focused on a broad range of activities supporting business growth including customer acquisition, new product and service development, pricing optimization, and customer loyalty. He spent much of his career in hospitality at IHG (Intercontinental Hotels Group) where he had a global role managing all seven IHG brands including InterContinental and Holiday Inn. Prior to IHG, Mr. Kowalski was Director of Brand Marketing for Princess Cruises where he managed marketing strategy, advertising and program development for the cruise line. He also worked at The Coca-Cola Company in various brand marketing roles, including managing the Sprite, Minute Maid and Barq’s root beer brands. Mr. Kowalski earned his bachelor’s degree in economics at Northwestern University and master’s degree in business administration from the Kellogg Graduate School of Management at Northwestern University

Susan K. Nelson, Senior Vice President, Finance (50) – Susan K. Nelson serves as the Senior Vice President, Finance for MedStar. Ms. Nelson will become Executive Vice President, Chief Financial Officer effective July 1, 2017. In her current role, she provides strategic and operational leadership for System-wide financial forecasting, budgeting, capital allocation, shared services accounting, general ledger, financial information systems, and financial reporting. She also serves as technical advisor on all matters pertaining to outside auditors, as well as internal and external financial reporting and disclosure. Ms. Nelson joined MedStar Health in 2005, bringing more than 15 years of experience in accounting and auditing. Prior to her position at MedStar, she served as senior manager of Assurance and Advisory Business Services for Ernst & Young, LLP. As a certified public accountant, Ms. Nelson holds a Bachelor of Science degree in business administration with a major in accounting from Ohio State University. She is a member of the Healthcare Financial Management Association (HFMA), the American Institute of CPAs (AICPA), and the Maryland Association of CPAs (MACPA). Currently, Ms. Nelson serves on the finance committee for Chesapeake Regional Information System for Our Patients (CRISP), Maryland’s statewide health information exchange, and the board for the Greater Chesapeake Chapter of the Juvenile Diabetes Research Foundation. She previously served as the chairman of the board of directors for the American Red Cross Blood Services Board of the Central Ohio Region.

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Eric R. Wagner, Executive Vice President, Insurance and Diversified Operations (61) – Eric R. Wagner is the Executive Vice President, Insurance and Diversified Operations for MedStar. In this role, he provides executive leadership for most of MedStar’s non-hospital companies, including MedStar Health Plans (which comprises MedStar Family Choice, the System’s Medicaid HMO and MedStar Medicare Choice, the System’s Medicare HMO), MedStar Health Visiting Nurse Association, and MedStar Ambulatory Services. Mr. Wagner oversees population health-related activities for the System, including its collaboration with Evolent Health for MedStar Accountable Care (Medicare ACO) and MedStar Select, a health plan for associates. Mr. Wagner also is responsible for overseeing government affairs and managed care activities on behalf of MedStar and all of its entities. He previously served as Senior Vice President for MedStar with responsibility for all managed care activities. Prior to joining MedStar in 1995, Mr. Wagner was with Ernst & Young's healthcare consulting practice. Earlier in his career, he served as President and one of four founders of a healthcare consulting and management firm. Mr. Wagner has more than 35 years of experience in the healthcare industry in operations, strategy, business development, and finance. He has published several books, chapters and articles on managed care and provider compensation. Mr. Wagner has been an adjunct faculty member at Georgetown University, where he taught courses on healthcare policy and administration. He serves on the Executive Committee of the Maryland Hospital Association and on the Maryland Health Services Cost Review Commission Advisory Council. He previously served on the Board of Directors of the Maryland Chamber of Commerce. He also has been active in civic affairs in Alexandria, Virginia where he previously served as Chairman of the Planning Commission. Mr. Wagner holds a bachelor's degree in political science from the State University of New York at Stony Brook. He received his master's degree in business administration with specializations in health administration and finance from the University of Chicago Booth School of Business, where he was the recipient of the Bachmeyer Award for Academic Excellence.

Loretta Young Walker, Senior Vice President and Chief Human Resources Officer (52) – Loretta Young Walker is the Senior Vice President and Chief Human Resources Officer for MedStar. In this capacity, she has oversight of all human resources functions for MedStar’s approximately 30,000 employee population located in 10 hospitals and approximately 20 other health related businesses across Maryland and Washington, D.C, region. Prior to joining MedStar, Ms. Walker served as Vice President, Human Resources for W.W Grainger, North America's leading broad line supplier of maintenance, repair and operating products, with operations also in Asia, Europe and Latin America. Ms. Walker was responsible for providing HR generalist leadership and support to several areas of the business including teams that serve Large Customers in the U.S. and Latin America, Medium Customers in the U.S., Marketing, Global ecommerce, and Enterprise Systems. Prior to this role, Ms. Walker served as Chief Human Resources Officer for Turner Broadcasting System, Inc. where she had executive oversight of all human resources and security functions for Turner’s domestic and international operations. Under Ms. Walker’s leadership, Turner’s human resources organization and its effectiveness was recognized by several media and professional organizations, including DiversityInc, Working Mother magazine, and the International Association for Human Resources Information Management. Ms. Walker joined Turner in 1999 from BellSouth, where she spent 14 years building the HR function from the ground up. Ms. Walker earned a bachelor’s degree in computer information systems from Auburn University at Montgomery, and an MBA from Samford University. She is also a certified Senior Professional in Human Resources (SPHR). Ms. Walker has served on the boards for Cancer Treatment Centers of America’s Southeast and Midwest region and is an executive advisory board member at Mississippi State University School of Business. She has also been a member of the Atlanta Housing Authority Board. Business to Business magazine honored Ms. Walker with an IMPACT Award in 2011. She has been listed among the “100 Most Influential Blacks in Corporate America” by Savoy magazine and was honored by Diversity Best Practices with its Diversity Officer Leadership Award. She also is a member of the Leadership Atlanta Class of 2012.

ACUTE CARE FACILITIES

The System operates the largest network of acute care facilities in the Baltimore-Washington, D.C. region based on admissions, number of beds and market share. The number of licensed beds for each of the System’s nine acute care facilities and one rehabilitation facility are contained in the following chart.

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Licensed Total Licensed Post acute Licensed Facility Location Acute Beds Beds Beds

MedStar Franklin Square Medical Center Baltimore, MD 409 - 409

MedStar Good Samaritan Hospital Baltimore, MD 155 69 224

MedStar Harbor Hospital Baltimore, MD 177 - 177

MedStar Union Memorial Hospital Baltimore, MD 183 - 183

MedStar Georgetown University Hospital Washington, DC 538 - 538

MedStar Montgomery Medical Center Olney, MD 132 - 132

MedStar National Rehabilitation Network Washington, DC - 137 137

MedStar Southern Maryland Hospital Center Clinton, MD 216 - 216

MedStar St. Mary's Hospital Leonardtown, MD 119 - 119

MedStar Washington Hospital Center Washington, DC 895 17 912

Total 2,824 223 3,047 Source: Maryland Health Care Commission (Maryland Hospitals); District of Columbia Department of Health Regulation and Licensing Administration Health Care Facilities Division (DC Hospitals)

The Hospitals

The following is a description of each of the System’s hospitals.

MedStar Franklin Square Medical Center. MedStar Franklin Square Medical Center (MFSMC) is an acute care teaching hospital located in eastern Baltimore County, Maryland. MFSMC provides many medical and healthcare services, including a broad range of healthcare specialties, advanced technologies and treatments not traditionally found at community hospitals. It is accredited by the Joint Commission and certified as a Primary Stroke Center and has earned the Magnet Designation for excellence in nursing, the Excellence Award for Quality Improvement from the Delmarva Foundation and inclusion in the U.S. News & World Report Best Hospital specialty ranking for four consecutive years. In 2015, MFSMC was the first hospital in the Baltimore area and one of only three in the state of Maryland to achieve the prestigious five- year Baby-Friendly designation from Baby-Friendly USA. In addition, in 2015, MFSMC received the American Heart Association/American Stroke Association’s Get With The Guidelines®-Stroke Gold Plus Achievement Award, a national recognition endorsing the hospital’s continued commitment and success in implementing a higher standard of care for stroke patients. In 2016, MFSMC received the Woman’s Choice Award as one of America’s Best Breast Centers and was one of 42 winners nationwide. In addition, MFSMC received the 2016 Women’s Choice Award® for being one of America’s Best Hospitals for Bariatric Surgery. With more than 2,400 employees, MFSMC is one of the largest employers in Baltimore County.

MedStar Good Samaritan Hospital. MedStar Good Samaritan Hospital (MGSH) is an acute care teaching hospital located in northeast Baltimore City, Maryland, known for its specialties in nephrology, geriatrics and physical medicine. In addition to general adult acute care services, MGSH operates a comprehensive inpatient rehabilitation unit. It has expanded geriatric services through the Center for Successful Aging, a team-based approach to addressing the unique needs of an aging population. Most recently the MedStar Total Eldercare Program, which was founded at MWHC, was expanded to MGSH,

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offering comprehensive care to the frail elderly. MGSH also offers community-based health services through the Good Health Center and oversees the provision of senior living services through the two senior housing complexes located on its 43-acre campus. MGSH is recognized by The Joint Commission as an Advanced Primary Stroke Center. For the last four years, MGSH has received the Delmarva Foundation Excellence Award for Quality Improvement. The hospital has also received the 2015 “Partner for Change” award by Practice Greenhealth for its commitment to environmental sustainability and was recognized for sustainable garden initiatives.

MedStar Harbor Hospital. MedStar Harbor Hospital (MHH) is located just south of Baltimore’s Inner Harbor, in Baltimore City, Maryland. It is an acute care teaching hospital offering clinical services in medicine, surgery, obstetrics and gynecology, orthopaedics, pediatrics, and behavioral health. Collaboration with the National Institute on Aging (one of the National Institutes of Health) makes MHH the home of the Baltimore Longitudinal Study on Aging, the nation’s longest running study of aging and conditions affecting the elderly. Parexel, an international clinical research organization, has its Pharmacology Research Unit located at MHH. MHH is recognized by The Joint Commission as an Advanced Primary Stroke Center and is certified in Joint Replacement of the Hip and Knee by The Joint Commission. In 2015, MHH was recognized by the March of Dimes Maryland – National Capital Area Chapter – Healthy Babies are Worth the Wait Award for being committed to providing the best care for mothers and their babies by reducing the rate of premature births and decreasing the number of non- medically indicated elective deliveries and cesarean deliveries. The American Heart Association awarded MHH’s commitment and success in implementing a higher standard of stroke care with the Get With the Guidelines—Quality Achievement Silver Quality Achievement Award. Additionally, the hospital received recertification for the Pediatric Asthma Care program from The Joint Commission.

MedStar Union Memorial Hospital. MedStar Union Memorial Hospital (MUMH) is an acute care teaching hospital, located in the north-central section of Baltimore City, Maryland. The hospital offers clinical services in general medicine and surgery, and specialty services in cardiac care, hand surgery, orthopaedics, sports medicine, and vascular surgery. MUMH is a cardiac regional treatment center and is aligned with the Cleveland Clinic through the MedStar Heart and Vascular Institute, to share best practices and improve care for heart patients. MUMH’s Curtis National Hand Center is designated by the U.S. Congress as the National Center for the Treatment of the Hand and Upper Extremity. MUMH has one of the most comprehensive orthopaedic and sports medicine programs in the region. MUMH is the only hospital in Maryland with a Palliative Care Program certified by The Joint Commission. MUMH has the unique distinction of having its own biomechanics research facility and surgical skills training lab. In addition, the hospital is recognized by the Joint Commission as an Advanced Primary Stroke Center and is certified in Joint Replacement of the Hip and Knee by The Joint Commission. In 2015, MUMH was recognized by U.S. News & World Report as one of the best hospitals in the Baltimore region for heart bypass, knee replacement and orthopaedics. MUMH was also recognized by Practice Greenhealth Environmental Excellence for its ongoing commitment to improving its environmental performance and pride in realizing a top standard of excellence in sustainability.

MedStar Georgetown University Hospital. MedStar Georgetown University Hospital (MGUH) is an acute care teaching and research hospital located in northwest Washington, D.C. MGUH’s centers of excellence include neurosciences, transplantation, cancer and gastroenterology. MGUH's Lombardi Comprehensive Cancer Center is one of only 69 centers in the U.S., and the only one in Washington, D.C., designated as a Comprehensive Cancer Center by the National Cancer Institute. The construction of the Washington region’s first Proton Therapy Center is under development at MGUH and will be one of only 25 in the nation. MedStar Georgetown Transplant Institute is one of the highest volume transplant programs in the United States, performing liver, kidney, small bowel, colon, stomach, and multi-organ transplants. MGUH offers auto islet cell transplantation for those patients suffering from the pain of chronic pancreatitis. Outpatient transplant evaluation and follow-up clinics are offered at MFSMC, MMMC, MGSH, MSMHC and MWHC as well as several community locations. MGUH's neurosciences program is recognized as an Advanced Primary Stroke Center by The Joint Commission. MGUH was the first hospital in Washington, D.C. to attain Magnet Recognition by ANCC, and one of only 71 hospitals nationwide to achieve three magnet designations. The American Heart Association awarded MGUH’s

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commitment and success in implementing a higher standard of stroke care with the Get With the Guidelines—Quality Achievement Silver Quality Achievement Award. Proceeds of the Series 2017 bond offering will be used to fund the construction of a new 430,000 square foot surgical pavilion at MGUH. See “MedStar Georgetown University Hospital Project” for a description of this project.

MedStar Montgomery Medical Center. MedStar Montgomery Medical Center (MMMC) is located in Olney in northeastern Montgomery County, Maryland, a suburb of Washington, D.C. In conjunction with the specialists from MGUH and MWHC, MMMC provides access to specialty care for residents throughout the county. The acute care hospital offers a range of comprehensive services including a cardiac and vascular program, general surgery, orthopaedics, cancer care, addictions and mental health and women’s services. In 2016, MMMC launched the MedStar Health Center for Integrative Medicine, a new initiative designed to promote patient centered care, focus on health and healing and improve outcomes by treating the whole person. MMMC has also been recognized in several areas including as a Certified Primary Stroke Center, an accredited Chest Pain Center, as well as by the Delmarva Foundation for Excellence in Quality Improvement. MMMC received the Stroke Gold Plus Quality Achievement Award along with the Target: StrokeSM Honor Roll designation from the American Heart Association/American Stroke Association’s Get With The Guidelines® program. The hospital received the 2016 and 2017 “Partner for Change” award by Practice Greenhealth for its commitment to environmental sustainability

MedStar National Rehabilitation Network. MedStar National Rehabilitation Network (MNRN) includes MedStar National Rehabilitation Hospital (MNRH), a specialty hospital located directly adjacent to MedStar Washington Hospital Center, in northwest Washington, D.C. and 51 outpatient rehabilitation centers throughout Washington, D.C., Maryland, and Virginia. MNRH is a comprehensive medical rehabilitation facility offering a full range of treatments and services for the physical rehabilitation of individuals with disabling injuries and illnesses such as stroke, traumatic brain and spinal cord injuries, arthritis, amputations, post-polio syndrome, cerebral palsy, multiple sclerosis, chronic pain, back and neck pain, occupational injuries, cancer and cardiac disease that require medical rehabilitation. The hospital also offers specialized pediatric care in partnership with Children’s National Medical Center. MNRN operates or participates as a joint venture partner in outpatient centers which offer general rehabilitative care as well as distinct programs such as hand therapy, occupational rehabilitation, cancer rehabilitation and sports medicine. MNRN is nationally known for its research and body of knowledge on improving the lives of people with spinal cord injury and disease.

MedStar Southern Maryland Hospital Center. MedStar Southern Maryland Hospital Center (MSMHC) is an acute care hospital located in southern Prince George’s County, Maryland. The hospital offers a full range of services and is known for its cardiovascular and orthopaedic programs. MSMHC operates a Women and Newborns Center, including an obstetrics and gynecology program and the Southern Maryland region’s only Level 2 special care nursery. MSMHC is completing a plan for participation in the MedStar Heart and Vascular Institute to be included in the clinical and research alliance with the Cleveland Clinic Alliance to share best practices and improve heart care for patients. Among other specialty services and facilities, the hospital has a sleep disorders lab, inpatient and outpatient behavioral health programs, asthma and allergy center, rehabilitative medicine, and cancer treatment services. Since joining MedStar Health, in December 2012, MSMHC added specialists in conjunction with MGUH and MWHC, providing needed access and expertise in caring for its patients. MSMHC has an accredited Chest Pain Center and opened the first Primary Stroke Center in Prince George’s County.

MedStar St. Mary’s Hospital. MedStar St. Mary’s Hospital (MSMH) is located in Leonardtown, Maryland, in southern St. Mary’s County, a rural community in Southern Maryland. The hospital provides general, acute care services in medicine, surgery, obstetrics and gynecology, oncology, orthopaedics, pulmonary and cardiac rehabilitation, and psychiatry. The hospital offers orthopaedic services through the MedStar Georgetown Orthopaedic Institute. It also provides hospice care and is a partner in a joint venture that provides home care. MSMH opened a two-story outpatient pavilion in 2011, that includes cancer care and infusion services, outpatient imaging and women’s health services, and community outreach and

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physician office space. MSMH was awarded the Maryland Performance Excellence Platinum Award in 2014. For the eighth consecutive year, MSMH was the recipient of the Delmarva Foundation for Medical Care’s Excellence Award for Quality Improvement. The American Heart Association awarded MSMH’s commitment and success in implementing a higher standard of stroke care with the Get With the Guidelines—Quality Achievement Gold Quality Achievement Award.

MedStar Washington Hospital Center. MedStar Washington Hospital Center (MWHC) is an acute care teaching and research hospital located in northwest Washington, D.C. It is the largest hospital in the nation’s capital. The hospital offers primary, secondary and tertiary health services to adult and neonatal patients. It is a major referral center for the most complex tertiary services and operates the region’s only adult burn center. MedStar Heart and Vascular Institute (MHVI), headquartered at MWHC, is a national leader in the research, diagnosis and treatment of cardiovascular disease and formed a clinical and research alliance with the Cleveland Clinic. The Nancy and Harold Zirkin Heart and Vascular Hospital, Washington D.C.’s first and only dedicated cardiovascular hospital opened in June 2016. MHVI offers a full complement of services including heart transplant. The hospital’s cancer center offers cancer treatment, therapies and access to clinical trials. The hospital operates the largest, private, hospital-based ground and air ambulance and Level I trauma service in the region. MWHC offers comprehensive ambulatory care through a wide range of medical and surgical specialty outpatient clinic programs. MWHC is recognized by The Joint Commission as an Advanced Primary Stroke Center and in Ventricular Assist Device. It is the Washington region’s only Comprehensive Stroke Center.

Medical Staff

As of March 31, 2017 the System had approximately 6,415 affiliated physicians, including approximately 2,040 employed physicians and had contracts with approximately 365 additional physicians. Each hospital maintains its own medical staff organization responsible for credentialing and privilege delineation. All of the active medical staff members are board certified, grand-fathered or board eligible in their respective specialties.

Licenses and Accreditations

Each of the System’s hospital facilities is appropriately licensed and certified for Medicare and Medicaid reimbursement and each is accredited by The Joint Commission. MNRN and MGSH are accredited by both the Commission on Accreditation of Rehabilitation Facilities and The Joint Commission. The System’s home health agencies are licensed providers of home health care and are accredited by The Joint Commission.

Academic Affiliations

The Georgetown University School of Medicine is the principal academic partner of MedStar. In addition, the Washington Region hospitals maintain local affiliations with George Washington University School of Medicine, Howard University School of Medicine and The Uniformed Services University of the Health Sciences. Since July of 2016, Georgetown University School of Medicine’s affiliation with MedStar also extends to MedStar’s Baltimore region hospitals, where medical students complete clinical clerkships at MFSMC. For more information on the System’s relationship with Georgetown University see “MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION – Agreements with Georgetown University.” In addition, a few of the System’s hospitals have post-graduate programs in affiliation with The Johns Hopkins University School of Medicine, University of Maryland Medical System, Children’s’ National Medical Center, and the Washington D.C. Veterans’ Affairs Medical Center.

With the exceptions of MMMC, MSMH, and MSMHC, all of the hospitals in the System are teaching hospitals; however, these three hospitals now have resident rotations from the other System hospital programs. Six of the hospitals (MFSMC, MGUH, MHH, MNRH, MUMH and MWHC) sponsor graduate medical education programs and are fully accredited by the Accreditation Council for Graduate Medical Education. A seventh hospital, MGSH, recently merged its residency program with MUMH. In

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aggregate, the System enrolls over 1,100 residents and fellows in 90 academic programs of graduate medical education. These programs include virtually all adult specialty training and some pediatric programs; approximately 48% of the enrolled residents are in primary care training programs. MedStar teaching faculty hold academic appointments principally at Georgetown University School of Medicine and some hold appointments at the University of Maryland School of Medicine, and/or Johns Hopkins University School of Medicine.

NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES

Physician Networks

As of March 31, 2017, the System employed 2,040 physicians, 951 advanced practice clinicians, and more than 1,100 residents and fellows. The provider network consists of 37% medical specialties, 31% primary care, 20% surgical specialties, 7% emergency medicine, 2% behavioral health, and 3% other. Hospital-based specialties practice at all ten of the System’s hospitals, while the ambulatory providers practice at MedStar’s 294 additional sites of care serving the greater mid-Atlantic region. All of the physicians are board certified, grand-fathered or board eligible in their respective specialties. Specialized services include cardiac surgery, neurosciences, orthopaedics, organ transplantation, neonatal intensive care, cancer care, shock/trauma, burn care and hand surgery. Nearly 50% of primary care is certified as a Medical Home. The greatest concentration of employed physicians is the clinical faculty at MGUH and MWHC serving the Washington metropolitan area; these physicians account for over 90% of the admissions to these two hospitals. In addition, MWHC Physician – Hospital Organization, Inc. has contractual arrangements with approximately 75 private physicians and is co-owned by MWHC and members of its medical staff.

Health Plans

The System owns and operates MedStar Family Choice, Inc. (MFC), a health maintenance organization licensed by the State of Maryland and the District of Columbia. MFC, a wholly-owned Maryland stock corporation, is one of eight Maryland-designated Medicaid Managed Care Organizations (MCOs) participating in Maryland’s HealthChoice mandatory Medicaid managed care program. MFC is one of three participants in the District of Columbia’s Medicaid managed care program. MFC established a MedStar Medicare Choice product and began participation with the federal Medicare Advantage program in the District of Columbia on January 1, 2013. Since that time, the Medicare Advantage program has expanded to include the City of Baltimore and numerous surrounding counties, extending in Southern Maryland. MFC served approximately 86,000 Medicaid enrollees in Maryland, 57,000 Medicaid enrollees in the District of Columbia, and 11,000 Medicare Advantage members as of March 31, 2017. MFC has been operating in the District of Columbia’s Medicaid program under a contract that expires September 30, 2017. MFC was recently notified that it was not selected to continue to provide services under this program after the conclusion of its existing contract. Management continues to have discussions with the District government related to MFC’s participation in this program and a Resolution of Disapproval has been filed by certain city council members to trigger a 45-day review period. Additionally, MedStar has filed a formal protest of the proposed contract awards with the District’s Contract Appeals Board. In the event these efforts are not successful and the contract is not renewed, MedStar expects to continue to provide medical care at our facilities for many of these Medicaid participants, and management believes the termination of this contract will not have a material impact on fiscal 2018 earnings from operations. MFC maintains a network of primary care and specialty providers composed of MedStar’s employed physicians and community-based affiliated physicians in the geographic areas it serves. Members of MFC receive care at System hospitals, employed physician offices, through independent practices participating in the provider network, and from out-of-network providers. MFC has been recognized for its quality of care by the Maryland Department of Health and Mental Hygiene’s Consumer Report Card by being ranked as one of the two top performing plans each year since 2003.

MedStar was approved for a Track 3 Medicare Shared Savings Program Accountable Care Organization (“ACO”) for 2016. The ACO is currently serving 47,000 Medicare participants. MedStar established MedStar Select as an option under the System’s employer based health plan, available for all

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MedStar employees. As of March 31, 2017, approximately 27% of benefits eligible employees and their dependents are enrolled in MedStar Select (see “STRATEGIC INITIATIVES – MedStar 2020 – Population Health”).

Home Health Care

The System provides home health care primarily through its wholly-owned subsidiary, the MedStar Visiting Nurse Association (MVNA). The MVNA provides personalized home health care for homebound patients in Maryland, Northern Virginia, and Washington, D.C. with the mission of making a positive difference in people’s lives by providing health care in the home and community. Accredited through The Joint Commission, MVNA provides the following skilled services: nursing, physical therapy, speech therapy, occupational therapy, and social services. The System had approximately 21,500 home health admissions and approximately 300,000 visits for the fiscal year ended June 30, 2016.

MVNA’s Remote Patient Monitoring Program allows the healthcare team to track patients’ vital signs (heart rate, blood pressure and weight), symptoms, medication compliance, and other relevant health status information on a daily basis. The remote technology instantly transmits patient-recorded health information to the patient’s doctor and/or nurse, allowing the healthcare team to closely monitor progress between home visits. By reviewing this information daily, MVNA can intervene quickly when negative symptoms arise or when patients are not complying with doctors’ orders. For high-risk patients, early intervention improves outcomes, keeps patients safe, and prevents them from being readmitted to the hospital for complications. In collaboration with MedStar Institute for Innovation, MVNA aims to expand the program and maximize its effectiveness in improving patient outcomes.

MedStar Health’s post acute care leaders developed the Patient Care Coordination (PCC) program to improve integration of post-acute care services and enhance care coordination across the MedStar System. The program aimed to improve patient outcomes after discharge from the hospital by connecting patients to the next level of care within MedStar’s distributed care delivery network and to reduce the likelihood for emergency care or hospital readmission. The first PCC Program focused on total joint replacement patients, but now includes additional high-risk elderly patient populations like congestive heart failure (CHF) and chronic obstructive pulmonary disease (COPD), stroke, and renal failure. With this program, care coordination planning begins at the hospital admission. Once the patients in need are identified, PCC coordinators conduct an assessment, review the patient’s insurance benefits and discuss options for post discharge care with the patient and family. The coordinators provide follow-up for 30 days post discharge to help patients understand and adhere to their plan of care. PCC promotes system collaboration, reduces length of stay and likelihood for readmission, and improves the patient experience.

MedStar supports Patient Centered Medical Home (PCMH), a MedStar Health and CareFirst Program. The program supports care management for MedStar Medical Group (MMG) patients that are high risk/complex patients. Since 2013, MVNA and MMG have identified and served 995 patients in this program. In 2016, MVNA began supporting a MedStar system initiative – Aetna Total Cost and Quality Program. MVNA monitors over 6,000 patients to meet quality measures and monitors high-risk patients in this group for care planning and coordination of care with the patients’ physicians.

MVNA recognizes that patients discharged directly from the Emergency Department (ED) often need homecare services to begin more quickly than others. In partnership with MFSMC and MWHC, MVNA initiated a program called Rapid Track to address ED patients’ urgent home health needs. Patients referred to the Rapid Track program receive their first visit from a home healthcare nurse within 24 hours of discharge from the ED, sometimes within hours of returning home. The regular industry standard is to initiate homecare services within 48 hours of discharge. An MVNA nurse helps patients transition home safely and evaluates ongoing needs.

Post Acute Facilities

The System’s Commission on Accreditation of Rehabilitation Facilities (CARF)-accredited comprehensive medical rehabilitation hospital, MNRN operates 137 post acute care beds (see “THE

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HOSPITALS – MedStar National Rehabilitation Network”) for more information. The System has a 50% ownership interest in a 117-bed skilled nursing facility located adjacent to the campus of MFSMC. MGSH owns and operates a CARF-accredited comprehensive impatient rehabilitation unit with a total of 69 licensed beds, including 18 licensed beds recently moved from MUMH.

MedStar Ambulatory Services

MedStar Health is committed to creating the most accessible healthcare system in the region bringing healthcare services close to where people live and work. As part of this strategy, MedStar has recently opened three significant ambulatory facilities:

The MedStar Health Bel Air Medical Campus. Opened in April 2016, designed with both patients and providers in mind, offering a streamlined and collaborative approach to health care bringing MedStar experts from across the region to one convenient location. This state-of-the-art, 100,000 square foot ambulatory care center serves Harford County, Maryland, providing comprehensive care for patients including urgent care, primary care, and multi-specialty care as well as on-site radiology and laboratory services. Special services include a comprehensive cancer center that includes infusion services, radiation therapy, medical oncology, and breast surgery experts. The Bel Air medical campus also offers advanced orthopaedics, neurosurgery, pain management, sports medicine as well as physical and occupational therapy. Patients can also take advantage of cardiology and vascular services. A community room is available for use by community groups and organizations and for community health screening events.

The MedStar Health Lafayette Centre. An 112,000 square foot facility, located in Washington, D.C., opened in September 2016. This comprehensive, ambulatory care center is located in the downtown business district. This state-of-the-art medical facility provides comprehensive, coordinated medical care with expert specialists from MGUH and MHWC, as well as rehabilitation experts from MNRN and MedStar Cardiology Associates. Specialized services include: colorectal surgery, endocrine surgery, endocrinology, primary care, gastrointestinal, laboratory, orthopaedics, plastic surgery, sports medicine, urology, vascular and women’s health. Full-service radiology services are available including MRI, CT, and ultrasound. The Centre also includes a same day surgery center with four operating rooms and valet parking. A high tech Sports Performance Center is also available.

MedStar Health at Brandywine. A 60,000 square foot center, opened in July 2016, serves Maryland’s Prince George's, Charles, and St. Mary's counties with primary care and multi-specialty care. This state-of-the-art medical facility will provide comprehensive, coordinated medical care with expert specialists from MGUH and MWHC, as well as rehabilitation specialists from MNRN and MedStar Cardiology Associates. In addition to primary care, specialized services include: orthopaedics, rheumatology, physiatry, laboratory and ear nose and throat. Full-service radiology services are available including MRI and ultrasound. Coming soon will be the addition of same day surgery and an infusion center. MedStar Health at Brandywine also features a meeting room for use by community groups and organizations.

In addition, the System owns and operates five ambulatory surgery centers (ASC). These facilities offer a variety of procedures primarily in pain management, plastic surgery, podiatry, gynecology, ophthalmology, urology, gastroenterology, sports medicine, and orthopaedics. In addition, the System operates eight multi-specialty centers and fifteen urgent care facilities. The further development of the System’s ambulatory and urgent care services is a key component of the System’s strategies (see “STRATEGIC INITIATIVES – MedStar 2020 – Ambulatory Care and Physician Alignment”).

Radiation Oncology

The System provides hospital-based radiation oncology services at MGSH, MGUH, MMMC, MUMH and MWHC. The System also owns and manages two freestanding radiation oncology centers located on the campuses of other System hospitals and one in the new MedStar Ambulatory Care Center (MACC) located in Bel Air, MD. In addition, management support is provided for one non-System hospital in the Baltimore-Washington area. The System operates this site through various management agreements.

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Air and Ground Transportation

MedStar operates its own emergency medical service that provides both emergency and non- emergency patient transport services for the entire System. The MedStar Transfer Center coordinates the transfer of over approximately 10,000 patients each year. These patients are primarily transferred from smaller community hospitals to MedStar’s tertiary care hospitals in the District of Columbia and Baltimore. MedStar transport operates three helicopter bases which complete approximately 2,000 medevac missions each year and a ground critical care ambulance which completes approximately 1,200 transports each year. MedStar Transport coordinates over 20,000 ambulance and wheelchair van transports providing quick and easy access to MedStar’s Distributed Care Delivery Network.

In addition, MedStar was the first healthcare system to partner with Uber to provide ride-sharing services to patients. The System uses Uber to move qualifying patients to and from appointments, as an alternative to taxi vouchers.

Retail Pharmacies

The System owns and manages retail pharmacies on eight System hospital campuses, as well as one freestanding senior living location. A full range of prescription and over-the-counter items are offered to patients, as well as System employees.

Innovation and Research Activities

The mission of the MedStar Institute for Innovation (MI2) is to catalyze innovation that advances health. MI2’s role is to foster innovation throughout MedStar by offering innovation services that include traditional intellectual property and technology transfer expertise. MI2 is composed of several functional areas, including MedStar Inventor Services (MIS), The National Center for Human Factors in Healthcare and MedStar Simulation Training & Educational Lab (SITEL). See “STRATEGIC INITIATIVES – Innovation and Research” for more information.

MedStar Health Research Institute (MHRI) is the research arm for MedStar, providing scientific, administrative, and regulatory support for research programs that complement the key clinical services and teaching programs in all hospitals in the System. MHRI supports clinical research performed by private attending medical staff, hospital-employed medical staff and full-time research investigators. MHRI and its investigators participate in a wide range of research aimed at advancing health and the quality of delivered care by linking to the major clinical service lines including cardiovascular, diabetes, lipid disorders, orthopaedics, cardiac surgery, rehabilitation, renal diseases, anesthesiology, gerontology and women’s health and safety. There are also active investigations in diabetes, gerontology, women's health and health services research (research on the delivery of care to improve quality and safety). For fiscal year 2016, there were approximately 500 funded research projects supported by approximately $28 million of external funding, of which approximately $15 million was federal funding.

MARKET FORCES AND ENVIRONMENT

Regional Focus / Service Area

As a provider of healthcare services to the Baltimore-Washington, D.C. region, the System offers a continuum of services to more than 5.9 million residents in the cities of Baltimore and Washington, D.C. and the 11 Maryland counties in and around the Baltimore-Washington, D.C. corridor (Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s, and St. Mary’s). This target service area represents MedStar’s primary market focus for planning purposes as 94% of the inpatients served were from this market in fiscal year 2016. In addition, 3% of the acute inpatients are from the adjacent Northern Virginia suburbs of Washington, D.C. (i.e., Arlington, Alexandria, Fairfax, Falls Church, Loudoun, Manassas, Prince William and Stafford counties).

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The following table shows the inpatient origin by jurisdiction within the System’s primary service area in fiscal year 2016, the most recent data available.

FY16 Target Service Area Inpatient Origin of Discharges by Jurisdiction

% of Total System FY16 Inpatient FY16 IP Jurisdiction 2015 Population(1) Discharges (2) Discharges(2) Washington, D.C. 659,468 25,284 20.6% Baltimore City, MD 622,168 20,960 17.1% Baltimore County, MD 828,995 22,387 18.2% Prince George's County, MD 903,611 19,928 16.2% Montgomery County, MD 1,035,587 10,890 8.9% St. Mary's County, MD 111,389 8,906 7.3% Charles County, MD 156,207 4,135 3.4% Anne Arundel, MD 563,107 3,500 2.9% Harford County, MD 252,195 2,739 2.2% Calvert County, MD 91,437 1,527 1.2% Howard County, MD 312,038 1,004 0.8% Frederick County, MD 246,419 993 0.8% Carroll County, MD 168,369 482 0.4% Total 5,950,990 122,735 100.0% (1) Buxton 2015 Population Data. (2) Source: DCHA/Webfocus, excludes MS-DRG 795 Normal Newborns.

Market Regulation

The System operates under two different planning and rate regulatory environments. For a discussion of the Maryland “all payor” system and the general third-party payor considerations applicable in the District of Columbia, see “REGULATORY ENVIRONMENT” and “CERTAIN BONDHOLDERS’ RISKS” in the forepart of this Official Statement.

Under current law, a non-federal healthcare facility in the State of Maryland may not develop, operate, or participate in any covered healthcare project unless the Maryland Health Care Commission (the Commission) has issued a certificate of need (CON) for the project. Covered healthcare projects include the construction, development, or other establishment of a new healthcare facility, certain relocations of healthcare facilities, certain changes in the type or scope of healthcare services offered by a healthcare facility, certain changes in bed capacity, certain health service-related capital expenditures, and the offering of certain new health services. A CON is not required for certain healthcare projects, including (i) certain transfers or acquisitions of existing healthcare facilities not involving changes in services or bed capacity, (ii) capital expenditures by a health care facility for the acquisition and installation of major medical equipment, (iii) patient care related capital expenditures that do not exceed $12.0 million (as of March 2017) as further adjusted for inflation for hospitals and $6.0 million (as of March 2017) as further adjusted for inflation for other healthcare facilities if the expenditures do not involve the addition of new beds or certain health care services, (iv) patient care related capital expenditures for construction or renovation in excess of the current threshold of $12.0 million for hospitals (as of March 2017) as further adjusted for inflation, so long as the project does not require a total cumulative increase in patient charges or hospital rates of more than $1.5 million for the capital costs associated with the project over the entire period or schedule of debt service as determined by the Commission, (v) capital expenditures made by hospitals that

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are not related to patient care and do not increase patient charges or other rates, and (vi) the closure of a hospital. In addition, qualified mergers and consolidations between or among healthcare facilities are exempt from CON review if certain findings are made by the Commission. The Commission annually adjusts the capital expenditure thresholds based on the Consumer Price Index-Urban (CPI-U) for the Baltimore Metropolitan Area published by the U.S. Department of Labor, Bureau of Labor Statistics, rounded to the nearest $50,000.

According to the Commission, the CON program is intended to ensure that new health care facilities and services are developed in Maryland only as needed and if determined to be needed, that they are the most cost-effective approach to meeting identified needs, of high quality, geographically and financially accessible, and financially viable. If the Commission determines that the new health care facilities or services are needed, the Commission seeks to ensure that such facilities or services will not have a significant negative impact on the cost, quality, or viability of other health care facilities and services. MedStar is currently seeking CON approval from the Commission for several projects located at its Maryland facilities.

In the District of Columbia, a CON approval is needed from the State Health Planning and Development Agency (SHPDA) to offer or develop a new institutional healthcare service, certain changes in bed capacity of a health care facility, certain capital expenditures by or on behalf of a healthcare facility that exceed $2.5 million, certain capital expenditures for major medical equipment that exceed $1.5 million, and capital expenditures to acquire by purchase or comparable arrangement a healthcare facility. Notice and SHPDA approval is needed for closure of a healthcare facility or service. CON approval is not needed for (i) correction of cited deficiencies that are in violation of federal and District of Columbia fire, building and safety codes and deficiencies identified by national accrediting associations and District of Columbia government licensing agencies; (ii) non-patient care projects requiring a capital expenditure of less than $8 million; (iii) the acquisition of medical equipment under certain circumstances to replace the same or similar equipment for which a CON has been granted; (iv) acquisition of major medical equipment solely for research; and (v) certain capital expenditures by health maintenance organizations. Among the CON approvals recently received by MedStar in the District of Columbia are approvals for the development of an ambulatory care center and a single treatment room proton beam facility. A CON was approved for the MGUH surgical pavilion project on March 25, 2016.

Service Area Competition

The System is one of several health systems that provide a full range of health care services to residents of the Baltimore-Washington, D.C. region, with a leading presence in both of the anchor cities and their surrounding suburbs. A comparison of the System to other health systems in the Baltimore- Washington, D.C. region is provided in the following table, with systems listed in order of inpatient market share. Market share data is for the fiscal year ended June 30, 2016, representing the most recent data available.

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Comparison Benchmark Measures for Baltimore-Washington, D.C. Region Integrated Delivery Systems FY16 Inpatient Number of Hospital Market Share (2) System Facilities (1) (3)(4) MedStar Health System 10 20.6% Johns Hopkins Health System 5 16.0% University of Maryland Medical System 11 14.2% LifeBridge Health System 3 6.8% Adventist Healthcare System 3 5.0% Dimensions Healthcare 2 2.8% Inova Health System 5 0.7%

(1) Source: FY16 MedStar data from internal records; all other data from AHA Guide, 2015 edition (May 2014). (2) Includes: Anne Arundel, MD; Baltimore, MD; Baltimore City, MD; Calvert, MD; Carroll, MD; Charles, MD; Frederick, MD; Harford, MD; Howard, MD; Montgomery, MD; Prince George's, MD; St. Mary's, MD; Washington, D.C. (excludes Northern Virginia). (3) Inpatient market share is based on discharges. Source: DCHA/Webfocus, excludes MS-DRG 795 Normal Newborns. (4) Center was acquired by LifeBridge Health in 2015. Inpatient market share for LifeBridge Health includes Carroll Hospital Center.

In addition to the health systems identified above, there are also a number of acute-care hospitals not associated with a regional system, a few of which are associated with national systems. For fiscal year 2016, Holy Cross Hospital and Holy Cross Germantown Hospital, both affiliated with Trinity Health, had 5.0% and 0.8% market shares (Holy Cross Germantown Hospital opened in October 2014), respectively; St. Agnes Hospital and Providence Hospital, both affiliated with Ascension Health had 2.9% and 1.8% market shares, respectively; George Washington University Hospital, jointly owned and operated by a partnership between George Washington University and a subsidiary of Universal Health Services Inc., had a 2.9% market share. Although the number of independent hospitals has declined in recent years through merger activity, those that remain have developed a number of services and programs across the continuum of care. The four independent hospitals with the largest market shares in the Baltimore-Washington region are in rank order Anne Arundel Medical Center, Greater Baltimore Medical Center, Frederick Memorial Hospital, and Mercy Medical Center. For the fiscal year ended June 30, 2016, these four independent hospitals’ respective market shares ranged from 4.1% to 2.5%. Dimensions Healthcare recently created a joint venture with the University of Maryland Medical System to provide healthcare services in Prince George’s County, by relocating and redeveloping Prince George’s Hospital Center into a new regional medical center in Largo, Maryland.

Reimbursement

As described in “REGULATORY ENVIRONMENT” and “CERTAIN BONDHOLDERS’ RISKS” in the forepart of this Official Statement, payment in the Washington, D.C. service area is predominantly based on diagnosis-related group (DRG) and other forms of case rates, per diems, and discounted fee-for-service. The major payors in the System’s market area reimburse health care charges on a DRG-based reimbursement methodology, and there continues to be payor interest in moving away from percent of charges to fixed fee reimbursement for outpatient services as well as for opportunities to align incentives with providers through pay for performance metrics. Maryland hospital rates are regulated by the Health Services Cost Review Commission (HSCRC) under the state’s all-payor system. MedStar has alternative rate arrangements (DRG-based global rates) approved by the HSCRC related to specific payor contracts.

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In January 2014, the Centers for Medicare and Medicaid Services (CMS) approved Maryland’s waiver for a five-year period beginning January 1, 2014 for inpatient and outpatient hospital services. The waiver ties hospital per capita revenue growth to the state’s economic growth of 3.58% and will require growth in Medicare spending per beneficiary in Maryland to be 0.5% below the national average. CMS can require the State to submit a corrective action plan if targets for a given performance year are not met. The waiver also imposes quality measures and encourages population health management.

In connection with the waiver, the HSCRC introduced the Global Budget Revenue (GBR) model, which covers the Corporation’s seven Maryland hospitals. This model moves payment to hospitals from each individual service to a total revenue for each hospital (or a combination of hospitals) to provide hospitals flexibility in the objectives of better care for individuals, higher levels of overall population health, and improved health care affordability. The model removes the financial incentive from increasing volume and provides incentive to work with partners to provide care in the appropriate setting. Additionally, the GBR model has the potential of including both prospective and retrospective rate adjustments. Management believes the impact of such adjustments would not be material to the consolidated financial statements. The GBR arrangement has been renewed for fiscal year 2017, although it can be terminated by either party with 180 days prior notice. The State of Maryland and CMS have started discussions on Phase 2 of the waiver that would go into effect January 1, 2018 that could add potential population health metrics to include total cost of care benchmarks and savings.

Managed care continues to be a significant factor in the provision of health insurance in the Baltimore-Washington, D.C. region. Among the commercially insured regional population virtually all enrollees have some form of managed care plan benefits, with HMO coverage accounting for over one quarter of this enrollment. The majority of managed care penetration continues to be from five companies – Aetna, CareFirst BlueCross BlueShield, CIGNA, Kaiser Permanente, and United Healthcare.

MedStar has successfully concluded negotiations with all five payors within the last three years on behalf of its Washington-based hospitals, its employed physicians, and most of the System’s diversified businesses. Targets were set for each payor prior to commencing the negotiation based on the financial requirements of the hospitals/entities, the market position and characteristics of the payor, and other marketplace conditions. The System achieved or exceeded its targets in each of the concluded negotiations, and was able to secure several multi-year agreements. While payor reimbursement is still predominately based on fee-for-service, some negotiations are providing for additional payments for performance if predetermined quality and process measures are met. More recently, MedStar again successfully renegotiated one of five contracts noted above and is in the midst of renegotiating two others. The System anticipates continued success in future negotiations.

As noted above, a substantial majority of individuals within the System’s service area who have private insurance are covered by Aetna, CareFirst, CIGNA, Kaiser Permanente, and United Healthcare. Almost all of MedStar’s provider entities contract with each of these payors, except for Kaiser Permanente. Kaiser Permanente has a small, select network that includes MWHC as one of its hub hospitals for all specialties, MGUH and MUMH for neurosurgery and cardiac care, respectively, and MFSMC for Kaiser’s anticipated Medicare Advantage product.

Medicare Advantage penetration is lower in the region compared to other parts of the country. MedStar has a Medicare Advantage plan that began operations in 2013. Key competitors for this plan include Kaiser Permanente and CIGNA Healthspring. (See “STRATEGIC INITIATIVES – MedStar 2020 – Population Health”) for more information.

The following table provides a summary distribution of the payor mix of discharges and net revenue at the System’s hospitals for inpatient and outpatient hospital services for the fiscal year ended June 30, 2016.

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The System’s Payor Mix

Payor Percent of Total Net Revenue Inpatient Discharges Percent Medicare (excludes Medicare HMO) 38.7% 35.4% Managed care (includes commercial HMO/PPO, Medicare HMO, 44.9% 48.1% and Medicaid HMO) Medicaid (excludes Medicaid HMO) 7.8% 5.7% BlueCross BlueShield (excluding HMO/PPO) 5.2% 7.8% Other commercial/indemnity (excluding PPO) 1.1% 1.3% Other (self-pay, workers’ compensation, etc.) 2.3% 1.7% Totals 100.0% 100.0% Fiscal Year 2016 data includes all System Hospitals, Net Revenue includes Inpatient and Outpatient payment. Source: The System’s internal data.

HISTORICAL UTILIZATION

The following table presents selected historical utilization statistics for the System for the nine months ended March 31, 2017 and 2016 and the fiscal years ended June 30, 2016 and 2015.

Selected Utilization Statistics

Nine Nine Months Months Fiscal Year Fiscal Year Ended Ended Ended Ended March 31, March 31, June 30, June 30, 2017 2016 2016 2015 Licensed Beds 3,118 3,228 3,228 3,219 Admissions (excluding sub-acute) 102,953 103,778 137,990 143,664 Patient Days 555,683 563,093 749,705 765,820

Observations 30,258 32,232 43,191 43,077 Emergency Room Visits 378,174 396,573 530,294 547,472 Home Health Visits 219,492 222,964 299,065 266,778 Physician Office Visits 1,474,419 1,484,189 2,020,942 1,696,460 Other Outpatient Visits 1,385,837 1,416,802 1,903,611 1,821,997 Total Outpatient Visits 3,488,180 3,552,760 4,797,103 4,375,784

MedStar Family Choice Covered Lives 1/ 154,000 131,100 138,901 115,028 Source: The System’s internal data. 1/ Includes 51,100 and 57,000 Medicaid covered lives in the District of Columbia at March 31, 2016 and March 31, 2017, respectively and 45,900 and 52,500 covered lives at June 30, 2015 and June 30, 2016, respectively, for which the contract expires in September 30, 2017. See “NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES – Health Plans” for more information on this program.

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SUMMARY FINANCIAL INFORMATION Summary of Operations

The following is a summary of the consolidated statements of operations and changes in net assets of the System for the fiscal years ended June 30, 2016 and 2015 and for the nine-month periods ended March 31, 2017 and 2016.

Information for the fiscal years ended June 30, 2016 and 2015 is derived from the System’s audited consolidated financial statements for those fiscal years, which are included in Appendix B. All eliminations and reporting adjustments have been made to present the information in accordance with U.S. generally accepted accounting principles. This data should be read in conjunction with the audited financial statements for the fiscal years ended June 30, 2016 and 2015 and related notes included in Appendix B. Information for the nine-month periods ended March 31, 2017 and 2016 is not based upon audited financial information but, in the opinion of management, is presented on a basis consistent with the audited consolidated financial statements in Appendix B, and includes normal recurring adjustments necessary for a fair presentation therein. While MedStar makes reasonable good faith efforts to prepare these reports to reflect the financial condition at the end of each quarter, the reader must be aware that there may be subsequent adjustments made at the end of the fiscal year, including any adjustments made during MedStar’s annual audit, that relate back to prior quarters. The results of operations for the nine- month period ended March 31, 2017 are not necessarily indicative of the operating results to be expected for the entire fiscal year ending June 30, 2017.

Consolidated Statements of Operations and Changes in Net Assets Nine-Months Ended Fiscal Year Ended March 31 June 30 2017 2016 2016 2015 (in millions) (in millions) (unaudited) (unaudited) (audited) (audited) Operating revenues Net patient service revenue $3,492.9 $3,449.8 $4,611.3 $4,437.6 Provision for bad debt, net (161.9) (172.7) (225.3) (206.7) Total net patient service revenue, net of provision for bad debt 3,331.0 3,277.1 4,386.0 4,230.9 Premium revenue 606.0 483.6 666.4 561.3 Other operating revenue 153.0 154.8 213.6 235.0 Net operating revenues 4,090.0 3,915.5 5,266.0 5,027.2 Operating expenses Personnel 2,192.9 2,058.9 2,752.5 2,591.5 Supplies 571.8 578.9 779.0 741.5 Purchased services 684.8 665.1 911.9 844.0 Other operating expenses 384.4 366.5 466.7 452.6 Interest expense 33.8 33.1 44.2 47.9 Depreciation and amortization 144.9 138.5 186.0 188.9 Total operating expenses 4,012.6 3,841.0 5,140.3 4,866.4 Earnings from operations 77.4 74.5 125.7 160.8 Nonoperating gains (losses), net 111.6 (104.5) (79.6) (49.5) Excess (deficiency) of revenue over expenses 189.0 (30.0) 46.1 111.3 Change in funded status of defined benefit plans - - (255.3) (118.5) Other changes in net assets 12.5 (1.0) 4.4 24.3 Total increase (decrease) in net assets $201.5 ($31.0) ($204.8) $17.1

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Capitalization

The capitalization of the System as of March 31, 2017, June 30, 2016 and June 30, 2015 is set forth below. In addition, proforma capitalization at March 31, 2017 is presented below. Proforma debt includes the effect of the issuance of the Bonds in the aggregate proceeds amount of $428.0 million(*) (including premium bonds and costs of issuance) to fund the MGUH Surgical Pavilion project and other major capital expenditures across the System. MedStar’s Master Indenture prohibits the System from incurring additional debt if the debt-to-capitalization ratio shall exceed 67.0%.

Estimated Proforma June 30, 2015 June 30, 2016 March 31, 2017 March 31, 2017(2)(*) (in millions) (in millions) (in millions) (in millions) Long-Term Indebtedness $1,342.5 $1,317.6 $1,288.1 $1,716.1 (including current portion) Net Assets(1) 1,466.2 1,260.7 1,461.5 1,461.5 Capitalization (Long-Term Indebtedness plus Net 2,808.7 2,578.3 2,749.6 3,177.6 Assets)(1) Long-term Indebtedness as a 47.8% 51.1% 46.8% 54.0% Percentage of Capitalization (1) Excludes permanently restricted net assets. (2) Debt-to-capitalization reflects all long-term debt on the balance sheet of MedStar, including the net of any premiums and discounts on bonds outstanding. The actual definition of Indebtedness in the Master Indenture may permit net premiums and discounts to be omitted from the calculation. (*) Preliminary, subject to change.

Source: The System’s internal data.

Debt Service Coverage

The following table presents the System’s maximum annual debt service coverage for the fiscal years ended June 30, 2016 and June 30, 2015 and proforma debt service coverage after giving effect to the issuance of the Bonds.

/ Fiscal Years ended June 30 (in millions) 2015 2016 2016 Proforma(2)

Operating earnings before interest, depreciation $397.6 $355.9 $355.9 and amortization Investment income 16.1 11.7 11.7 Net gains (losses) on sales of investments 43.2 11.9 11.9 Other Non-Operating (1.1) (5.5) (5.5) Income Available for Debt Service $455.8 $374.0 $374.0

Maximum Annual Debt Service(1) $77.6 $77.9 $99.5(3) Maximum Annual Debt Service Coverage Ratio 5.87x 4.80x 3.76x(3) (1) Maximum Annual Debt Service for 2016 and 2015 is calculated based on (a) actual interest rates on outstanding fixed rate bonds; (b) a fixed interest rate of approximately 3.69% per annum based on an interest rate swap agreement relating to a portion of the District of Columbia 1998 Bonds (see “MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION – Interest Rate Swap Agreement”); and (c) the higher of actual

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interest rates paid on June 30 or the average annual rate paid on all other System variable rate indebtedness as of June 30 of each year. (2) Proforma Maximum Annual Debt Service includes the issuance of the Bonds (including costs of issuance), with fixed coupon rates of interest at expected market rates, and amortizing through 2047, in an aggregate proceeds amount of $428.0 million. (3) Preliminary, subject to change.

Source: The System’s internal data.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

Nine-Month Period Ended March 31, 2017 Compared to Nine-Month Period Ended March 31, 2016

Having another year of positive operating performance, MedStar generated positive earnings from operations for the nine-month period ended March 31, 2017 of $77.4 million compared to $74.5 million for the nine-month period ended March 31, 2016, an increase of $2.9 million or 3.9%. The favorable operating margin was 1.9% for both periods. Operating earnings before interest, depreciation and amortization for the nine-month period ended March 31, 2017 were $256.1 million which were favorable to the $246.1 million for the same period in the prior year. These favorable operating results were driven by growth in premium and net patient service revenues, partially offset by increased personnel and other operating expenses. MedStar overcame an increase in the utilization of agency personnel and the expense and revenue impacts of implementing a new physician/ambulatory electronic health record system to achieve these positive operating results. MedStar’s total net operating revenues were $4,090.0 million for the nine- month period ended March 31, 2017 exceeding the $3,915.5 million for the nine-month period ended March 31, 2016 and total operating expenses were $4,012.6 million for the nine-month period ended March 31, 2017 compared to $3,841.0 million for the same period in the prior year.

The System’s total net operating revenues were $4,090.0 million for the nine-month period ended March 31, 2017, an increase of $174.5 million or 4.5% when compared to $3,915.5 million for the nine- month period ended March 31, 2016. Net patient service revenue, net of bad debt, for the nine-month period ended March 31, 2017 was $3,331.0 million, an increase of $53.9 million or 1.6% increase over revenue for the nine-month period ended March 31, 2016. The increase was primarily due to higher case mix acuity and favorable rates in MedStar’s Washington, D.C. hospitals and increased professional fee revenue, partially offset by a decrease in patient volumes. For the Maryland hospitals under the Global Budget Revenue (GBR) model, revenue is no longer recognized based on volumes alone. The provision for bad debts of $161.9 million for the nine-month period ended March 31, 2017 improved by $10.8 million or 6.3% as compared to the nine-month period ended March 31, 2016, reversing the prior year’s unexpected increase. Premium revenue of $606.0 million increased by $122.4 million or 25.3% from $483.6 million in the prior year due to a growth in membership in the Medicaid and Medicare insurance businesses in Maryland and Washington, D.C. Covered lives at March 31, 2017 were 154,012 as compared to 131,130 at March 31, 2016, an increase of 22,882 or 17.4% (see Subsequent Events note in Appendix B). Other operating revenue was $153.0 million for the nine-month period ended March 31, 2017 compared to $154.8 million for the same period in the prior year. Changes to estimates resulting from settled, or tentatively settled, prior year third party cost reports resulted in gains of approximately $15.5 million and $3.2 million for the nine-month periods end March 31, 2017 and 2016, respectively.

Total operating expenses were $4,012.6 million for the nine-month period ended March 31, 2017 as compared to $3,841.0 million for the nine-month period ended March 31, 2016, an increase of $171.6 million or 4.5%. This increase was primarily driven by higher personnel costs due to temporary help and agency usage, wage increases year-over-year, and increased costs of benefits, including health insurance. In addition, there was an increase in purchased services due to higher costs in the Medicaid insurance business tied to growth in membership discussed above and increases in consulting tied to the implementation of a new physician/ambulatory electronic health record system and certain Systemwide performance improvement initiatives. These increases were partially offset by improved malpractice

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expense due to better-than-anticipated claims experience and favorable supplies expense due to supply cost management and benefits realized from performance improvement initiatives.

Non-operating activity improved $216.1 million with a net gain of $111.6 million for the nine- month period ended March 31, 2017 compared to a net loss of $104.5 million for the nine-month period ended March 31, 2016. The increase was primarily attributable to favorable returns in the investment market which also resulted in MedStar’s positive excess of revenue over expenses of $189.0 million for the nine-month period ended March 31, 2017 as compared to a deficiency of revenue over expenses of $30.0 million for the same period in the prior year. Net assets increased $201.5 million for the nine-month period ended March 31, 2017 due to investment market returns and positive earnings from operations.

MedStar’s unrestricted cash and investments (including Board-designated funds) were $1,836.3 million at March 31, 2017, an increase of $42.7 million over $1,793.6 million at June 30, 2016. Days cash on hand (including investments) were 131 days at March 31, 2017 compared to 133 days at June 30, 2016.

Fiscal Year Ended June 30, 2016 Compared to Fiscal Year Ended June 30, 2015

MedStar achieved better-than-expected positive earnings from operations of $125.7 million and an operating margin of 2.4% in fiscal year 2016. Although fiscal year 2016 earnings were less than the prior year earnings from operations of $160.8 million and an operating margin of 3.2%, it is important to note that MedStar overcame many unique challenges in fiscal year 2016 including significant enrollment and related rate issues in the Maryland Medicaid insurance plan (which were corrected in fiscal year 2017), an unexpected increase in bad debt, the January 2016 blizzard and the March 2016 malware event. For more information on malware, see “CERTAIN BONDHOLDERS’ RISKS – Cyber Security Risks” in this Official Statement. Operating earnings before interest, depreciation and amortization for fiscal year 2016 were $355.9 million compared to $397.6 million in the prior year. The positive operating results were driven by growth in the outpatient and physician services revenues and favorable-to-budget operating expenses. MedStar’s total net operating revenues were $5,266.0 million in fiscal year 2016 compared to $5,027.2 million in fiscal year 2015 and total operating expenses were $5,140.3 million compared to $4,866.4 million.

The System’s total net operating revenues were $5,266.0 million in fiscal year 2016, an increase of $238.8 million or 4.8% when compared to $5,027.2 million in fiscal year 2015. Net patient service revenue, net of bad debt, for fiscal year 2016 was $4,386.0 million, an increase of $155.1 million or 3.7% increase over revenue for fiscal year 2015. This increase was driven by overall outpatient volume growth, and favorable rates and higher case mix acuity in MedStar’s Washington, D.C. hospitals, partially offset by a decrease in inpatient volumes. For the Maryland hospitals under the GBR, revenue is no longer recognized based on volumes alone. The provision for bad debts was $225.3 million in fiscal year 2016 as compared to $206.7 million in the prior year, due to higher deductibles and coinsurance, an increase in Medicaid-pending accounts receivable and staffing issues. Premium revenue of $666.4 million increased by $105.1 million or 18.7% from $561.3 million in prior year due to growth in membership in the Medicaid and Medicare insurance businesses in Maryland and Washington, D.C. Covered lives at June 30, 2016 were 138,901 as compared to 115,028 at June 30, 2015, an increase of 23,873 or 20.8% (see Subsequent Events note in Appendix B). In April 2015, approximately 110,000 Medicaid recipients failed to recertify across the state of Maryland and actions were taken to try to recoup these members. For MedStar Family Choice, this redetermination of eligibility for coverage resulted in the loss of approximately 10,000 members. As of June 30, 2016, 7,000 of these members had been unable to re-enroll, which partially offset the increase in covered lives. Maryland Medicaid premium rate cuts effective January 1, 2015 under the HealthChoice program, coupled with adverse selection caused by the Medicaid enrollment problems, created significant industry losses for calendar year 2015 (see operating expense discussion below). Other operating revenue was $213.6 million in fiscal year 2016 as compared to $235.0 million in fiscal year 2015, primarily due to a decrease in investment returns on investments held in the self-insurance trust. Changes to estimates resulting from settled, or tentatively settled, prior year third party cost reports resulted in gains of approximately $3.9 million and $22.1 million for fiscal year 2016 and fiscal year 2015, respectively. Additionally, in fiscal year 2015, the System settled certain outstanding appeals of claims denied by the

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Medicare Recovery Audit Contractors (RAC) program and received payments of approximately $11.0 million, which were reflected as an adjustment to revenue.

Total operating expenses were $5,140.3 million for fiscal year 2016 as compared to $4,866.4 million in fiscal year 2015, an increase of $273.9 million or 5.6%. The increase was primarily due to increased purchased services related to growth and higher health services utilization costs, including the impact of adverse selection tied to re-enrollment, in the System’s Medicaid and Medicare insurance businesses (see premium revenue discussion above) and normal expense inflation, partially offset by favorable malpractice expense due to better-than-anticipated claims experience.

Non-operating activity was a net loss of $79.6 million in fiscal year 2016 compared to net loss of $49.5 million in fiscal year 2015 and MedStar’s excess of revenue over expenses was $46.1 million in fiscal year 2016 as compared to $111.3 million in fiscal year 2015. The decreases were primarily attributable to unfavorable returns in the investment market. Net assets decreased $204.8 million during fiscal year 2016, inclusive of a $255.3 million change in the funded status of the defined benefit plans.

MedStar’s unrestricted cash and investments (including board-designated funds) were $1,793.6 million at June 30, 2016 and $1,860.8 million at June 30, 2015. Positive operating cash flow and investment market declines resulted in days cash on hand of 133 days at June 30, 2016 compared to 145 days at June 30, 2015. Days cash on hand at June 30, 2016 and June 30, 2015 includes approximately 3 and 8 days, respectively, of unrestricted proceeds from the February 2015 taxable bond transaction.

Retirement Plans

The System has two qualified defined benefit plans (MedStar Health, Inc. Pension Equity Plan (PEP) and MedStar Health, Inc. Cash Balance Retirement Plan (CBRP)) covering substantially all full-time employees hired before 2005. MSMH also has a defined benefit pension plan that substantially covers all employees of MSMH.

Benefits under the plans are substantially based on years of service and the employees’ career earnings. MedStar contributes to the plans based on actuarially determined amounts necessary to provide assets sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006 and Internal Revenue Service regulations.

MedStar recognizes the funded status of defined benefit pension plans in the balance sheet with a corresponding recognition in unrestricted net assets of unrecognized gains or losses, prior service costs or credits and transition assets or obligations. The funded status is measured as the difference between the fair value of the plan’s assets and the projected benefit obligation of the plan. The unfunded amount recognized in the consolidated financial statements for pension liabilities as of the most recent measurement date of June 30, 2016 was $495.9 million. (See notes to financial statements in Appendix B for full disclosure of significant assumptions used to determine the funded status). For the plan years beginning January 1, 2016, the adjusted funding target attainment percentage (“AFTAP” or “IRS funded status”) for both defined benefit pension plans exceeded 90% and as a result, the plans are not subject to any benefit restrictions.

Effective December 31, 2009, the System froze its defined benefit pension plans for all non-union employees (approximately 84% of the System’s employees). Effective December 31, 2011 and 2010, certain union employees agreed to freeze their defined benefit accruals under new collective bargaining agreements. As of January 1, 2012 the plans were frozen for future benefit accruals for all participants. Affected employees earn all future benefits through MedStar’s defined contribution retirement savings plans. Under these plans, the System matches 50% of eligible participant’s salary reduction contributions up to a maximum of 6% of compensation. MedStar’s minimum defined benefit pension plan contributions are expected to average approximately $40 million per year over the next five years. These estimated amounts are subject to change based on economic and market conditions. In addition, MedStar has traditionally funded in excess of the minimum required amount, although there can be no assurance that the Company will continue to do so. Pension remeasurements occur annually on June 30. As of March 31,

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2017, although not recorded, the estimated impact of a pension remeasurement would have reduced the pension liability and increased net assets by approximately $80 million.

Liquidity and Capital Resources

Investment Policy. The System held $2,233.2 million of investable assets on its balance sheet at March 31, 2017. Of this amount, approximately $542.4 million was held in cash and cash equivalents, which may be invested in overnight sweep vehicles that invest in Treasury and agency securities and repurchase agreements. The System also maintains three separate pools of long-term investments, including the Corporate Endowment, Master Retirement Trust, and the Greenspring Financial Insurance Limited (GFIL - MedStar’s offshore captive insurance company) portfolios. Investments in the Corporate Endowment and the Master Retirement Trust are managed according to an investment policy adopted by the MedStar Board. MedStar retains an investment consulting firm to review the organization’s asset allocation strategies and aid in the manager selection process. The Investment Committee of the MedStar Board is charged with approving all investment management decisions for these long-term investments including establishing asset allocation policies, reviewing investment performance on a quarterly basis, and retaining and terminating investment managers. MedStar’s internal Treasury staff is responsible for making recommendations to the Investment Committee regarding asset allocation targets, investment manager retention and termination, and investment policies, monitoring investment managers’ performance and compliance with investment policies, and ongoing manager due diligence. Investments in the GFIL portfolio are managed according to an investment policy adopted by the GFIL Board of Directors. The GFIL Board of Directors and its management are charged with making all investment management decisions for these long-term investments including establishing asset allocation policies, reviewing investment performance, and retaining and terminating investment managers. For all pools of investments, professional external investment managers are retained to manage specific asset classes, and an independent third party is utilized for investment performance reporting. MedStar’s primary investment objective is to achieve the highest possible total return commensurate with safety and preservation of capital in real, inflation adjusted, terms. The investment policy guidelines for the Corporate and GIFL portfolios were amended to prohibit, when possible, investment in companies whose principal business is the sale or manufacture of tobacco products. The following table presents MedStar’s actual asset allocation as of March 31, 2017.

Corporate Master Retirement Type of Investment Investment GFIL Trust Portfolio

Domestic Equity 24.6% 24.9% 21.5% International Equity 17.0% 16.8% 19.0% Emerging Markets 8.7% 9.8% 9.5% Total Public Equity 50.3% 51.5% 50.0% Fixed Income 15.0% 16.2% 39.4%

Hedge Funds 22.3% 21.2% 9.9%

Private Equity 1.2% 1.9% 0.0%

Inflation Hedge 9.9% 8.8% 0.0%

Cash 1.4% 0.4% 0.7%

Total 100.0% 100.0% 100.0%

Approximately 71% of the System’s investable assets held on the System’s balance sheet (which excludes investments held in the Master Retirement Trust) as of March 31, 2017 offer daily liquidity,

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including the cash and cash equivalents previously noted and certain investments held in the Corporate Endowment and GFIL portfolios described above. Approximately 13% of investments offer monthly liquidity, with 15% offering liquidity less than one year but greater than one month. Less than 1% of investments offer liquidity annually or greater.

Investment Performance. As of March 31, 2017, the System had balance sheet cash and cash equivalents, short-term and long-term investments and short and long-term assets whose use is limited or restricted totaling $2,233.2 million. For the fiscal years ended June 30, 2016 and 2015, the System recorded net realized investment gains of $11.9 million and $43.2 million, respectively. During this period, unrealized gains (losses) on investments were ($92.9) million and $(75.9) million, respectively.

For the nine-month period ended March 31, 2017 and 2016, the System recorded net realized investment gains of $17.1 million and $9.8 million, respectively. During this period, unrealized gains/ (losses) on trading investments were $98.3 million and ($112.9) million.

The ability of the System to generate investment income and realized gains is dependent in large measure on market conditions. The market value of its investment portfolio, as well as its investment income, has been volatile in the past, and this volatility may continue in the future.

Lines of Credit and Bank Facilities. MedStar currently maintains a $250.0 million bank line of credit with a group of banks. At March 31, 2017, approximately $129.8 million was outstanding under this facility. The credit agreement is evidenced and secured by an obligation issued under the Master Indenture. The Credit Agreement includes certain financial covenants, including the maintenance of Maximum Annual Debt Service coverage ratio of 1.25 measured quarterly on a rolling four-quarter basis, Days Cash on Hand of 70 days calculated semi-annually at June 30 and December 31, and maintenance of minimum credit ratings at the “BBB” level. The line of credit is due to expire in April 2019.

In addition, MedStar maintains a $30.0 million letter of credit facility, provided by a single lender. This facility is principally used to securitize certain regulatory obligations under various insurance programs. Terms and conditions, which are similar to the bank line of credit, have been established for a three-year period, but the facility can be canceled at the bank’s option each year. There were approximately $16.1 million in standby letters of credit issued at March 31, 2017. The facility is evidenced and secured by an obligation issued under the Master Indenture. The facility is due to expire in April 2019.

MedStar maintains three letters of credit supporting variable rate demand bonds. Two letters of credit, which support the District of Columbia Series 1998A Tranche I and Tranche II bonds, were issued by TD Bank, N.A., with $38.8 million of Tranche I bonds and $38.8 million of Tranche II bonds outstanding as of March 2017. The third letter of credit, which supports the District of Columbia Series 1998A Tranche III bonds, was issued by PNC Bank, National Association, with $38.7 million of bonds outstanding as of March 2017. The Tranche I letter of credit expires in February 2022, the Tranche II letter of credit expires in April 2018, and the Tranche III letter of credit expires in March 2020. Terms and conditions are similar to the bank line of credit referenced above. The facilities are evidenced and secured by obligations issued under the Master Indenture. All bank facilities include cross default provisions to MedStar’s public indebtedness. Any covenants contained therein may be waived by the commercial banks and therefore should not be relied upon by bondholders. If new bank debt is incurred in relation to this transaction, covenants are expected to be consistent with those previously noted.

Debt and Interest Rate Swap Management Policy

MedStar maintains a Debt and Interest Rate Swap Management Policy. This policy governs the issuance and management of all long-term debt obligations, guarantees of debt, and lease financings. In addition, the Debt and Interest Rate Swap Management Policy also governs swap products used to manage interest rate exposure, whether or not related to a specific issuance of debt. The policy dictates the authorizations required for the issuance of debt, the process for evaluating and executing such financings including the use of fixed and floating rate debt, guarantees, and structural features of transactions. In addition, the policy stipulates that MedStar will consider the impact on credit ratings prior to the issuance

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of additional indebtedness. The Debt and Interest Rate Swap Management Policy also provides the circumstances under which hedging instruments may be utilized, the process for evaluating such risks, and stipulates how hedging transactions shall be executed.

Interest Rate Swap Agreement

In connection with the issuance of the 1998A District of Columbia Bonds, MedStar entered into an interest rate swap agreement with Wells Fargo Bank, National Association (formerly Wachovia Bank, National Association), with a notional amount of $150.0 million (reduced to $84.8 million at March 2017). The interest rate swap agreement expires in 2027, which is prior to the maturity of the 1998A District of Columbia Bonds. The agreement has the effect of synthetically converting the interest rate on the 1998A District of Columbia Bonds from a variable rate to a fixed rate of approximately 3.7%. The percentage of LIBOR to be received under the agreement is intended to offset the variable rate payable by MedStar with respect to the 1998A District of Columbia Bonds, though the LIBOR-based rate may not (and currently does not) equal the variable rate actually paid with respect to the 1998A District of Columbia Bonds. The interest rate swap agreement is evidenced and secured by an obligation issued under the Master Indenture. Although MedStar has never been required to post collateral under this swap agreement, certain collateral may be required to be pledged if the System’s credit ratings decline below the BBB level. As of March 31, 2017, the interest rate swap had a negative mark-to-market valuation of $10.3 million.

Agreements with Georgetown University

2000 Transaction Agreements

In 2000, MedStar and Georgetown University (the University) signed certain definitive agreements whereby MedStar received substantially all of the assets owned by the University that constitutes the MedStar Georgetown University Hospital (MGUH), the Community Practice Network, the Faculty Practice Group and certain office buildings and a parking lot on the campus (collectively referred to as the Transferred Businesses). These agreements became effective July 1, 2000 and transferred control of the identified physical plant and other real property assets of the Transferred Businesses to MedStar for use as an academic medical center for a minimum of ninety-eight years. At the end of the one hundred and fifty year lease term (including a fifty-two year renewal), the University shall convey all leased assets, excluding the underlying land, to MedStar for a nominal amount and enter into a rent-free ground lease for MedStar’s use.

In connection with this acquisition, MedStar also entered in two gain-sharing agreements with the University, an Asset Purchase Agreement (APA) and an Academic Affiliation and Operation Agreement (AAOA). Under the terms of the APA, MedStar agreed to pay the University annually 50% of the amount by which the combined operating earnings before interest, taxes, depreciation and amortization, as defined in the APA (Adjusted Washington Region EBITDA) of MedStar’s Washington D.C. businesses, including but not limited to MWHC, MNRN and MGUH, exceeded a certain threshold amount. These additional payments expired in 2016 when MedStar’s cumulative payments reached $70.0 million.

Pursuant to the terms of the AAOA, in support of academic programs at the University, for each fiscal year following the termination of the payment terms imposed by the APA described above, MedStar was required to pay the University a gain-sharing payment equal to 17.5% of the Adjusted Washington Region EBITDA in excess of a threshold as defined in the agreement. Under this provision, MedStar has paid $20.4 million to the University as of March 31, 2017.

Additionally, in accordance with the terms of the AAOA, the University is required to make payments to MedStar equal to a percentage of the University School of Medicine’s total undergraduate tuition revenue, in exchange for teaching services provided by MGUH physicians. MedStar recognized $12.3 million of tuition revenue during the year ended June 30, 2016.

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2017 Transaction Agreements

In June 2017, MedStar and the University entered into a refreshed and extended partnership agreement to expand the partnership across the system, provide enhanced clinical and academic alignment for the next 50 years, and support the construction of a new surgical pavilion at MGUH.

Depending on MedStar’s operating performance, payments under these agreements are expected to total approximately $22.0 million per year for the first five years and $33.0 million per year in years 6-20. After 20 years, payments are expected to be comparable to years 6-20 after adjusting for inflation for the remaining term of the agreement. Over the past four years, annual payments to the University have averaged $19.0 million per year.

The following are components of the transaction included in the payments noted above:

• Under the terms of the 2017 APA, MedStar purchased the right to use the University’s trade name and trademarks Systemwide for a period of 50 years in connection with the following service lines: oncology, neurology, cardiac, rehabilitation, behavioral health/psychiatry, orthopedics, radiology and neurosurgery.

• The original lease was amended to include an additional parcel of land for construction of the new surgical pavilion.

• The existing AAOA term was extended through June 30, 2066 and the existing gain-sharing provision discussed above was eliminated effective for fiscal year 2017. Commencing after the close of the 6th year of the amended agreement, MedStar shall pay the University an annual gain- sharing payment based on MedStar’s audited consolidated earnings from operations margin. No payment shall be required for a fiscal year if in the prior fiscal year MedStar’s consolidated earnings from operations margin is less than 1.5%.

• To support the purpose and operations of the School of Medicine (SOM), including research, academics, and the training of medical students, MedStar also signed a 50-year Conditional Pledge Agreement. Beginning in fiscal year 2017, MedStar conditionally pledged to make annual contributions to the SOM, if the SOM meets certain annual conditions.

For more information on the Agreements with Georgetown University see Appendix B.

STRATEGIC INITIATIVES

MedStar 2020

Management embarked on an initiative to further define and refine the characteristics and components of the organization’s distributed care delivery network, and to translate those findings into a concrete and actionable approach for transforming its business model – MedStar 2020. The System’s intent was to evolve by expanding access and resources across the region; creating new business models with more focus on post acute and primary care; and evolving focus from episodic care to a coordinated, bundled network of care across the continuum for all patients.

The focus of the 2013 - 2017 Strategic Plan was to be the first five-year phase of the System’s roadmap to MedStar 2020. The strategies guided the organization in building out the components of MedStar 2020. The 2018-2020 Strategic Plan is designed to build upon the current strategic direction, complete the last three years of the MedStar 2020 journey and act as a bridge to the next ten year vision. As the market dynamics and competitive environment are constantly changing, the Strategic Plan priorities are updated through the annual planning and budgeting process. The major management initiatives are described below:

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Acute Care Strategy

The System continues to build off its strong base of acute care facilities. This includes a focus on integrating acute care services at its ten System hospitals with strategies in ambulatory and physician alignment, population health and post acute care noted below. There is a continued emphasis on business growth through reconfiguration, optimization and distribution of access points and drawing patients to destination services as part of a coordinated system of care. Regionally and Systemwide, service lines are being integrated in heart care, cancer, orthopaedics, and neurosciences. The first phase focused on establishing and integrating service lines and programs on a regional basis in the Washington and Baltimore regions. The current phase is building upon the regional service lines to integrate and develop Systemwide service lines and uniquely competitive programs. In addition, there are unique regional service lines, such as surgical sub-specialties and transplants in the Washington Region.

At the System level, The MedStar Heart & Vascular Institute was established under a single clinical leader. It is a national leader in the research, diagnosis and treatment of cardiovascular disease headquartered at MWHC. The MedStar Heart & Vascular Institute is developing common practices and outcome measures to be used across the System. A clinical and research alliance was formed with the Cleveland Clinic in 2013. In 2014, the alliance was expanded to include MUMH and planning is underway to extend the alliance to MSMHC. Under the alliance, MedStar and the Cleveland Clinic have agreed to share best practices related to patient care, outcomes measurement, quality reporting and clinical research. Physician teams from both MedStar and the Cleveland Clinic are working together to accelerate improvements in heart care and research, to support even greater outcomes and clinical protocols. In June 2016, the Nancy and Harold Zirkin Heart and Vascular Hospital, DC’s first and only dedicated cardiovascular hospital opened.

The MedStar-Georgetown Cancer Institute is a collaborative program that brings together top cancer specialists with depth and breadth of expertise and experience in the diagnosis, treatment and care for cancers in both adults and children. MGUH’s Lombardi Comprehensive Cancer Center, the Washington region’s only comprehensive cancer center as designated by the National Cancer Institute, serves as the research engine for the network. The Washington region’s first Proton Therapy Center is under development at MGUH and will be one of only 25 in the nation, providing advanced cancer treatment when it opens, expected to be in September 2017. Strategies are being implemented to provide access to patients through distributed sites throughout the region and connect expertise through a collaborative practice environment. The MedStar Health Cancer Network based in Baltimore, with its hub at MFSMC, has formalized its collaboration with MGUH to enhance service offerings and connect to research and academics. In 2015, the Angelos Center for Lung Diseases opened at MFSMC and an expanded community Cancer Center site opened in Harford County, Maryland in 2016. MedStar is partnering with Caris LifeScience and joined its Caris Centers of Excellence for Precision Medicine Network. MedStar is participating in the development of standards of care and best practices for integrating and using molecular profiling in oncology practice to increase patient access to personalized medicine in clinical settings. MedStar is using the tumor profiling service to identify therapy options and clinical trial opportunities based on the unique characteristics of a patient’s tumor.

MedStar Orthopaedics includes more than 100 surgeons seeing patients in over 35 locations in the Baltimore-Washington corridor. MedStar is building regional orthopaedics and spine subspecialties to ensure consistent patient experience and quality. MedStar is also home to the Curtis National Hand Center in Baltimore, and MedStar’s physicians serve as the official medical provider for the National Football League’s (NFL) Baltimore Ravens, Major League Baseball’s (MLB) Baltimore Orioles, National Basketball Association’s (NBA) , National Hockey League’s (NHL) Washington Capitals, and other sports teams. MedStar Sports Medicine and US Lacrosse established the nation’s leading lacrosse sports medicine program with a sports medicine, orthopaedic surgery and physician therapy center opened in August 2016, in northern Baltimore County.

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MedStar is developing capabilities and expertise in neurosciences, from stroke care and movement disorders to multi-disciplinary complex spine surgery and distributed rehabilitation sites. Strategies are being implemented to provide access to patients through distributed sites throughout the region and connect expertise through a collaborative practice environment. A nationally-recognized pituitary program and neuro-oncology program was developed. Expertise was recruited to expand the movement disorder program and provide enhanced access in the region. Telestroke/Teleneurology services were expanded in emergency departments to provide access to expertise and timely intervention in stroke care. Rehabilitation services are integrated into the care continuum to maintain and restore a patient’s functional capabilities.

MedStar Palliative Care program was developed at MUMH and scaled up across the System as a best practice program. The program addresses physical, emotional, social, and spiritual needs of individuals living with a serious illness and can be provided in conjunction with life-prolonging treatments. The patient's care plan is individual and focuses on maximum comfort, allowing for monitoring of symptoms using a combination of medications tailored to the needs of each patient. Palliative care teams are being developed in all of the MedStar’s acute care hospitals.

Recognizing changing utilization patterns and the market levers within the Maryland Health Services Cost Review Commission (HSCRC) Global Budget Revenue Model, the MedStar Maryland hospitals are continuing to develop and implement strategies to incorporate population health management approaches to treating patients in the highest quality, lowest cost settings and aligning with community providers. In addition, in the Baltimore Region, where MedStar has four hospitals, a coordinated set of strategies is being developed and deployed to optimize and distribute programs and services that meet patient needs for access, offer high quality, low cost alternatives and are competitively positioned. Orthopaedics is the first service line to implement an optimization plan, consolidating more complex surgery at a hub hospital and retaining access points for other distributed orthopaedic and sports medicine related surgery. MGSH and MUMH have developed strategies to integrate their services, leadership and joint campus development as they serve a shared market. Similarly, in Southern Maryland, MSMH and MSMHC are developing strategies to serve the Southern Maryland peninsula market under one organizational leader.

Ambulatory Care and Physician Alignment

An important aspect of MedStar’s distributed delivery care network is the alignment of the System’s physician and ambulatory strategies. As management is positioning the organization to provide a comprehensive and integrated system of care to patient populations, management believes that MedStar’s capabilities to provide primary and specialty care, along with diagnostic and therapy services in a variety of settings as part of an integrated system of care is essential. The ambulatory care initiative is multi-faceted and is designed to improve MedStar’s geographic accessibility and distribution of care. The strategy focuses on restructuring, consolidating and optimizing the System’s existing ambulatory care centers and developing new ambulatory care centers in key markets. The major strategy has been to build out the ambulatory network and develop multiple care levels, from urgent care to multi-specialty centers and major ambulatory care centers. The next phase is to fully optimize the network and capacity that has been built out and identify the next set of market priorities and market-specific strategies jointly between the physician organization and ambulatory services, including an approach to ambulatory surgical services. For more information, see NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES – MedStar Ambulatory Services.

In order to extend MedStar’s footprint and unique collaboration models. MedStar entered into a clinical affiliation with CVS Health partnering with CVS’s Minute Clinic locations distributed throughout the region and collaborating in care coordination in areas such as medication management through integration of Electronic Health Records systems. In addition to expanding physical access to services, MedStar embarked upon a Telehealth strategy, with the

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first phase in partnership with American Well, to provide convenient care for low acuity services. The MedStar eVisit program was first offered to MedStar associates and rolled out direct to consumers in October, 2016. The next phase will test chronic care management interventions and expansion of provider to provider consultation via an a Telehealth Innovation Center platform

The alignment and integration of the System’s employed physicians and advanced practice clinicians is in progress under new leadership since January, 2016. MedStar Medical Group (MMG) serves as an umbrella organization for providers who are directly employed by MMG and those employed by the MedStar’s hospitals or other operating entities. To foster success in the physician enterprise a myriad of clinical and operational strategies are being coordinated. Among them is the establishment and development of practice councils for all major clinical specialties to form Systemwide standardized, evidence-based guidelines for the professional practice of medicine and to foster clinical integration across MedStar’s Distributed Delivery Care Network. To date, MedStar has formed 25 practice councils. Each practice counsel has four sub-components: Electronic Health Records, clinical practice guidelines, clinical practice operations, and quality and safety. This also inculcates a culture of communication, providing a voice for clinicians in designing and delivering care – a hallmark of an engaged provider enterprise. Additional strategies include developing and implementing recommendations to enhance the practice environment and operations while creating an aligned standard of quality and consistency across the System’s sites; and defining and evolving the organizational structure as MedStar moves further into risk-based contracting. This effort will be the foundation for evolving MedStar’s capabilities to function in a variety of reimbursement models, while also providing a standard of care for the patients served across all practice settings. An initiative focused on right- sizing and configuring the primary care network is in progress along with refreshing market opportunities and priorities for growth in conjunction with ambulatory services. All the work underway is predicated on a goal of leveraging the considerable strengths within MedStar to create a medical group that defines, cultivates and values the highest quality, most effective, most efficient provider and practice performance – grounded in the strength of alignment and integration. See “NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES – Physician Networks” for more information.

Post Acute Care Strategy

The System operates the largest home care company in the region, with approximately 300,000 home care visits in fiscal 2016 (see “Home Health Care”). In addition, the System provides comprehensive acute and ambulatory rehabilitation services with the operation of a 137 bed rehabilitation hospital in Washington, D.C. (see “MedStar National Rehabilitation Network”), has 69 licensed comprehensive inpatient rehabilitation beds in the Baltimore region (see “MedStar Good Samaritan Hospital”) as well as a number of affiliations to provide sub-acute care and other post-acute care services. The System also participates in a skilled nursing facility joint venture which has a total of 117 beds at MFSMC and an extensive retail pharmacy network (see “Retail Pharmacies”). MedStar also operates 58 rehabilitation sites (51 MNRN-owned and 7 hospital- based). Current plans are to improve integration of post-acute care and enhance care coordination with acute services, strengthen the portfolio and demonstrate patient outcomes, experience and cost. This is being accomplished by building an infrastructure that links post-acute care to acute and physician services so as to advance the care coordination of populations with high post-acute care utilization and by identifying new program and service opportunities, and developing partnerships where there are gaps in the portfolio.

Digital Strategy

MedStar’s digital strategy is focused on seamless consumer engagement. MedStar's redesigned website was the launching pad for a multi-channel consumer experience which leverages mobile apps, social media, digital marketing, contact centers, digital analytics and eVisits. MedStar is building a new web and mobile based platform called MedStar Now, which is

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expected to allow patients to more effectively search for providers, book appointments online, understand PromptCare wait times, and register online if they are a new patient.

Population Health

Recognizing the shifting reimbursement environment from fee-for-service to value-based purchasing, the System is focused on population health initiatives. The System’s Medicaid managed care organization, MedStar Family Choice, operates in Baltimore County, Baltimore City, Washington, D.C., Anne Arundel County, Harford County, Prince George’s County, Montgomery County and Southern Maryland. For additional information see “NON-ACUTE SUBSIDIARIES AND/OR AFFILIATES – Health Plans.” MedStar Medicare Choice, a new Medicare Advantage Plan which began in the District of Columbia, entered the Central Maryland and Southern Maryland markets in 2015 (see “Health Plans”). MedStar was approved for a Track 3 Medicare Shared Savings Program Accountable Care Organization (“ACO”) for 2016. The ACO is currently servicing 47,000 Medicare participants. Infrastructure was developed to better coordinate and manage patient care for the System’s communities and specific populations through a partnership with Evolent Health. As of March 2017, MedStar Family Choice, MedStar Medicare Choice and the ACO had approximately 201,000 enrollees. Management routinely monitors the profitability of its population health initiatives. MedStar offers employees three medical plans as part of our Total Rewards package. The MedStar Select Plan, featuring the MedStar Select Provider Network is available to MedStar employees and their dependents. As of March 31, 2017, approximately 27% of benefits eligible employees and their dependents are enrolled in MedStar Select.

Quality and Safety Improvements

The System devotes substantial efforts to the continuous improvement in the quality of care delivered and safety of its patients and caregivers. MedStar management, clinical staff, and medical staff are all engaged in this effort, led by a centralized team in order to ensure best practices are identified and implemented across the System.

In order to provide quality transparency to its community, MedStar posts its Centers for Medicare and Medicaid Services (CMS) clinical care measures on its website. This not only provides easier access to the measures, but also provides information to the public that is more current than the data available on the CMS website. Designed by clinicians, the web pages convey information in layman's terms for ease of understanding and are displayed in a comparative format including data from all hospitals reporting to CMS. On its website, MedStar also provides Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) information about the System’s patients' perception of their experiences.

The focus on clinical quality and safety performance has been extended to a number of Systemwide initiatives related to service lines and patient conditions. Each initiative focuses not only on clinical quality, but also on patient safety and financial performance. Each initiative is staffed broadly, with participation from across the System to ensure wide acceptance and implementation of all measures and practices. Several of these initiatives have achieved tangible improvements in the quality of clinical care and safety for patients. Management believes that MedStar’s quality and safety initiatives have resulted in a decrease in serious safety events with demonstrated financial benefits, including a decline in malpractice expenses, even as the number of employed physicians has increased. Among those are the following: • High Reliability Organization - MedStar has long been committed to delivering the highest levels of quality and safety to its patients. Over the last 48 months, MedStar has been driving to become a High Reliability Organization (HRO). A HRO is an organization that succeeds in avoiding unintentional patient harm due to high risk factors and complexity embedded in the provision of care. To date, over 2,000 MedStar Health leaders and over 28,000 employees and physicians have been trained

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on the tools and techniques used by resilient organizations. Additionally, over 1,100 Safety Coaches are working in clinical care units to increase visibility around the System’s HRO journey. • Culture of Safety – Over the last eight years, MedStar has conducted a Systemwide employee survey on employee perceptions of the culture of patient safety. The results have provided a platform for a systematic patient safety improvement plan across all entities in the System. The Systemwide activities that resulted from this planning work led to tangible (1%-3%) improvements in critical safety domains over this period. Additional plans have been developed and activities implemented for continued patient safety improvement. • Council for Ideal Obstetrical Care – Initially focused on risk reduction, this task force has transitioned to develop evidence-based guidelines for quality and safety in obstetrical care and is currently focusing on creating a culture of safety. As a result of these practices, birth trauma rates across the System continue to be below the national average. • Stroke Task Force – This group deployed evidence-based protocols across the System and received Primary Stroke Certification from The Joint Commission at all hospitals other than MSMH (MSMH has Primary Stroke Center Designation through the Maryland Institute for Emergency Medical Services System). • Falls Prevention Initiative – This initiative is focused on prevention of falls with serious harm. Hospitals across the System are implementing evidence-based prevention practices and developing Systemwide protocols to standardize practice. • Standardized Telemetry Protocols and Practices – This initiative is focused on implementing evidence-based, best-practices across our System for patients requiring special monitoring (e.g. cardiac, post-surgical patients). • Hospital Acquired Conditions, Readmissions and Sepsis System Collaborative – Work to identify and implement improvement opportunities for prevention of hospital acquired conditions (e.g. infections, urinary tract infections) and readmissions to support quality, safety and pay for performance is ongoing. Through these efforts, MedStar Hospitals have achieved Systemwide all-time low infection rates in central line infections in our ICU and in our non-ICU patients as well as in surgical site infections in knee and hip replacement surgeries. Additionally, a Systemwide steering committee was put in place 30 months ago to bring System wide best-practices related to early identification and treatment of sepsis to all MedStar entities. • Learning from Every Death Collaborative - In partnership with the Mayo Clinic, the Learning from Every Death program has been implemented across all MedStar hospitals. Based on success seen at the Mayo Clinic, deaths that occur within our hospitals are now reviewed by an interprofessional clinical team for possible learning’s and system/process improvements. • Heart Failure (HF) Patients – A program has been developed to provide evidence based care to HF patients across the continuum of care. Implemented initially at MedStar’s two tertiary heart hospitals, the program is being systematically rolled out to the other MedStar hospitals. • Systemwide implementation of the RL Solutions Patient Safety Event Management System – The online reporting system tracks near misses and unsafe conditions that may arise across MedStar’s care facilities allowing for process improvement. To date, over 115,000 occurrences have been shared across the System for learning and improvement purposes. • TheraDoc – This program was implemented Systemwide in 2014. It is an antibiotic stewardship software program that improves infection management by matching appropriate antibiotic therapy to bacterial infection, alerting caregivers to opportunities for switching IV to PO therapy, and streamlining antibiotics to less

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costly and/or more targeted therapy. Through its antibiotic stewardship the program also helps in reducing C. Diff infections.

For more information on MedStar’s quality and safety programs, including MedStar’s inpatient experience scores, please go to: https://www.medstarhealth.org/mhs/about- medstar/quality-and-patient-safety/#q={}

Supply Chain Initiatives

The System continues a major focus on supply chain initiatives and has benefited significantly from a new supply chain operating model that was implemented in 2016. The new model is oriented around clinical service lines including orthopedics/trauma, heart and vascular, surgical services, imaging/lab and general patient care. The model pairs a strategic sourcing leader for each clinical service line with a clinical value analysis nurse specialist. The team works directly with MedStar physicians, nurses and other clinical stakeholders to implement supply cost reductions, and quality and service improvements. MedStar is also continuing its supply chain partnership (the MNS Supply Chain Network, LLC) that was formed in partnership with Novant Health and Sentara Health in November 2011. The network aggregates the $1.5 billion annual supplies expenditures of the three organizations for enhanced leverage in contract negotiations with the supplier community. Savings continue to be generated largely by standardizing to the lowest prices for supplies across the three healthcare systems with savings in pharmaceuticals, general commodities and various physicians preference products. Supply savings realized in the first half of fiscal 2017 from the new operating model and the MNS Network was approximately $10.3 million.

MedStar Leader of the Future

MedStar continues to invest in its greatest asset, its people. The System has created four leadership development programs for physicians, nurses, senior executives and management. These programs serve as part of succession planning and expanding the pipeline of high performing leaders across MedStar Health to fill a broad range of existing and new leadership positions that will emerge from the MedStar 2020 strategy. The first cohort of 25 physician leaders completed their 18-month program in June 2016 and a second cohort started in January 2017. The first program for 15 executive leaders began in November 2015. The nursing leadership program was launched in January 2017 with a cohort of 26 MedStar nurses. In addition, more than 90% of MedStar’s 2,500 leaders have participated in a leadership development program. These programs are intended to better prepare the System’s managers to navigate the changing healthcare environment and ensure the System is well positioned for the future.

MedStar 2020 Performance Transformation

The MedStar 2020 Performance Transformation initiative is continuing to advance as the Systemwide performance and operational excellence component of the MedStar 2020 strategy. The objective is to drive value into the System by redesigning MedStar’s clinical and business operations to be more effective and more efficient. In doing so, it is simultaneously advancing the System’s capability for continuous and sustainable performance improvement.

The areas of opportunity include administrative and support service functions, clinical services, supply chain, care management and clinical performance improvement. Numerous initiatives developed by collaborative teams of MedStar leaders and providers, are in active implementation. Each initiative represents an opportunity for MedStar to implement a more highly evolved System solution for MedStar’s operations. To sustain (or hardwire) the successful transformation of each initiative the appropriate functional or operational leader is fully vested in the changes being implemented. Many initiatives are supported by MedStar’s internal organizational effectiveness change management experts.

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The long-term sustainability of the initiative includes building a talented internal team to lead the implementation of targeted opportunities with our operational leadership and to develop future opportunities for focused performance improvement. MedStar has successfully and seamlessly transitioned this initiative from a third-party consultant which initially helped assess and scope the opportunities. To advance the System capability for continuous improvement, a standard improvement methodology as well as improvement tools and training are being deployed.

Innovation and Research

MedStar recognizes the importance of innovation and research in successfully responding to the changing health care environment. The MedStar Institute for Innovation (MI2), whose mission is to catalyze innovation that advances health, is expected to continue to make the System a leader in driving health care innovation. The MedStar Health Research Institute (MHRI) and MedStar’s partnership with Georgetown University should continue to make the System a leader in translational and health sciences research.

MHRI is the research arm for MedStar, providing scientific, administrative, and regulatory support for research programs that complement the key clinical services and teaching programs in all hospitals in the System. MHRI supports clinical research performed by attending medical staff and by full-time research investigators. MHRI and its investigators participate in a wide range of research aimed at advancing health and the quality of delivered care by conducting health services research. MHRI is part of the Georgetown-Howard Universities Center for Clinical and Translational Science (CTSA), an NIH-sponsored program to support multidisciplinary, cross- institutional teams of researchers in advancing science that can be used to improve the nation’s health. In fiscal year 2015, the CTSA was renewed by the NIH for an additional five years and received one of the highest scores in the nation based on performance in the first five years. Many of MHRI’s clinical researchers and scientists are nationally and internationally known investigators, serving on NIH committees and editorial boards and fulfilling academic appointments. MHRI’s research infrastructure enables it to provide a wealth of support to investigators and sponsors.

In fiscal year 2016, MHRI participated in over 1,000 clinical trials, was awarded over 300 new contracts/grants (includes all federal, foundation, commercial and fee for service contracts) and published over 800 scientific publications (new medical discoveries). MHRI is in the top 20% of U.S. institutions receiving funds from the NIH and other federal agencies, with approximately 60% of its studies being federally funded.

MI2 was founded in 2009. Its role is to foster innovation throughout MedStar by offering innovation services that include traditional intellectual property and technology transfer expertise, either in partnership with MedStar employees as well as collaborative commercialization with external strategic partners, including startups. Through the MedStar Innovation Platform, MedStar associates can access tools for ideation, thinking differently, and design, as well as respond to innovation challenges, and keep current on developments in healthcare innovation across the organization.

MI2 is composed of several functional areas. MedStar Inventor Services (MIS) offers a turnkey technology commercialization system in conjunction with Cleveland Clinic Innovations to help MedStar employees take best ideas to the marketplace. MIS provides a full range of intellectual property protection, prototyping, market assessment, and licensing services.

The National Center for Human Factors in Healthcare applies the safety science of human factors engineering and cognitive science (the design of devices and processes optimized to work in the way that people actually think and act) to improve patient care. The Human Factors Center is both a large research enterprise (with NIH and AHRO funding) as well as a clinical consultation service across MedStar and to external medical device and health information technology companies. MI2’s National Center for Digital Health and Data Science finds,

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identifies, and creates new software applications, information visualizations, predictive analytics, and other information tools to support the health and well-being of the System’s patients and the workflow and performance of the System’s clinicians. The MI2 External Alliance division forges partnerships with outside agencies and companies, that help further MedStar’s vision, including being a founding partner of the entrepreneurial incubator and venture fund 1776.

MedStar Simulation Training & Education Lab (SITEL) is MedStar’s learning infrastructure organization. MedStar SITEL’s mission is to catalyze the creation and support the delivery of quality education by providing associates and educators with adaptable learning infrastructure and resources. MedStar SITEL also focuses on the impact of learning on entities, associates, patients and communities. MedStar SITEL supports improved performance by deploying a blended model of interactive online and face-to-face training, 3-D virtual simulation and hands-on, high-fidelity simulations, as well as performance support tools that can be used during the delivery of patient care. It is also responsible for MedStar’s Learning Management System, used by all 30,000 associates across MedStar, and for its Continuing Medical Education (CME).

Enterprise Risk Management

MedStar has established an Enterprise Risk Management (ERM) Program throughout MedStar. The goals of this program are to identify, assess, prioritize and implement solutions to external and internal risks impacting the mission and operations of MedStar.

Information Technology Strategy

A key component of MedStar Health’s Electronic Health Record (EHR) strategy is the expansion of the inpatient MedConnect EHR. This is essential to enhancing patient care, ongoing optimization of the EHR and supporting the MedStar 2020 strategy. Built on the Cerner Millennium platform, MedConnect provides a common patient record for nursing documentation, physician orders and ancillary department support.

MedStar recently completed the transition from the GE Centricity EHR to MedConnect within its ambulatory clinics and practices. This implementation added more than 2,000 providers and 3,000 non- providers in the ambulatory setting to the same EHR currently used in the System’s hospitals. This initiative lays the foundation for an integrated clinical platform across the continuum of care (inpatient/ambulatory).

Currently, MedStar is adding new MedConnect inpatient functionality for hospitals including critical care, anesthesia, bedside medical device integration, infusion management/pump integration, emergency department, physician documentation, Dragon voice recognition, Health Information Management and inpatient rehabilitation.

MedConnect and the EHRs from the three most recent hospitals to join the System – MMMC, MSMHC, and MSMH - are all available via MedStar’s Health Information Exchange (HIE) so physicians in any venue can see the complete patient history. MedStar’s integration efforts have won several innovation awards including the “Most Wired” recognition by Hospitals & Health Networks magazine for the 12th time. In 2016, MedStar received the Most Wired Advanced designation, one among an elite group of 19 hospitals and health systems out of the 414 named to the Most Wired list. Expansion of the EHR has kept pace with federal expectations as it has garnered Meaningful Use incentive payments. While much of MedStar’s expenditures for electronic medical records have been incurred, additional investments can be expected over the next several years as MMMC, MSMHC, and MSMH are brought onto the common platform.

In an effort to continue moving toward the use of single enterprise systems, MedStar recently implemented the enterprise staffing and scheduling application, Clairvia (a Cerner application). Clairvia provides the hospital’s staff, both nursing and non-nursing, tools for efficiently managing its workforce and

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is fully integrated with MedStar’s Invision patient management system, PeopleSoft HR application, and API Time & Attendance.

MedStar continues exploring further integration and extension of MedConnect based on its strategic agreement signed with Cerner in September 2014. This agreement provides access to Cerner’s complete catalog, funds joint development and locates key Cerner personnel permanently at MedStar sites.

MedStar is actively participating in efforts to expand the Maryland Health Information Exchange (HIE). Currently the System’s physicians have access to a more complete view of the care their patients received, regardless of where the care was provided in Maryland and DC hospitals, which should lead to safer and more cost effective care. Physicians currently receive alerts if their patients have been admitted to any hospital in the state and additional alerts if one of their patients is admitted to another hospital in the state within 30 days of a previous discharge. In addition, MedStar providers can now also access the Prescription Drug Monitoring Program (PDMP).

In support of the MedStar Health Research Institute, which has more than 150 active scientists and investigators who conduct high quality translational and health sciences research, MedStar has recently integrated the MedConnect EHR with a new Clinical Trials Management System. This sets the stage for increased collaboration between MedStar and Georgetown University.

Access to patient data is critical to providing quality care and maintaining its confidentiality, integrity and availability is behind MedStar’s enhanced IT security awareness campaign. The campaign includes promotion of mandatory training for all associates and a just-in-time phishing component. MedStar has also instituted a number of security enhancements over the year including requiring that all documents stored on the hard drives of MedStar personal computers automatically be written to a shared/network drive to protect files from accidental or malicious data loss. To further protect data, MedStar expanded the use of two-factor authentication and Citrix to remotely access enterprise applications and implemented removable media encryption technology to protect data on USB drives, CDs and DVDs. Also, an enhanced email security gateway has improved MedStar’s email scanning capabilities including providing more accurate identification of malware, spam and bulk email.

This year MedStar launched a single sign-on initiative designed to give providers a fast and secure way to access the EHR. Installed in the Emergency Departments and nursing units of seven MedStar hospitals, Imprivata/iAccess allows MedStar providers and associates to log on with an ID and password only once every four hours. Between that time, they can use their MedStar ID badges to tap a computer’s RFID badge reader and automatically open an application without having to re-enter their ID and password. Also known as “tap and go,” this technology enables providers to move from the nursing unit to a patient’s room or even their on-site office and call up the last session they had open to seamlessly continue their work.

MedStar Georgetown University Hospital Surgical Pavilion Project

MGUH is committed to providing the highest quality health care services to the residents of Washington, D.C. as well as the broader metropolitan area. After years of extensive review and discussion, MedStar Health and MGUH concluded that a new Medical/Surgical Pavilion on the Georgetown University campus was necessary to address a confluence of factors, including the condition of the existing facility, a need for modern operating rooms, a growing aging population within the District of Columbia, and the need for an upgraded patient experience. The proposed new state-of-the-art Medical/Surgical Pavilion and Hospital renovation project will allow MGUH to continue to provide the highest quality services to the community for many years to come. For more details on the MGUH Surgical Pavilion project see “THE PROJECT” in the forepart of this Official Statement.

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Capital Expenditures and Other Major Capital Projects

In addition to the MGUH project, MedStar is expecting to invest up to $61.2 million of bond proceeds in a number of major capital projects across the System. These projects may include investment in operating rooms at MFSMC, Phase II of renovations at MWHC, and other Systemwide projects. The MFSMC and MWHC projects require Certificates of Need, which have not yet been received. These expenditures are in addition to MedStar’s routine capital expenditures which are expected to average approximately $210 million per year over the next four years, as well as several additional major capital projects that have not yet been approved.

RESTRICTED FUNDS

All of the hospitals engage in charitable solicitation. All restricted funds are held subject to the principal and income restrictions imposed by the donors. The value of funds restricted by donors for specific purposes and endowments (controlled funds) at June 30, 2016 was $80.8 million and such funds are recorded as part of investments and assets whose use is limited or restricted.

In addition to controlled funds, MGSH is the beneficiary of a trust established under the will of a generous benefactor. The funds from that bequest are held by a separately incorporated and unaffiliated foundation. Except for the payment of administrative expenses, this foundation is established to financially support MGSH. MGSH may request expenditures of principal as well as income from this fund, subject to the approval of the foundation’s board. The foundation has the exclusive authority to invest and manage and disburse its funds. MGSH’s interest in the net assets of this foundation as of June 30, 2016 was $54.6 million.

EMPLOYEES

On March 31, 2017, the System employed approximately 30,000 employees. There are three unions actively representing approximately 14.2% of the System’s employees.

The Service Employees International Union, Local 722, represents approximately 1,890 service workers at MWHC, including environmental services, dietary, nursing support and technical positions, under a contract that expires on June 30, 2018. See “LEGAL MATTERS – Labor Matters” for more information.

National Nurses United (NNU) represents approximately 1, 839 registered nurses at MWHC under a contract that expires on May 31, 2019.

The Service Employees International Union, District 1199E-DC, represents approximately 531 service workers at MGUH, including housekeeping, maintenance, skilled crafts, food service, phlebotomists, nursing unit secretaries, and nurse aides under a contract that expires on October 31, 2019.

In addition, on August 3, 2016 associates in the department of Public Safety at MWHC, voted in favor of representation by the Law Enforcement Officers Security Unions (LEOSU-DC). Approximately 60 employees will be represented by the union. Contract negotiations have not yet begun.

VOLUNTEERS

The hospitals receive support from an active volunteer program. Currently, there are approximately 1,748 volunteers. Volunteers run the Lifeline and Patient Representatives programs, thrift shops, gift shops and assist in all areas within each hospital’s facilities.

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COMMUNITY BENEFITS

The provision of a full range of quality healthcare services to MedStar’s patients and community is an integral part of the System’s not-for-profit mission. In addition, the System provides many community benefit programs, defined as programs or services designed to improve access to health services, enhance population health, advance knowledge, and relieve or reduce the burden of government or other entities. The System provides free community wellness and fitness programs including seminars, health screenings, physician hotlines and support groups for persons with chronic illnesses. Healthcare professionals visit schools to teach good health habits and through its medical house program, home visits are made to chronically ill and homebound elders.

The System is involved in many community building activities, including mentoring students through school-based health careers programs, establishing community gardens, and leading community coalitions to address documented health needs. In addition, the System partners with other community- based not-for-profits and sponsors and supports a wide range of community causes. These programs benefit many in the Washington-Baltimore region but are especially important for low income, uninsured, and other vulnerable populations.

Through its financial assistance policy, patients who meet income guidelines receive care regardless of their ability to pay. The System also provides medical education and research programs that benefit the wellbeing of the broader community. Medical education programs support a pipeline to ensure the availability of highly skilled healthcare practitioners, including workforce shortage areas. MedStar researchers participate in more than 1,000 clinical trials that help expand the scope of knowledge around medical practice and in areas such as health disparities.

The System completed its Community Health Needs Assessment as a Systemwide initiative and on behalf of all ten MedStar hospitals in 2015. MedStar identified three levels of programming: Focus areas are where MedStar will lead based on its expertise and core community benefit programming such as chronic disease prevention and management and access to care. Collaboration includes initiatives where MedStar does not have the internal expertise or resources to implement and where there are external partners with equal or greater capabilities and capacity. Participation includes areas that MedStar recognizes are significant contributors to health, such as housing, hunger, transportation and jobs, but where MedStar is better positioned to serve as a supporter for these initiatives.

In fiscal year 2016 the System invested $340.0 million in community benefit activities (the most current data available, calculated in accordance with the American Hospital Association’s guidelines for community benefits), including medical education, charity care, community health and community building programs, and research.

Below is a brief description of several of the community benefit programs recently provided by MedStar.

SBIRT Program

Screening, Brief Intervention, and Referral to Treatment (SBIRT) is an evidence-based program to address substance abuse among those who present to the emergency department (ED) and other care settings. MedStar’s Community Health department is leading the SBIRT program across the four MedStar Baltimore region hospitals. To date more than 83,000 substance use screenings have been completed in the emergency departments of the four participating hospitals, with nearly 4,100 interventions completed and over 700 treatment referrals made since the inception of the program in September 2016.

Population Health Workforce Support for Disadvantaged Areas Program

MedStar’s Community Health department launched the Population Health Workforce Support for Disadvantaged Areas Program in 2017 that will train and hire individuals from disadvantaged communities to work as community health workers and peer recovery coaches at several MedStar

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hospitals. New positions will be embedded in hospital care teams and in the community to improve population health in underserved areas surrounding MedStar hospitals. MedStar expects to hire over 40 new community health workers and peer recovery coaches over the next two years as part of this program.

Living Well Program

The Living Well initiative aims to train lay leaders in the community to provide the evidence- based Chronic Disease Self-Management program in community “hotspots” (i.e., communities surrounding our hospitals with high ED readmissions, disease prevalence, and charity care) for patients and community members impacted by chronic disease. This program was launched in March 2017 and will be implemented across the System, reaching more than 700 individuals each year.

Get Connected to Health

The Get Connected to Health program aims to provide primary care services to individuals from underserved and resourced communities through a mobile clinic unit, provided by St. Mary’s Hospital. In 2016 and 2017, the program conducted, more than 550 patient visits.

KIDS Mobile Medical Clinic (KMMC)

MedStar Georgetown University Hospital’s KIDS Mobile Medical Clinic (KMMC) is a medical home on wheels that targets children in underserved communities in the District of Columbia. While primary care is the principal focus, KMMC also provides sick visits, vision and hearing screenings, lab studies, and pharmacy services. Based on a partnership with Ronald McDonald House Charities, the KMMC managed more than 1,600 patients in 2016 and 2017 to date.

Rx for Success

MedStar’s partnership with Vivien T. Thomas Medical Arts Academy in Baltimore, Maryland and Eastern High School in Washington, D.C. grooms inner city, high school, minority students for careers in nursing, biotechnology, pharmacy and surgical services. The students are able to apply the skills they learn in a simulation lab furnished by MedStar and supporting partners. Selected students are also able to network and gain work experience through a paid summer internship offered at MedStar care delivery sites. During the internship, students are exposed to a variety of health careers and they are coached and mentored on the critical skills needed to be successful. Since the program’s inception in 2008, over 100 students have been placed in the 8-week internship across MedStar. The Rx for Success program was expanded to Eastern High School in 2016.

National Diabetes Prevention Program (DPP)

In an effort to address chronic diseases and the growing problem of prediabetes and type II diabetes, five of the MedStar hospitals have implemented the national evidence based Diabetes Prevention Program (DPP), designed by the Centers for Disease Control and Prevention (CDC). The program targets individuals who are prediabetic, to make lifestyle changes to improve their health and reduce the risk of becoming diabetic. Since the program’s inception at MedStar entities in 2009, more than a thousand participants have completed the programs core session. In 2016 and 2017, over 350 individuals participated in the DPP program.

Shepherd’s Clinic

Through MUMH’s partnership with Shepherd’s Clinic, low-income Baltimore city residents are able to receive primary care, specialty care and wellness services. The program relies on 350 volunteers to offer a wide range of services, including but not limited to: internal medicine, cardiology, dermatology, endocrinology, gynecology, physical therapy, podiatry and cancer screenings. In 2016, the clinic managed 3,500 patient visits.

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INSURANCE

Professional and General Liability

Coverage for medical professional liability (PL or malpractice) and comprehensive corporate general liability (GL) for all entities is provided through MedStar’s wholly-owned captive insurance company, Greenspring Financial Insurance Limited (GFIL), domiciled in Grand Cayman Island.

Funding of GFIL is annually determined based on an independent actuarial analysis. The actuarial liability and funding determination is based on incurred losses and actual case payments and reserves as well as an estimate of the liability associated with claims incurred but not yet reported. The GFIL Board reviews premium adequacy annually and considers charging additional premium should there be a premium deficiency. MedStar injects additional capital as required to ensure insurance reserves and shareholder equity combined is equal to or exceeds the actuarially determined outstanding losses at a minimum of a 60% confidence level, discounted. GFIL currently purchases commercial excess reinsurance from insurance carriers rated “A” or better by A.M. Best.

Management believes that current levels of funding along with the commercial excess reinsurance coverage purchased by GFIL are adequate to provide for all claims that have been or may be asserted against it for general or professional liability.

Comprehensive Property Insurance

MedStar maintains a comprehensive property insurance policy with commercial insurers in amounts that are believed to be sufficient to cover all real and personal property, boiler, machinery, and business interruption losses. The policy contains commercially reasonable provisions for deductibles and other endorsements to provide coverage on a replacement cost basis.

Workers’ Compensation

The System is a qualified self-insured employer within the District of Columbia and as such finances its exposure via a self-insurance trust. Excess insurance on a per-claim basis is purchased from a commercial insurer. The System insures its Maryland exposure (other than MMMC, MSMH and MSMHC) via commercial workers’ compensation insurance with a per claim retained limit. MMMC is a Maryland qualified self-insured entity and as such finances its exposure through a self-insurance trust. MSMH and MSMHC maintain workers’ compensation and employers’ liability coverage through the MHA Workers’ Compensation Self-Insurance Group, a self-insurance trust created by the Maryland Hospital Association in 1993, and funded by the participating hospitals.

Other Insurance

MedStar also maintains additional commercial insurance coverage customarily in place and in limits customarily maintained by similar healthcare organizations. These coverage’s include Directors & Officers Liability, including Employment Practices Liability, Information Security and Privacy Insurance (Cyber Liability Coverage), Automobile Liability, Garagekeeper’s Liability, Non-Owned Aircraft Liability and Helipad Premises Liability Insurance, Employed Lawyers Liability, Fiduciary Liability and Crime Coverage. All programs of insurance are reviewed by management on an annual basis.

LEGAL MATTERS

MedStar is a large, complex, highly-regulated health care provider functioning in an extremely competitive market. The System provides a full spectrum of health care services in communities of widely varying demographics and across a very large geography. The patients it serves participate in private insurance programs; government insurance programs, such as Medicare and Medicaid; and, in some instances, pay for care themselves.

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Given the nature, size and complexity of its business, the System has been, and will continue to be, party to various labor and employment matters, legal and regulatory inquiries and proceedings, and commercial litigation, as discussed below. With the exception of those matters described below which are too preliminary in nature to determine if they will have a material adverse effect on the consolidated financial position or results of operations of the System, management does not expect that the pending legal and regulatory proceedings will have a material adverse effect on the consolidated financial position or results of operations of the System.

a. Labor Matters

As previously noted in the “EMPLOYEES” section above, of the approximately 30,000 employees of the System, approximately 4,300 are affiliated with labor unions, with MWHC nurses representing approximately 1,839 of the System’s union-affiliated employees. At MWHC, nurses are represented by National Nurses United, Effective June 1, 2015, MWHC entered into a four-year collective bargaining agreement with National Nurses United. Also at MWHC, service workers are represented by SEIU, Local 722, pursuant to a collective bargaining agreement that runs until June 30, 2018. In August 2016, the Public Safety Officers at MWHC voted to be represented by Law Enforcement Officers Security Unions-DC. The hospital commenced negotiations for an initial contract with that union in May 2017. At MGUH, SEIU 1199 represents service workers pursuant to a collective bargaining agreement that expires October 31, 2019.

At the present time, management does not expect that labor matters will have a material adverse effect on the consolidated financial position or results of operations of the System.

b. Legal and Regulatory Proceedings

Today’s health care delivery environment is such that all large providers face increasing scrutiny across a spectrum of legal and regulatory requirements. Management is currently aware of several legal proceedings and government inquiries into the operations of MedStar providers, and the System and its providers are responding appropriately to each proceeding/inquiry.

In June 2008, the Office of Inspector General of the U.S. Department of Health & Human Services served a subpoena requesting documents relating to MUMH’s business arrangements with a private cardiology group. The U.S. Attorney’s Office for the District of Maryland (USAO) subsequently indicated to MedStar that MUMH’s business arrangements with the cardiology group were under investigation for potential violations of laws and regulations governing Federal health care programs. After extensive periods of government inactivity, beginning in February 2016 the USAO issued civil investigative demands compelling production of additional documents and witness interviews. MedStar has cooperated with this investigation.

On April 26, 2016 the Corporation was notified of a whistleblower lawsuit filed in the U.S. District Court in Northern District of Illinois alleging False Claims Act violations against Accretive Health and MedStar. The unsealing of the complaint was the result of the federal government’s decision not to intervene in the lawsuit at the time, which decision permits the whistleblower to proceed with the lawsuit against the defendants. The System is defending against the lawsuit.

At the present time, management cannot conclude, based on the preliminary nature of these matters, how these matters will be resolved or whether such resolutions will have a material adverse financial impact on the System.

c. Malpractice Claims

As an integrated healthcare system, MedStar experiences malpractice claims from time to time. At the present time, management feels that such malpractice claims are adequately covered by insurance that is currently in place and does not expect that the results of any of these claims will have a material adverse

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effect on the consolidated financial position or results of operations of the System. See also “INSURANCE – Professional and General Liability.”

d. Commercial Litigation

In the course of its operations, the System regularly enters into business arrangements with vendors and service providers. Periodically, there are disputes with regard to these arrangements which result in commercial litigation. At the present time, management is aware of several such disputes; however, these matters are not anticipated, individually or collectively, to have a material adverse financial impact on the System.

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MedStar Health’s Sphere of Influence MedStar Health’s sphere of influence in FY16 includes 457 zip codes.

Note: MedStar’s sphere of influence includes those zip codes that sent 100 or more discharges or visits at MedStar entities in FY16.Sources: PlanningMart, Explorys, MedStar VNA Internal data.

A-49 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B

MEDSTAR HEALTH, INC. Consolidated Financial Statements June 30, 2016 and 2015 (With Independent Auditors’ Report Thereon)

MEDSTAR HEALTH, INC.

Table of Contents

Page

Independent Auditors’ Report 1

Consolidated Financial Statements:

Consolidated Balance Sheets 3

Consolidated Statements of Operations and Changes in Net Assets 5

Consolidated Statements of Cash Flows 7

Notes to Consolidated Financial Statements 8

KPMG LLP 1 East Pratt Street Baltimore, MD 21202-1128

Independent Auditors’ Report

The Board of Directors MedStar Health, Inc.:

We have audited the accompanying consolidated financial statements of MedStar Health, Inc. (the Corporation), which comprise the consolidated balance sheets as of June 30, 2016 and 2015, and the related consolidated statements of operations and changes in net assets and cash flows for the years then ended and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Opinion In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of MedStar Health, Inc. as of June 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

October 7, 2016

2

MEDSTAR HEALTH, INC. Consolidated Balance Sheets June 30, 2016 and 2015 (Dollars in millions)

Assets 2016 2015 Current assets: Cash and cash equivalents $ 572.1 572.3 Investments 122.0 74.9 Assets whose use is limited or restricted 60.2 61.3 Receivables: From patient services (less allowances for uncollectible accounts of $183.0 in 2016 and $191.3 in 2015) 653.6 584.1 Other 92.0 93.0 745.6 677.1 Inventories 60.3 60.4 Prepaids and other current assets 41.6 33.1 Total current assets 1,601.8 1,479.1 Investments, net of current portion 921.0 1,002.2 Assets whose use is limited or restricted, net of current portion 487.7 554.7 Property and equipment, net 1,272.7 1,197.4 Interest in net assets of foundation 54.6 63.0 Goodwill and other intangible assets, net 253.0 258.2 Other assets 128.0 136.3 Total assets $ 4,718.8 4,690.9

3 (Continued) MEDSTAR HEALTH, INC. Consolidated Balance Sheets June 30, 2016 and 2015 (Dollars in millions)

Liabilities and Net Assets 2016 2015 Current liabilities: Accounts payable and accrued expenses $ 499.8 433.8 Accrued salaries, benefits, and payroll taxes 376.7 348.2 Amounts due to third-party payors, net 94.7 83.5 Current portion of long-term debt 103.3 19.5 Current portion of self insurance liabilities 89.8 88.4 Other current liabilities 103.5 147.9 Total current liabilities 1,267.8 1,121.3 Long-term debt, net of current portion 1,214.3 1,323.0 Self insurance liabilities, net of current portion 307.4 310.6 Pension liabilities 495.9 293.0 Other long-term liabilities, net of current portion 132.5 137.3 Total liabilities 3,417.9 3,185.2 Net assets: Unrestricted net assets: MedStar Health, Inc. 1,118.2 1,319.0 Noncontrolling interests 17.6 15.3 Total unrestricted net assets 1,135.8 1,334.3 Temporarily restricted 124.9 131.9 Permanently restricted 40.2 39.5 Total net assets 1,300.9 1,505.7 Total liabilities and net assets $ 4,718.8 4,690.9

See accompanying notes to consolidated financial statements.

4 MEDSTAR HEALTH, INC. Consolidated Statements of Operations and Changes in Net Assets Years ended June 30, 2016 and 2015 (Dollars in millions)

2016 2015 Operating revenues: Net patient service revenue $ 4,611.3 4,437.6 Provision for bad debts (225.3) (206.7) Total net patient service revenue, net of provision for bad debts 4,386.0 4,230.9 Premium revenue 666.4 561.3 Other operating revenue 213.6 235.0 Net operating revenues 5,266.0 5,027.2 Operating expenses: Personnel 2,752.5 2,591.5 Supplies 779.0 741.5 Purchased services 911.9 844.0 Other operating 466.7 452.6 Interest expense 44.2 47.9 Depreciation and amortization 186.0 188.9 Total operating expenses 5,140.3 4,866.4 Earnings from operations 125.7 160.8 Nonoperating gains (losses): Investment income 11.7 16.1 Net realized gains on investments 11.9 43.2 Change in unrealized (losses) gains on derivative instrument (1.5) 1.1 Change in unrealized losses on investments, net (92.9) (75.9) Loss on extinguishment of debt — (25.2) Income tax provision (3.6) (8.2) Other nonoperating losses (5.2) (0.6) Total nonoperating losses (79.6) (49.5) Excess of revenues over expenses $ 46.1 111.3

5 (Continued) MEDSTAR HEALTH, INC. Consolidated Statements of Operations and Changes in Net Assets Years ended June 30, 2016 and 2015 (Dollars in millions)

2016 2015 Unrestricted net assets: Excess of revenues over expenses $ 46.1 111.3 Acquired noncontrolling interests — 10.8 Change in funded status of defined benefit plans (255.3) (118.5) Distributions to noncontrolling interests (0.4) (2.9) Net assets released from restrictions used for purchase of property and equipment 11.1 6.2 (Decrease) increase in unrestricted net assets (198.5) 6.9 Temporarily restricted net assets: Contributions 20.8 25.6 Realized net gains on restricted investments 0.8 2.0 Change in unrealized losses on restricted investments, net (2.5) (2.4) Decrease in net assets of foundation (8.4) (1.9) Net assets released from restrictions (17.7) (13.2) (Decrease) increase in temporarily restricted net assets (7.0) 10.1 Permanently restricted net assets: Contributions 1.0 — Realized net gains on restricted investments 0.1 0.3 Change in unrealized losses on restricted investments, net (0.4) (0.2) Increase in permanently restricted net assets 0.7 0.1 (Decrease) increase in net assets (204.8) 17.1 Net assets, beginning of year 1,505.7 1,488.6 Net assets, end of year $ 1,300.9 1,505.7

See accompanying notes to consolidated financial statements.

6 MEDSTAR HEALTH, INC. Consolidated Statements of Cash Flows Years ended June 30, 2016 and 2015 (Dollars in millions)

2016 2015 Cash flows from operating activities: Change in net assets $ (204.8) 17.1 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 186.0 188.9 Gain on sale of property and equipment (6.1) (0.1) Change in funded status of defined benefit plans 255.3 118.5 Realized net gains on marketable investments (12.8) (45.5) Change in unrealized losses of marketable investments 95.8 78.5 Decrease in net assets of foundation 8.4 1.9 Unrealized loss (gain) on derivative instrument 1.5 (1.1) Net settlement payment on derivative instrument 3.3 3.6 Loss on extinguishment of debt — 25.2 Distributions to noncontrolling interests 0.4 2.9 Deferred income tax provision 3.4 6.1 Provision for bad debts 225.3 206.7 Temporarily and permanently restricted contributions (21.8) (25.6) Acquired noncontrolling interests — (10.8) Changes in operating assets and liabilities: Receivables (293.8) (255.9) Inventories and other assets (0.7) (10.3) Accounts payable and accrued expenses 110.0 71.8 Amounts due to third-party payors 11.2 (2.2) Other liabilities (104.8) (44.8) Net cash provided by operations 255.8 324.9 Cash flows from investing activities: Proceeds (purchases) of investments and assets whose use is limited or restricted, net 64.1 (111.2) Purchases of alternative investments (48.1) (109.6) Proceeds from sales of alternative investments 3.0 35.9 Net settlement payment on derivative instrument (3.3) (3.6) Purchases of property and equipment, and other (268.0) (252.4) Net cash used in investing activities (252.3) (440.9) Cash flows from financing activities: Proceeds from long-term borrowings — 511.6 Repayments of long-term borrowings (24.9) (21.9) Repayments of refinanced bonds and other borrowings — (420.2) Payment of deferred issuance costs (0.2) (3.8) Temporarily and permanently restricted contributions 21.8 25.6 Distributions to noncontrolling interests (0.4) (2.9) Net cash (used in) provided by financing activities (3.7) 88.4 Decrease in cash and cash equivalents (0.2) (27.6) Cash and cash equivalents at beginning of year 572.3 599.9 Cash and cash equivalents at end of year $ 572.1 572.3 Supplemental disclosure of cash flow information: Cash paid for interest $ 50.8 50.8 Noncash investing and financing activities: Noncash purchases of property, plant and equipment $ 21.2 19.5

See accompanying notes to consolidated financial statements.

7 MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(1) Description of Organization and Summary of Significant Accounting Policies (a) Organization MedStar Health, Inc. (MedStar or the Corporation) is a tax-exempt, Maryland membership corporation which, through its controlled entities and other affiliates, provides and manages healthcare services in the region encompassing Maryland, Washington D.C. and Northern Virginia. The Corporation became operational on June 30, 1998 by the transfer of the membership interests of Helix Health, Inc. (Helix – a not-for-profit Maryland Corporation) and Medlantic Healthcare Group, Inc. (Medlantic – a not-for-profit Delaware Corporation) in exchange for the guarantee of the debt of both Helix and Medlantic by the Corporation. The trade names of the principal tax-exempt and taxable entities of the Corporation are:

Tax-Exempt  MedStar Ambulatory Services (formerly known as Bay Development Corporation)  MedStar Franklin Square Medical Center  MedStar Georgetown University Hospital  MedStar Good Samaritan Hospital  MedStar Harbor Hospital  MedStar Health Research Institute  MedStar Health Visiting Nurse Association, Inc.  MedStar Medical Group, LLC  MedStar Montgomery Medical Center  MedStar National Rehabilitation Network  MedStar Southern Maryland Hospital Center  MedStar St. Mary’s Hospital  MedStar Surgery Center, Inc.  MedStar Union Memorial Hospital  MedStar Washington Hospital Center  of the City of Baltimore, Inc.  HH MedStar Health, Inc.

Taxable  Greenspring Financial Insurance, LTD.  MedStar Enterprises, Inc. and Subsidiaries 8 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

 MedStar Family Choice, Inc.  MedStar Physician Partners, Inc.  Parkway Ventures, Inc. and Subsidiaries  RadAmerica II, LLC (b) Basis of Presentation The consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (U.S. GAAP). All majority owned subsidiaries, direct member entities and controlled affiliates are consolidated. All entities where the Corporation exercises significant influence but for which it does not have control are accounted for under the equity method. All other entities are accounted for under the cost method. All significant intercompany accounts and transactions have been eliminated.

(c) Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future results could differ from current estimates.

(d) Cash and Cash Equivalents All highly liquid investments with an original maturity date of three months or less are considered to be cash equivalents.

(e) Investments and Assets Whose Use is Limited or Restricted The Corporation’s investment portfolio is considered trading and is classified as current or noncurrent based on management’s intention as to use. All securities are reported at fair value principally based on quoted market prices in the consolidated balance sheets. The Corporation has elected to use the fair value option to account for its alternative investments. The fair value of alternative investments is determined based on the Net Asset Value (NAV) of the shares in each investment company or partnership. Purchases and sales of securities are recorded on a trade-date basis.

Investments in unconsolidated affiliates are accounted for under the cost or equity method of accounting, as appropriate, and are included in other assets in the consolidated balance sheets. The Corporation utilizes the equity method of accounting for its investments in entities over which it exercises significant influence. The Corporation’s equity income or loss is recognized in other operating revenue on the consolidated statements of operations and changes in net assets.

Assets whose use is limited or restricted include assets held by trustees under bond indentures, self-insurance trust arrangements, assets restricted by donor, and assets designated by the Board of Directors for future capital improvements and other purposes over which it retains control and may,

9 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

at its discretion, use for other purposes. Amounts from these funds required to meet current liabilities have been classified in the consolidated balance sheets as current assets.

Investment income (interest and dividends), realized gains and losses on investment sales, and unrealized gains and losses are reported as nonoperating gains and losses in the excess of revenues over expenses in the accompanying consolidated statements of operations and changes in net assets unless the income or loss is restricted by the donor or law. Investment income and realized gains and losses on funds held in trust for self-insurance purposes are included in other operating revenue. Investment income and net gains and losses that are restricted by the donor are recorded as a component of changes in temporarily or permanently restricted net assets, in accordance with donor imposed restrictions. Realized gains and losses are determined based on the specific security’s original purchase price or adjusted cost if the investment was previously determined to be other-than-temporarily impaired.

(f) Inventories Inventories, which primarily consist of medical supplies and pharmaceuticals at many of the operating entities, are stated at the lower of cost or market, with cost being determined primarily under the average cost or first-in, first-out methods.

(g) Property and Equipment Property and equipment acquisitions are recorded at cost and are depreciated or amortized over the estimated useful lives of the assets. Estimated useful lives range from three to forty years. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Depreciation is computed on a straight-line basis. Major classes and estimated useful lives of property and equipment are as follows: Leasehold improvements Lease term Buildings and improvements 10–40 years Equipment 3–20 years

Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support, and are excluded from the excess of revenues over expenses, unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service.

Management routinely evaluates the carrying value of its long-lived assets for impairment. No significant impairment charges were recorded against the carrying value of the Corporation’s long-lived assets during the years ended June 30, 2016 and 2015.

10 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(h) Interest in Net Assets of Foundation The Corporation recognizes its rights to assets held by a recipient organization, which accepts cash or other financial assets from a donor and agrees to use those assets on behalf of or transfer those assets, the return on investment of those assets, or both, to the Corporation. Changes in the Corporation’s economic interests in the financially interrelated organization are recognized in the consolidated statements of operations and changes in net assets as a component of changes in temporarily restricted net assets.

(i) Goodwill and Other Intangible Assets Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. As of June 30, 2016 and 2015, the Corporation had one reporting unit, which included all subsidiaries of the Corporation and held goodwill, net on its balance sheet of $218.0 and $219.2, respectively. Goodwill is evaluated for impairment annually using a qualitative assessment to determine whether there are events or circumstances that indicate it is more likely than not that the reporting unit’s fair value is less than its carrying amount. Based on this qualitative assessment, the Corporation determined that there was no goodwill impairment for the years ended June 30, 2016 and 2015.

Other intangible assets are recorded at fair value and amortized over their estimated useful lives. Other intangible assets were $48.2 as of June 30, 2016 and 2015, gross of accumulated amortization of $13.2 and $9.2, respectively. The Corporation recognized amortization expense of $4.0 and $3.1 for the years ended June 30, 2016 and 2015, respectively, related to identifiable intangible assets.

(j) Financing Costs Financing costs incurred in issuing bonds have been capitalized and are included in other assets on the consolidated balance sheets. These costs are being amortized over the estimated duration of the related debt using the effective interest method. Accumulated amortization totaled $4.8 and $4.0 as of June 30, 2016 and 2015, respectively.

(k) Estimated Professional Liability Costs The provision for estimated self-insured professional liability claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. These estimates are based on actuarial analysis of historical trends, claims asserted and reported incidents. The receivables related to such claims are recorded at their net realizable value and are included in other assets in the accompanying consolidated balance sheets.

(l) Leases Lease arrangements, including assets under construction, are capitalized when such leases convey substantially all the risks and benefits incidental to ownership. Capital leases are amortized over either the lease term or the life of the related assets, depending upon available purchase options and lease renewal features. Amortization related to capital leases is included in the consolidated statements of operations and changes in net assets within depreciation and amortization expense.

11 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(m) Derivative The Corporation utilizes a derivative financial instrument to manage its interest rate risks associated with tax-exempt debt. The Corporation does not hold or issue derivative financial instruments for trading purposes. The derivative instrument is recorded on the consolidated balance sheets at its fair value within other long-term liabilities. The Corporation’s current derivative investment does not qualify for hedge accounting; therefore, the changes in fair value have been recognized in the accompanying consolidated statements of operations and changes in net assets as mark-to-market adjustments in nonoperating gains (losses).

(n) Net Patient Service Revenue and Net Patient Accounts Receivable Net patient service revenue, which includes hospital inpatient services, hospital outpatient services, physician services, and other patient service revenues, is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments due to future audits, reviews and investigations. The differences between the estimated and actual amounts are recorded as part of net patient service revenue in future periods as the amounts become known, or as years are no longer subject to audit, review or investigation. Payment arrangements include prospectively determined rates per discharge, fee-for-service, discounted charges, and per diem payments. Net patient service revenue is recognized when services are rendered based on billable charges. Other patient service revenue primarily consists of home care, long-term care and other non-hospital patient services.

The Corporation’s policy is to write-off all patient receivables which are identified as uncollectible. Patient accounts receivable are reduced by an allowance for uncollectible accounts to reserve for accounts which are expected to become uncollectible in future years. In evaluating the collectability of accounts receivable, the Corporation analyzes historical collections and write-offs and identifies trends for each of its major payor sources of revenue and amounts due from patients to estimate the appropriate allowance for uncollectible accounts and provision for bad debts.

(o) Charity Care The Corporation provides care to patients who meet certain criteria under its charity care policies without charge or at amounts less than established rates. Because the Corporation does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue.

(p) Premium Revenue and Medical Claims Expense Premium revenue consists of amounts received from the State of Maryland, the District of Columbia and the Centers for Medicare and Medicaid Services (CMS) by the Corporation’s managed care organization for providing medical services to subscribing participants, regardless of services actually performed. The managed care organization provides services primarily to enrolled Medicaid and Medicare beneficiaries. This revenue is recognized ratably over the contractual period for the provision of services. Medical expenses of the managed care organization include actuarially determined estimates of the ultimate costs for both reported claims and claims incurred but

12 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

unreported and are included in purchased services on the consolidated statements of operations and changes in net assets.

(q) Grants Federal grants are accounted for as either an exchange transaction or as a contribution based on terms and conditions of the grant. If the grant is accounted for as an exchange transaction, revenue is recognized as other operating revenue when earned. If the grant is accounted for as a contribution, the revenues are recognized as either other operating revenue, or as temporarily restricted contributions depending on the restrictions within the grant.

(r) Contributions Unconditional promises to give cash and other assets to the Corporation are reported at fair value at the date the promise is received. Conditional promises to give are reported at fair value at the date the condition is met. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations and changes in net assets as net assets released from restrictions in other operating revenue. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted net assets and reported within other operating revenue in the accompanying consolidated financial statements.

(s) Meaningful Use Incentives Under certain provisions of the American Recovery and Reinvestment Act of 2009 (ARRA), federal incentive payments are available to hospitals, physicians and certain other professionals (Providers) when they adopt, implement or upgrade certified electronic health record (EHR) technology and become “meaningful users,” as defined under ARRA, of EHR technology in ways that demonstrate improved quality, safety and effectiveness of care. Incentive payments are paid out over varying transitional schedules depending on the type of incentive (Medicare and Medicaid) and recipient (hospital or eligible provider). Eligible hospitals can attest for both Medicare and Medicaid incentives, while physicians must select to attest for either Medicare or Medicaid incentives. For Medicare incentives, eligible hospitals receive payments over four years while eligible physicians receive payments over five years. For Medicaid incentives, eligible hospitals receive payments based on the relevant State adopted payment structure and physicians receive payments over six years.

The Corporation recognizes EHR incentives when it is reasonably assured that the Corporation will successfully demonstrate compliance with the meaningful use criteria. During the years ended June 30, 2016 and 2015, certain hospitals and physicians satisfied the meaningful use criteria. As a result, the Corporation recognized $15.1 and $28.1 of EHR incentives during the years ended June 30, 2016 and 2015, respectively, in other operating revenue.

13 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(t) Excess of Revenues over Expenses The consolidated statements of operations and changes in net assets include a performance indicator, which is the excess of revenues over expenses. Changes in unrestricted net assets that are excluded from excess of revenues over expenses, include contributions of long-lived assets (including assets acquired using contributions that by donor restriction were to be used for the purpose of acquiring such assets), contributions from and acquisitions of and distributions to noncontrolling interests, and defined benefit obligations in excess of recognized pension cost, among others.

(u) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Any changes to the valuation allowance on the deferred tax asset are reflected in the year of the change. The Corporation accounts for uncertain tax positions in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes.

(v) Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets are those whose use by the Corporation or individual operating units has been limited by donors to a specific time period or purpose. Permanently restricted net assets have been restricted by donors to be maintained by the Corporation or individual operating units in perpetuity.

(w) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and cash equivalents, receivables, other current assets, other assets, current liabilities and long-term liabilities: The carrying amount reported in the consolidated balance sheets for each of these assets and liabilities approximates their fair value.

The fair value of investments, assets whose use is limited or restricted and the interest rate swap is discussed in note 3.

14 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(x) New Accounting Pronouncements In April and August 2015, the FASB issued Accounting Standards Update (ASU) 2015-03 and ASU 2015-15, Interest-Imputation of Interest, respectively, to simplify the presentation of debt issuance costs. The standard requires debt issuance costs be presented in the consolidated balance sheet as a direct deduction from the carrying value of the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements should be presented as an asset and amortized over the term of the arrangement. This guidance, which will be applied on a retrospective basis, is effective for annual fiscal periods beginning after December 15, 2015. The Corporation expects to record a decrease in other assets and a corresponding decrease in long-term debt upon adoption of the standard.

In May 2014 and March 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and Revenue from Contracts with Customers: Principal versus Agent Considerations, respectively. This guidance establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Particularly, the standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB updated the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. ASU 2014-09 is effective for fiscal year 2019. The Corporation expects to record a decrease in net patient service revenue and a corresponding decrease in bad debt expense upon adoption of the standard.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities arising from all leases on the consolidated balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and a modified retrospective approach is required. The Corporation in the process of assessing the impact the adoption of this standard will have on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for- Profit Entities, to improve the current net asset classification requirements and information presented in financial statements and notes about a not-for-profit entity’s liquidity, financial performance, and cash flows. This update requires not-for-profit entities to present two classes of net assets (net assets with donor restrictions and net assets without donor restrictions), rather than the three classes of net assets currently required, and other qualitative information regarding the entity’s liquidity, financial performance, and cash flows. The amendments in this update are effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. The Corporation is in the process of assessing the impact the adoption of this standard will have on the consolidated financial statements.

15 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

From time to time, new accounting guidance is issued by the FASB or other standard setting bodies that is adopted by the Corporation as of the effective date or, in some cases where early adoption is permitted, in advance of the effective date. The Corporation has assessed the recently issued guidance that is not yet effective and, unless otherwise indicated above, believes the new guidance will not have a material impact on our consolidated financial position, results of operations, or cash flows.

(y) Reclassifications Certain prior year amounts have been reclassified to conform with current period presentation, the effects of which are not material.

(2) Investments and Assets Whose Use is Limited or Restricted Investments and assets whose use is limited or restricted as of June 30, 2016 and 2015, at fair value consist of the following: 2016 2015 Cash and cash equivalents $ 70.5 87.6 Fixed income securities and funds 353.7 393.1 Equity securities 578.6 604.1 Alternative investments: Commingled equity funds 200.9 243.6 Inflation hedging equity, commodity, fixed income fund 67.6 58.8 Hedge fund of funds and private equity 319.6 305.9 Total investments and assets whose use is limited or restricted 1,590.9 1,693.1 Less short-term investments and assets whose use is limited or restricted (182.2) (136.2) Long-term investments and assets whose use is limited or restricted $ 1,408.7 1,556.9

16 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

Assets whose use is limited or restricted as of June 30, 2016 and 2015, included in the table above, consist of the following: 2016 2015 Funds held by trustees $ 7.9 30.7 Self-insurance funds 280.7 293.4 Funds restricted by donors for specific purposes and endowment 80.8 80.5 Funds designated by board 178.5 211.4 Total assets whose use is limited or restricted 547.9 616.0 Less assets required for current obligations (60.2) (61.3) Long-term assets whose use limited or restricted $ 487.7 554.7

Investment income and realized and unrealized gains (losses) for assets whose use is limited or restricted, cash equivalents and investments are comprised of the following for the years ended June 30, 2016 and 2015: 2016 2015 Other operating revenue: Investment income and realized gains $ 4.4 18.5 Nonoperating (losses) gains: Investment income 11.7 16.1 Net realized gains on investments 11.9 43.2 Change in unrealized losses on investments, net (92.9) (75.9) (69.3) (16.6) Other changes in net assets: Realized net gains on temporarily and permanently restricted net assets 0.9 2.3 Change in unrealized losses on temporarily and permanently restricted net assets, net (2.9) (2.6) Total investment (loss) return $ (66.9) 1.6

17 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(3) Fair Value of Financial Instruments The Corporation follows the guidance within FASB ASC Topic 820, Fair Value Measurement (ASC 820), which defines fair value and establishes methods used to measure fair value. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under ASC 820 are described below:

 Level 1 – Quoted prices in active markets for identical assets or liabilities at the measurement date;  Level 2 – Observable inputs other than quoted prices for the asset, either directly or indirectly observable, that reflect assumptions market participants would use to price the asset based on market data obtained from sources independent of the Corporation.  Level 3 – Unobservable inputs that reflect the Corporation’s own assumptions about the assumptions market participants would use to price an asset based on the best information available in the circumstances.

The Corporation has incorporated an Investment Policy Statement (IPS) into the investment program. The IPS, which has been formally adopted by the Corporation’s Board of Directors, contains numerous standards designed to ensure adequate diversification by asset class and geography. The IPS also limits all investments by manager and position size, and limits fixed income position size based on credit ratings, which serves to further mitigate the risks associated with the investment program. As of June 30, 2016 and 2015, management believes that all investments were being managed in a manner consistent with the IPS.

The following table illustrates the actual allocations of the Corporation’s primary long-term investment portfolio as of June 30: Actual Actual allocation allocation June 30, 2016 June 30, 2015 Publicly traded equities – domestic 26% 29% Publicly traded equities – international 15 14 Fixed income securities 16 14 Alternative investments: Commingled equity funds 12 13 Inflation hedging equity, commodity, fixed income fund 5 5 Hedge funds 23 21 Private equities 1 1 Cash 23 Total 100% 100%

18 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

The table below presents the Corporation’s investable assets and liabilities as of June 30, 2016, aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 642.6 ——642.6 U.S. Treasury bonds 85.3 ——85.3 U.S. agency mortgage backed securities 100.1 ——100.1 Corporate bonds — 135.4 — 135.4 Fixed income mutual funds 0.3 ——0.3 All other fixed income securities 6.5 26.1 — 32.6 Equity mutual funds & ETF’s 201.6 ——201.6 Common stocks 377.0 ——377.0 Alternative investments: Commingled funds — 200.9 — 200.9 Inflation hedging equity, commodity, fixed income fund — 67.6 — 67.6 Private equity ——15.7 15.7 Hedge funds: Custom hedge fund ——56.8 56.8 Other hedge funds ——247.1 247.1 Total assets $ 1,413.4 430.0 319.6 2,163.0

Level 1 Level 2 Level 3 Total Liabilities: Interest rate swap $ — 15.3 — 15.3 Total liabilities $ — 15.3 — 15.3

19 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

The table below presents the Corporation’s investable assets and liabilities as of June 30, 2015, aggregated by the three level valuation hierarchy: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 659.9 ——659.9 U.S. Treasury bonds 75.6 ——75.6 U.S. agency mortgage backed securities 151.8 ——151.8 Corporate bonds — 132.8 — 132.8 Fixed income mutual funds 0.4 ——0.4 All other fixed income securities 3.2 29.3 — 32.5 Equity mutual funds & ETF’s 147.4 ——147.4 Common stocks 456.7 ——456.7 Alternative investments: Commingled funds — 243.6 — 243.6 Inflation hedging equity, commodity, fixed income fund — 58.8 — 58.8 Private equity ——16.6 16.6 Hedge funds: Custom hedge fund ——59.7 59.7 Other hedge funds ——229.6 229.6 Total assets $ 1,495.0 464.5 305.9 2,265.4

Level 1 Level 2 Level 3 Total Liabilities: Interest rate swap $ — 13.8 — 13.8 Total liabilities $ — 13.8 — 13.8

For the years ended June 30, 2016 and 2015, there were no significant transfers between Levels 1, 2 or 3.

20 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

Changes to the fair values based on the Level 3 inputs are summarized as follows: Private Hedge equity funds Total Balance as of June 30, 2014 $ 17.0 259.2 276.2 Additions: Contributions/purchases 2.9 21.6 24.5 Disbursements: Withdrawals/sales (4.8) — (4.8) Net change in value 1.5 8.5 10.0 Balance as of June 30, 2015 16.6 289.3 305.9 Additions: Contributions/purchases 1.6 33.0 34.6 Disbursements: Withdrawals/sales (3.0) — (3.0) Net change in value 0.5 (18.4) (17.9) Balance as of June 30, 2016 $ 15.7 303.9 319.6

The following summarizes redemption terms for the hedge fund-of-funds vehicles held as of June 30, 2016:

Custom Hedge Fund Fund 1 Fund 2 Fund 3 Fund 4

Redemption timing: Redemption frequency Quarterly 70% monthly – quarterly Quarterly Quarterly 30% quarterly – annually Required notice 70 days within 90 days 90 days 65 days Audit reserve: Percentage held back for audit reserve 10% up to 10% 10% 10% Gates: Potential gate holdback — — — — Potential gate release timeframe — — — —

The hedge funds include three hedge funds-of-funds and one custom hedge fund. The custom fund is structured as a multi-strategy hedge fund with the Corporation as the sole investor. The investment objective and strategies used by the hedge funds-of-funds and custom hedge fund are similar. The investment objective is to achieve positive absolute returns with low volatility, achieved through

21 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

investments with multiple underlying managers who are investing across various strategies. Strategies utilized within these hedge funds include, but are not limited to:

 Credit/Distressed includes investment companies that focus mainly on opportunities in corporate fixed income securities of companies that are in financial distress, or perceived financial distress, or going through a restructuring or re-organization.  Event Driven includes investment companies that focus on identifying securities that would benefit from the occurrence of a major corporate event.  Global Macro includes investment companies that employ broad mandates to invest globally across all asset classes, including interest rates, currencies, commodities, and equities, in order to benefit from market movements within various countries.  Equity Long/Short includes investment companies that maintain long and short positions in publicly traded equities in order to capture opportunities driven by their perception of securities or industries being overvalued or undervalued.  Relative Value includes investment companies that seek to identify valuation discrepancies between related securities, utilizing fundamental and quantitative techniques to establish equities, fixed income, and derivative positions.

Investments in hedge funds are carried at estimated fair value. Fair value is based on the NAV of the shares in each investment company or partnership. Such investment companies or partnerships mark-to-market or mark-to-fair value the underlying assets and liabilities in accordance with U.S. GAAP. Realized and unrealized gains and losses of the investment companies and partnerships are included in their respective operations in the current year. Changes in unrealized gains or losses on investments, including those for which partial liquidations were effected in the course of the year, are calculated as the difference between the NAV of the investment at year-end less the NAV of the investment at the beginning of the year, as adjusted for contributions and redemptions made during the year and certain lock-up provisions. Generally, no dividends or other distributions are paid. The following summarizes the status of contributions to the private equity fund-of-funds vehicles held as of June 30, 2016: Percentage of Percentage of Total commitment commitment commitment contributed remaining Fund 1 $ 11.0 95.0% 5.0% Fund 2 7.1 95.7 4.3 Fund 3 7.1 91.4 8.6 Fund 4 10.0 21.3 78.7 Fund 5 5.0 39.0 61.0 Total $ 40.2

22 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

Investments in private equity funds, typically structured as limited partnership interests, are carried at fair value using NAV or equivalent as determined by the General Partner in the absence of readily ascertainable market values. Distributions under this investment structure are made to investors through the liquidation of the underlying assets. It is expected to take up to ten years to fully distribute the proceeds of those assets. The fair value of limited partnership interests is generally based on fair value capital balances reported by the underlying partnerships, subject to management review and adjustment. Security values of companies traded on exchanges, or quoted on NASDAQ, are based upon the last reported sales price on the valuation date. Security values of companies traded over the counter, but not quoted on NASDAQ, and securities for which no sale occurred on the valuation date are based upon the last quoted bid price. The value of any security for which a market quotation is not readily available may be its cost, provided however, that the General Partner adjusts such cost value to reflect any bona fide third-party transactions in such a security between knowledgeable investors, of which the General Partner has knowledge. In the absence of any such third-party transactions, the General Partner may use other information to develop a good faith determination of value. Examples include, but are not limited to, discounted cash flow models, absolute value models, and price multiple models. Inputs for these models may include, but are not limited to, financial statement information, discount rates, and salvage value assumptions.

The valuation of both marketable and nonmarketable securities may include discounts to reflect a lack of liquidity or extraordinary risks, which may be associated with the investment. Determination of fair value is performed on a quarterly basis by the General Partner. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a ready market for those investments existed.

(4) Property and Equipment Property and equipment as of June 30, 2016 and 2015 is as follows: 2016 2015 Land $ 85.0 84.1 Buildings and improvements 1,440.1 1,346.9 Equipment 1,814.1 1,801.2 3,339.2 3,232.2 Less accumulated depreciation and amortization (2,253.9) (2,139.2) 1,085.3 1,093.0 Construction-in-progress 187.4 104.4 $ 1,272.7 1,197.4

Construction-in-progress includes a variety of ongoing capital projects at the Corporation as of June 30, 2016 and 2015. Depreciation and amortization expense related to property and equipment amounted to $182.0 and $185.7 for the years ended June 30, 2016 and 2015, respectively.

23 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

On April 1, 2015, the Corporation and Shah Associates, M.D, P.A. (Shah Associates or the Practice) closed on an asset purchase agreement, whereby the Corporation purchased substantially all of the assets and assumed certain obligations of the Practice and invested in certain real estate and management services joint ventures with Shah Associates. The Practice is a multispecialty medical group serving Southern Maryland and has joined the Corporation under the name MedStar Shah Medical Group (included within MedStar Medical Group, LLC). Through this agreement, the Corporation added more than 85 providers in 17 medical specialties with offices throughout Southern Maryland. As a result of the transaction, the Corporation recognized approximately $26.8 of goodwill and other intangible assets, approximately $25.0 of property, plant and equipment and approximately $8.0 of other liabilities. The consolidated financial statements include the operations of the Practice since the closing date.

(5) Other Assets Other assets as of June 30, 2016 and 2015 consist of the following: 2016 2015 Deferred financing costs, net $ 10.3 10.8 Investments in unconsolidated entities 15.6 14.9 Reinsurance receivables 31.9 33.1 Deferred tax asset 18.4 21.7 Other assets 51.8 55.8 $ 128.0 136.3

The Corporation has investments in other healthcare related organizations that are accounted for under the equity method which total $15.6 and $14.9 at June 30, 2016 and 2015, respectively. Under the equity method, original investments are recorded at cost and adjusted by the Corporation’s share of the undistributed earnings or losses of these organizations. The related ownership interest in these organizations ranges from 8% to 50%. The Corporation’s share of earnings in these organizations was $2.6 for the years ended June 30, 2016 and 2015, and are recognized in other operating revenue in the consolidated statements of operations and changes in net assets. Certain other nonconsolidated entities are recorded under the cost method.

24 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(6) Debt As of June 30, 2016 and 2015, the Corporation’s outstanding borrowings include the following:

2016 2015 Maryland Health and Higher Educational Facilities: Authority fixed rate revenue bonds: Series 1998A 5.25% Term bonds due 2038 $ 82.0 82.0 Series 1998B 5.25% Term bonds due 2038 57.0 57.0 Series 2004 4.25%–5.75% Serial bonds due 2009-2025 — 4.6 Series 2011 2.00%–5.00% Serial bonds due 2012-2023 30.0 37.4 Series 2011 5.00% Term bonds due 2031 5.6 5.6 Series 2011 5.00% Term bonds due 2041 35.4 35.4 Series 2012 2.19% Direct Purchase due 2017–2022 38.6 38.6 Series 2013A 3.00%–5.00% Serial bonds due 2016-2028 60.9 60.9 Series 2013A 5.00% Term bonds due 2038 17.3 17.3 Series 2013A 5.00% Term bonds due 2041 25.0 25.0 Series 2013A 4.00% Term bonds due 2041 14.6 14.6 Series 2013B 3.00%–5.00% Serial bonds due 2025-2033 60.8 60.8 Series 2013B 4.00% Term bonds due 2038 45.0 45.0 Series 2013B 5.00% Term bonds due 2038 44.0 44.0 Series 2015 2.00%-5.00% Serial bonds due 2016-2033 180.4 180.4 Series 2015 5.00% Term bonds due 2038 35.2 35.2 Series 2015 5.00% Term bonds due 2042 75.2 75.2 Series 2015 4.00% Term bonds due 2045 66.4 66.4 Plus unamortized net premium 70.4 75.8 943.8 961.2 District of Columbia Hospital Revenue Bonds: Multimodal revenue bonds at variable rates: Series 1998A 0.27%–0.45% at June 30, 2016 Serial bonds due 2008-2038 (0.02%–0.11% at June 30, 2015) 119.7 122.9 District of Columbia Hospital Revenue Bonds: Multimodal revenue bonds at fixed rates: Series 1998B 2.75%–5.00% Serial bonds due 2008-2019 4.9 6.4 Series 1998C 2.75%–5.00% Serial bonds due 2008-2019 4.9 6.4 129.5 135.7 MedStar Health, Inc. Taxable Fixed Rate Revenue Bonds: Series 2015 0.80%-3.70% Serial bonds due 2016-2031 100.9 100.9 Notes payable to financial institutions or state agencies under mortgages (floating rates ranging between 2.3%–6.2%) and other 13.6 14.9 Line of credit due August 2019 (0.14%–1.00% at June 30, 2016 and 0.18%–0.84% at June 30, 2015) 129.8 129.8 244.3 245.6 Total debt 1,317.6 1,342.5 Less current portion of long-term debt (103.3) (19.5) Long-term debt, net $ 1,214.3 1,323.0

25 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

Scheduled maturities on borrowings for the next five fiscal years and thereafter are as follows: 2017 $ 103.3 2018 26.7 2019 157.3 2020 28.4 2021 29.4 Thereafter 902.1 $ 1,247.2

The Corporation, which is currently the sole member of an “obligated group” as defined in the Master Trust Indenture, is bound by the provisions of the Master Trust Indenture for payment of any outstanding obligations under existing loan agreements. All of the hospitals and certain other affiliates (the guarantors) of the Corporation are parties to a guaranty agreement pursuant to which they jointly and severally guaranty the payment and performance of the obligations under the Master Trust Indenture. The Master Trust Indenture requires that certain Material System Affiliates, which is defined therein as any system affiliate that generates in excess of 5.0% of the system's revenues, execute the guaranty agreement unless otherwise exempt pursuant to the provisions of the Master Trust Indenture. Parties to the guaranty agreement currently include: HH MedStar Health, Inc., MedStar Enterprises, MedStar Georgetown University Hospital, MedStar National Rehabilitation Hospital, MedStar Washington Hospital Center, MedStar Franklin Square Medical Center, MedStar Good Samaritan Hospital, MedStar Harbor Hospital, MedStar Montgomery Medical Center, MedStar Southern Maryland Hospital Center, MedStar St. Mary’s Hospital, MedStar Union Memorial Hospital, Parkway Ventures, and VNA. The obligations of the guarantors under the Guaranty Agreement are collateralized by deeds of trust granted by the hospitals. Under the Master Trust Indenture and the deeds of trust, as collateral for the payments due thereunder, the Corporation and its hospital affiliates, have granted a security interest in their revenues subject to permitted encumbrances. As of June 30, 2016, all of the Corporation’s Maryland Health and Higher Educational Facilities Authority Revenue Bonds, District of Columbia Hospital Revenue Bonds, and MedStar Health Taxable Revenue Bonds are secured by obligations issued under the Master Trust Indenture.

Under the Master Trust Indenture, the Corporation is required to maintain, among other covenants, a maximum annual debt service coverage ratio of not less than 1.10. Under the loan agreements relating to the Series 1998 Bonds (defined below), the Corporation is required to maintain a historical debt service coverage ratio of not less than 2.0 and to maintain at least 65 days cash on hand. In the event the Corporation does not meet either of these requirements, it is required to fund a trustee-held debt service reserve fund securing the Series 1998 Bonds. The amount to be deposited shall equal the lesser of: 10% of the principal amount of such outstanding bonds, or the largest annual debt service with respect to such bonds in any future year, or 125% of the average annual debt service of future years. As of June 30, 2016 and 2015, there were no funds required to be held in the debt service reserve fund for the Series 1998 Bonds.

In December 1998, the Maryland Health and Higher Education Facilities Authority (MHHEFA) and the District of Columbia (District) issued bonds (Series 1998 Bonds) on behalf of the Corporation. Bond

26 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

proceeds of approximately $588.6 were loaned to the Corporation under separate loan agreements with MHHEFA and the District upon execution of obligations pursuant to the Master Trust Indenture. MHHEFA issued $283.5 of Revenue Bonds. Principal and interest under the Series 1998 MHHEFA bonds are insured under municipal insurance policies with Assured and Ambac. The District issued $300.0 of Multimodal Revenue Bonds, including $150.0 Series 1998A, $75.0 Series 1998B, and $75.0 Series 1998C. The District Series 1998A bonds, which consist of three tranches totaling $116.3 at August 2016, trade as uninsured Variable Rate Demand Obligations backed by bank letters of credit. The Series 1998A Tranche I bonds which remained outstanding in August 2016 consisted of approximately $38.8 bonds trading in a daily mode backed by a letter of credit issued by Wells Fargo Bank, National Association and remarketed by J.P. Morgan Securities Inc. The letter of credit expires in March 2017. In the event of a failed remarketing, the Tranche I bonds would be tendered to the bank and repaid over a four-year period, beginning 367 days following the date of the failed remarketing. The Series 1998A Tranche II bonds totaled $38.8 in August 2016. These bonds trade in a weekly mode and are remarketed by TD Securities. The letter of credit backing these bonds was issued by TD Bank, National Association and expires in April 2018. In the event of a failed remarketing, the Tranche II bonds would be tendered to the bank and repaid over a five-year period, beginning 367 days following the failed remarketing. The Series 1998A Tranche III bonds totaled $38.7 in August 2016. These bonds trade in a weekly mode and are remarketed by Citigroup Global Markets Inc. The letter of credit backing these bonds was issued by PNC Bank, National Association. The term of the letter of credit is five years, and expires in May 2017. In the event of a failed remarketing, the Tranche III bonds would be tendered to the bank and repaid over a four-year period, beginning 367 days following the failed remarketing. No portion of the Series 1998A bonds has been put at June 30, 2016 and 2015, respectively. The $3.3 Series 1998B and $3.4 Series 1998C bonds (as of August 2016) are at a fixed rate and insured by Assured Guaranty, Ltd. The reimbursement obligation with respect to the letters of credit are evidenced and secured by obligations issued by the Corporation under the Master Trust Indenture.

Related to the District Series 1998A bonds, the Corporation entered into an interest rate swap with Wells Fargo Bank, National Association in a notional amount totaling $150.0 (reduced to $84.8 at August 2016). The swap agreement expires in fiscal year 2027. Under the terms of the swap, the Corporation pays a fixed rate and receives a variable rate. Collateral is only required to be posted under the swap in the event that the Corporation’s credit ratings are downgraded by two rating agencies below the BBB – or Baa2 – level. To date, no collateral postings have been required. As of June 30, 2016 and 2015, the variable interest rate under these agreements was 0.30% and 0.12%, respectively. The fixed rate was 3.6875% as of June 30, 2016 and 2015. The variable rates are capped at 14.0%. The interest rate swap was secured by obligations issued under the Master Trust Indenture.

Certain of the Corporation’s bonds are subject to optional redemption or purchase, as follows: (i) the Series 2011 Bonds maturing on or after August 2022 are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in 2021; (ii) the Series 2013A Bonds maturing on or after August 2024 are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in 2023; and (iii) the Series 2015 MHHEFA Bonds maturing on or after August 2025 are subject to redemption or purchase at the option of the Corporation prior to maturity beginning in 2025.

27 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

In June 2012, the Corporation entered into a $38.6 MHHEFA Direct Purchase financing transaction with JP Morgan Chase Bank, N.A. (the Series 2012 Bond). The proceeds from the transaction were used to redeem certain outstanding MHHEFA Series 1998A bonds that were due to mature in 2018 as well as a portion of the outstanding MHHEFA Series 1998 A&B bonds due to mature in 2028. The repayment of the Series 2012 Bond is evidenced by an obligation issued under the Master Trust Indenture. The term of the Series 2012 Bond is ten years and the repayment terms approximate the previous repayment terms of the Series 1998 bonds that were refunded. Covenants, conditions, and security for the Series 2012 Bond is similar to the revolving credit agreement.

The Corporation maintains a $250.0 revolving credit agreement provided by a group of banks. The facility has a three-year term expiring in April 2019. The facility is evidenced by an obligation issued under the Master Trust Indenture. The outstanding balance on the facility was $129.8 at June 30, 2016 and 2015. The facility includes certain covenants, including a requirement to maintain Days Cash on Hand of 70 days, measured semi-annually at each June 30 and December 31, and a Debt Service Coverage ratio of 1.25, measured quarterly on a rolling four quarters basis. In addition, the Corporation is required to maintain a minimum credit rating of Baa2 or its equivalent from at least two of Moody’s Investor’s Service, Standard & Poor’s, and Fitch Ratings.

In addition, the Corporation maintains a $30.0 letter of credit facility, provided by a single lender, which is also evidenced by an obligation issued under the Master Trust Indenture. This facility is principally used to securitize certain regulatory obligations under various insurance programs, and has terms and conditions similar to the revolving credit agreement. The facility has a three-year term expiring in April 2019. However, the standby letters of credit issued under the facility can be canceled at the bank’s option each year. As of June 30, 2016 and 2015, standby letters of credit issued pursuant to the facility were $21.2. No amounts have been drawn by the beneficiaries under the standby letters of credit.

(7) Retirement Plans The Corporation has two qualified defined benefit pension plans (MedStar Health, Inc. Pension Equity Plan (PEP) and MedStar Health, Inc. Cash Balance Retirement Plan (CBRP)) covering substantially all full-time employees hired before 2005. MedStar St. Mary’s Hospital also has a defined benefit plan that substantially covers all employees of MedStar St. Mary’s Hospital. Participation in all plans has been closed to new entrants and all plans are frozen to future benefit accruals.

Benefits under the plans are substantially based on years of service and the employees’ career earnings. The Corporation contributes to the plans based on actuarially determined amounts necessary to provide assets sufficient to meet benefits to be paid to plan participants and to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006, and Internal Revenue Service regulations. Effective July 1, 2000, employees of the Transferred Businesses (note 17) became participants in one of the Corporation’s pension plans and are reflected in the pension information provided below.

The Corporation’s investment policies are established by the MedStar Health, Inc.’s Investment Committee, which is comprised of members of the Board of Directors, other community leaders, and management. Among its responsibilities, the Investment Committee is charged with establishing and

28 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

reviewing asset allocation strategies, monitoring investment manager performance, and making decisions to retain and terminate investment managers. Assets of each of the Corporation’s pension plans are managed in a similar fashion by the same group of investment managers. The Corporation has incorporated an IPS into the investment program. The IPS, which has been formally adopted by the Corporation’s Board of Directors, contains numerous standards designed to ensure adequate diversification by asset class and geography. The IPS also limits all investments by manager and position size, and limits fixed income position size based on credit ratings, which serves to further mitigate the risks associated with the investment program. As of June 30, 2016 and 2015, management believes that all investments were being managed in a manner consistent with the IPS.

The following table illustrates the actual allocations of the Corporation’s primary pension plans’ investment portfolio as of June 30: Actual Actual allocation allocation June 30, June 30, 2016 2015 Publicly traded equities – domestic 26% 29% Publicly traded equities – international 12 11 Fixed income securities 17 15 Alternative investments: Commingled equity funds 16 15 Inflation hedging equity, commodity, fixed income fund 5 4 Hedge funds 21 20 Private equities 2 2 Cash 14 Total 100% 100%

29 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

The table below presents the Corporation’s pension plans’ investable assets as of June 30, 2016 aggregated by the three level valuation hierarchy:

Level 1 Level 2 Level 3 Total

Assets: Cash and cash equivalents $ 21.5 ——21.5 U.S. Treasury bonds 56.0 ——56.0 U.S. agency mortgage backed securities 28.1 ——28.1 Corporate bonds — 68.5 — 68.5 All other fixed income securities 2.9 13.1 — 16.0 Equity mutual funds and ETF’s 125.3 ——125.3 Common stocks 255.6 ——255.6 Alternative investments: Commingled funds — 149.5 — 149.5 Inflation hedging equity, commodity, fixed income fund — 42.7 — 42.7 Private equity ——18.8 18.8 Hedge funds: Custom hedge fund ——45.3 45.3 Other hedge funds ——157.5 157.5 Total assets $ 489.4 273.8 221.6 984.8

30 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

The table below presents the Corporation’s pension plans’ investable assets as of June 30, 2015 aggregated by the three level valuation hierarchy:

Level 1 Level 2 Level 3 Total

Assets: Cash and cash equivalents $ 47.1 ——47.1 U.S. Treasury bonds 50.5 ——50.5 U.S. agency mortgage backed securities 24.7 ——24.7 Corporate bonds — 67.0 — 67.0 All other fixed income securities 1.0 14.2 — 15.2 Equity mutual funds and ETF’s 73.8 ——73.8 Common stocks 344.5 ——344.5 Alternative investments: Commingled funds — 155.2 — 155.2 Inflation hedging equity, commodity, fixed income fund — 43.3 — 43.3 Private equity ——18.5 18.5 Hedge funds: Custom hedge fund ——47.6 47.6 Other hedge funds ——156.4 156.4 Total assets $ 541.6 279.7 222.5 1,043.8

For the years ended June 30, 2016 and 2015, there were no significant transfers between Levels 1, 2 or 3.

31 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

Changes to the fair values based on the Level 3 inputs are summarized as follows: Private Hedge equity funds Total Balance as of June 30, 2014 $ 17.0 193.0 210.0 Additions: Contributions/purchases 4.2 6.0 10.2 Disbursements: Withdrawals/sales (4.9) — (4.9) Net change in value 2.2 5.0 7.2 Balance as of June 30, 2015 18.5 204.0 222.5 Additions: Contributions/purchases 2.4 11.0 13.4 Disbursements: Withdrawals/sales (3.1) — (3.1) Net change in value 1.0 (12.2) (11.2) Balance as of June 30, 2016 $ 18.8 202.8 221.6

The general investment strategies, fund structures, and valuation methods related to the pension plans’ hedge funds and private equities are largely the same as those included in the Corporation’s primary investment portfolio and discussed further in footnote 3. The following summarizes redemption terms for the hedge fund of funds vehicles held as of June 30, 2016:

Custom Hedge Fund Fund 1 Fund 2 Fund 3 Fund 4

Redemption timing: Redemption frequency Quarterly 70% monthly – quarterly Quarterly Quarterly 30% quarterly – annually Required notice 70 days within 90 days 90 days 65 days Audit reserve: Percentage held back for audit reserve 10% up to 10% 10% 10% Gates: Potential gate holdback — — — — Potential gate release timeframe — — — —

32 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

The following summarizes the status of contributions to the private equity fund-of-funds vehicles held as of June 30, 2016: Percentage of Percentage of Total commitment commitment commitment contributed remaining Fund 1 $ 9.0 95.0% 5.0% Fund 2 8.5 95.7 4.3 Fund 3 8.5 91.4 8.6 Fund 4 5.0 20.2 79.8 Fund 5 5.0 39.0 61.0 Fund 6 5.0 58.0 42.0 Total $ 41.0

The Corporation has established a long-term investment return target of 7.75% for both the PEP and CBRP in 2016 and 2015, respectively. These assumptions are based on historical returns achieved in the investment portfolios and represent the return that can reasonably be expected to be generated on a similarly structured portfolio in the future.

The Corporation recognizes the funded status of defined benefit pension plans in the consolidated balance sheets and the recognition in unrestricted net assets of unrecognized gains or losses, prior service costs or credits and transition assets or obligations. The funded status is measured as the difference between the fair value of the plan’s assets and the projected benefit obligation of the plan. The measurement date for the plans is June 30.

The following are deferred pension costs which have not yet been recognized in periodic pension expense but instead are accrued in unrestricted net assets, as of June 30, 2016 and 2015. Unrecognized actuarial losses represent unexpected changes in the projected benefit obligation and plan assets over time, primarily due to changes in assumed discount rates and investment experience. Unrecognized prior service cost is the impact of changes in plan benefits applied retrospectively to employee service previously rendered. Deferred pension costs are amortized into annual pension expense over the expected future lifetime for active employees with frozen benefits. Amounts in Amounts Amounts unrestricted recognized in recognized in net assets to unrestricted unrestricted be recognized net assets net assets during the as of as of next fiscal year June 30, 2016 June 30, 2015 Net actuarial loss $ 22.9 923.1 667.8

33 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

The following table sets forth the plans’ funded status and amounts recognized in the accompanying consolidated financial statements as of June 30, 2016 and 2015: 2016 2015 Change in benefit obligation: Benefit obligation at beginning of year $ 1,334.4 1,278.8 Interest cost 59.8 57.0 Actuarial loss 134.0 53.7 Benefits paid (47.5) (55.1) Benefit obligation at end of year 1,480.7 1,334.4 Change in plan assets: Plan assets at fair value at beginning of year 1,043.8 1,046.9 Actual return on plan assets (54.9) (3.7) Company contributions 43.4 55.7 Benefits paid (47.5) (55.1) Plan assets at fair value at end of year 984.8 1,043.8 Funded status/net amount recognized $ (495.9) (290.6)

The amounts recognized in the consolidated financial statements consist of the following as of June 30: 2016 2015 Pension assets (included in other assets) $ — 2.4 Pension liabilities (495.9) (293.0)

The Corporation has estimated $53.7 for its defined benefit contributions for the fiscal year ending June 30, 2017. The accumulated benefit obligation is $1,480.7 and $1,334.4 at June 30, 2016 and 2015, respectively.

Expected fiscal year benefit payments for all defined benefit plans is as follows: 2017 $ 65.3 2018 67.7 2019 70.6 2020 75.9 2021 78.6 2022–2026 420.2 $ 778.3

34 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

Net periodic pension income for the years ended June 30, 2016 and 2015 is as follows: 2016 2015 Interest cost on projected benefit obligation $ 59.8 57.0 Return on plan assets (83.9) (77.7) Recognized actuarial loss 17.5 16.4 Net periodic pension income $ (6.6) (4.3)

The assumptions used in determining net periodic pension expense and accrued pension costs shown above are as follows: 2016 2015 Discount rates for obligations at year end: MedStar Health, Inc. Pension Equity Plan 3.95% 4.70% MedStar Health, Inc. Cash Balance Retirement Plan 3.85 4.50 MedStar St. Mary’s Hospital Pension Plan 3.50 4.35 Discount rates for pension cost: MedStar Health, Inc. Pension Equity Plan – July 1 – June 30 4.70% 4.65% MedStar Health, Inc. Cash Balance Retirement Plan – July 1 – June 30 4.50 4.50 MedStar St. Mary’s Hospital Pension Plan – July 1 – June 30 4.35 4.25 Expected long-term rate of return on plan assets – PEP and CBRP 7.75% 7.75% Expected long-term rate of return on plan assets – MedStar St. Mary’s Hospital 7.50 7.50

In 2015, the mortality assumption for the plans was updated to reflect recently published general industry mortality tables. Those tables were adjusted to reflect a slightly lower level of long-term improvement in life expectancy.

The Corporation also has various contributory, tax deferred annuity and savings plans with participation available to certain employees. The Corporation matches employee contributions up to 3.0% of compensation in certain plans. The Corporation contributed approximately $34.8 and $29.1 during the years ended June 30, 2016 and 2015, respectively.

35 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(8) Business and Credit Concentrations The Corporation provides healthcare services through its inpatient and outpatient care facilities located in the State of Maryland, the District of Columbia and Northern Virginia. The Corporation generally does not require collateral or other security in extending credit; however it routinely obtains assignment of (or is otherwise entitled to receive) patients’ benefits receivable under their health insurance programs, plans or policies (e.g., Medicare, Medicaid, Blue Cross, Workers’ Compensation, health maintenance organizations (HMOs) and commercial insurance policies).

The Corporation estimates the allowance for uncollectible accounts based on the aging of accounts receivable, historical collection experience, payor mix and other relevant factors. A significant portion of the allowance for uncollectible accounts relates to self-pay patients, as well as co-payments and deductibles owed by patients with insurance. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients. Other factors include the volume of patients through the emergency departments and the increased level of co-payments and deductibles due from patients with insurance. These factors continuously change and can have an impact on collection trends and the estimation process.

The activity in the allowance for uncollectible accounts is summarized as follows for the years ended June 30, 2016 and 2015: 2016 2015 Beginning balance $ 191.3 189.5 Provision for bad debts 225.3 206.7 Write-offs, net of recoveries (233.6) (204.9) Ending balance $ 183.0 191.3

As of June 30, 2016 and 2015, the Corporation’s allowance for uncollectible accounts was approximately 21.9% and 24.7%, respectively, as a percentage of gross patient service receivables. The Corporation’s provision for bad debts represents 4.9% and 4.7% of net patient service revenue for the years ended June 30, 2016 and 2015, respectively.

36 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

A summary of net patient service revenue by major category of payor for the years ended June 30, 2016 and 2015 is as follows: 2016 2015 Medicare and Medicare HMO $ 35% 34% Medicaid and Medicaid HMO 14 13 Carefirst Blue Cross Blue Shield 19 23 Other commercial and managed care payors 24 23 Self-pay 8 7 $ 100% 100%

A summary of net patient receivables by major category of payor as of June 30, 2016 and 2015 is as follows: 2016 2015 Medicare and Medicare HMO $ 24% 27% Medicaid and Medicaid HMO 21 19 Carefirst Blue Cross Blue Shield 14 15 Other commercial and managed care payors 34 33 Self-pay 7 6 $ 100% 100%

Certain Maryland-based hospital charges are subject to review and approval by the Health Services Cost Review Commission (HSCRC). The HSCRC has jurisdiction over hospital reimbursement in Maryland by agreement with CMS. This agreement is based on a waiver from the Medicare Prospective Payment System reimbursement principles granted under Section 1814(b) of the Social Security Act.

Under the Maryland HSCRC rate methodology, amounts payable for services in 2016 and 2015 to Maryland hospital patients under the Medicare and Medicaid insurance programs are computed at 94% of regulated charges. This discount amount does not include MCO granted discounts for medical education. Hospital patients under the Blue Cross and approved health maintenance organization insurance programs are computed at 98% of regulated charges. Maryland accounts receivable from these third-party payors have been adjusted to reflect the difference between charges and the payable amounts.

In January 2014, CMS approved Maryland’s waiver for a five-year period beginning January 1, 2014 for inpatient and outpatient hospital services. The waiver ties hospital per capita revenue growth to the state’s economic growth of 3.58% and will require growth in Medicare spending per beneficiary in Maryland to be 0.5% below the national average. CMS can require the State to submit a corrective action plan if targets for a given performance year are not met. The waiver also imposes quality measures and encourages population health management.

37 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

In connection with the waiver, the HSCRC introduced the Global Budget Revenue (GBR) model, which covers the Corporation’s seven Maryland hospitals. This model moves payments to hospitals from each individual service to a total revenue for each hospital (or a combination of hospitals) to provide hospitals flexibility in the objectives of better care for individuals, higher levels of overall population health, and improved health care affordability. The model removes the financial incentive from increasing volume and provides incentive to work with partners to provide care in the appropriate setting. Additionally, the GBR model has the potential of including both prospective and retrospective rate adjustments. Management believes the impact of such adjustments would not be material to the consolidated financial statements. The GBR arrangement is expected to be in place through December 31, 2018 and it will be renewed annually unless terminated by either party with 180 days prior notice.

The Budget Control Act of 2011 (the Budget Control Act) mandated significant reductions and spending caps on the federal budget for fiscal years 2012 through 2021. As part of this legislation, a 2% reduction in Medicare spending, known as Sequestration, was implemented beginning April 1, 2013 and the Corporation’s Medicare payments subsequent to that date were reduced by the mandatory 2%. It is not possible to determine how future congressional actions to reduce the federal deficit in order to end Sequestration will impact the Corporation’s revenues.

Through its MedStar Family Choice, Inc. subsidiary, the Corporation enters into fee-for-service and capitation agreements with independent health professionals and organizations to provide covered services to eligible enrollees where such services cannot be provided by its employed physicians or controlled entities. This subsidiary, which provides Medicare and Medicaid services, participates in an annual rate setting program with the State of Maryland and the District of Columbia. During the process, the revenues and expenses for all members are evaluated to ensure adequate funding is provided to deliver contracted services. Premium revenue primarily consists of the following: 2016 2015 Maryland Medicaid $ 319.9 309.5 District of Columbia Medicaid 250.3 212.4 Total Medicaid $ 570.2 521.9 Maryland Medicare $ 91.5 36.4 District of Columbia Medicare 4.1 2.6 Total Medicare $ 95.6 39.0

Medical and clinical expenses from these agreements include claim payments, capitation payments, and estimates of outstanding claims liabilities for services provided prior to the balance sheet date. The estimates of outstanding claims liabilities of $86.7 and $62.3 as of June 30, 2016 and 2015, respectively, are based on management’s analysis of historical claims paid reports and review of health services utilization during the period and are included in accounts payable and accrued expenses on the consolidated balance sheets. Changes in these estimates are recorded in the period of change. Claims payments and capitation payments are expensed in the period services are provided to eligible enrollees.

38 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(9) Certain Significant Risks and Uncertainties The Corporation provides general healthcare services in the State of Maryland, the District of Columbia and Northern Virginia. As a healthcare provider, the Corporation is subject to certain significant inherent risks, including the following:

 Dependence on revenues derived from reimbursement by the federal Medicare and state Medicaid programs;  Regulation of hospital rates by the State of Maryland HSCRC;  Government regulation, government budgetary constraints and proposed legislative and regulatory changes, and;  Lawsuits alleging malpractice or other claims.

Such inherent risks require the use of certain management estimates in the preparation of the Corporation’s consolidated financial statements and it is reasonably possible that a change in such estimates may occur.

The Medicare and state Medicaid reimbursement programs represent a substantial portion of the Corporation’s revenues and the Corporation’s operations are subject to a variety of other federal, state and local regulatory requirements. In addition, changes in federal and state reimbursement funding mechanisms and related government budgetary constraints could have a significant adverse effect on the Corporation. Similarly, failure by the Corporation to maintain required regulatory approvals and licenses and/or changes in related regulatory requirements could have a significant adverse effect.

Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount. Management periodically reviews recorded amounts receivable from or payable to third-party payors and may adjust these balances as new information becomes available. In addition, revenue received under certain third-party agreements is subject to audit. During 2016 and 2015, certain of the Corporation’s prior year third-party cost reports were audited and settled, or tentatively settled, by third-party payors, which resulted in gains of approximately $3.9 and $22.1, respectively. Adjustments resulting from such audits and management reviews of unaudited years and open claims are reflected as adjustments to revenue in the year that the adjustment becomes known. Although certain other prior year cost reports submitted to third-party payors remain subject to audit and retroactive adjustment, management does not expect any material adverse settlements.

The healthcare industry is subject to numerous laws and regulations from federal, state and local governments, and the government has increased enforcement of Medicare and Medicaid anti-fraud and abuse laws, as well as the physician self referral law (Stark Law). The Corporation’s compliance with these laws and regulations is subject to periodic governmental inquiries, and the Corporation has responded appropriately to any such inquiries. The Corporation is aware of certain asserted and unasserted legal claims by the government, and from time to time, the Corporation may agree to resolve certain legal claims asserted by the government. The Corporation will continue to monitor all government inquiries and

39 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

respond appropriately. The final outcomes of these government investigations cannot be determined at this time.

Recent federal initiatives have prompted a national review of federally funded healthcare programs. To this end, the federal government, and many states, implemented programs to audit and recover potential overpayments to providers from the Medicare and Medicaid programs. Since June 2010, the Corporation’s hospitals have received audit requests from the Medicare Recovery Audit Contractor (RAC) program. These RAC audit requests have focused on medical necessity of inpatient admissions and hospital coding practices. In addition, the hospitals have continued to receive routine audit requests from other Medicare and Medicaid contractors and the Office of Inspector General. The Corporation’s hospitals have cooperated with each of these audit requests and implemented a program to track and manage their effect. In October 2014, in response to a global settlement offer made by CMS, the Corporation’s hospitals submitted requests to settle certain outstanding appeals of claims denied by the RAC and other Medicare contractors on the basis of patient status. The hospitals entered into settlements with CMS and received settlement payments of approximately $11.0, which were reflected as an adjustment to revenue in the fiscal year ended June 30, 2015.

As a result of federal healthcare reform legislation, rules and regulations, substantial changes are occurring in the United States healthcare system. These include numerous provisions affecting the delivery of healthcare services, the financing of healthcare costs, reimbursement to healthcare providers and the legal obligations of health insurers, providers and employers. These provisions are currently slated to take effect at specified times over the next decade.

Effective January 1, 2016, MedStar Accountable Care, LLC (ACO) became active as a Medicare Shared Savings Program Track 3 ACO to improve the quality of care for Medicare Fee-For-Service (FFS) beneficiaries and reduce unnecessary costs. Under this three-year agreement with CMS, the ACO is eligible for annual bonus payments from CMS if it is able to achieve certain quality and savings benchmarks. Conversely, the ACO is at financial risk to the extent that costs exceed the CMS established benchmarks. The agreement includes a provision allowing cancellation with 60 days written notification. The ACO currently has approximately 38,000 attributed members tied to the Corporation’s primary care network. The results of the ACO’s operations did not have a material impact on the Corporation’s financial results for the year ended June 30, 2016.

The Corporation, in the normal course of business, is a party to a number of other legal and regulatory proceedings. Management does not expect that the results of these proceedings will have a material adverse effect on the consolidated financial position or results of operations of the Corporation.

In June 2011 and April 2014, two lawsuits were filed by several employees alleging violations by the Corporation of wage-hour laws. The plaintiffs in each of these actions seek certification of a class that would include hourly employees at several of the Corporation’s hospitals. The Corporation will continue to oppose class certification and otherwise defend itself and the hospitals in these matters. The final outcome this litigation cannot be determined at this time.

40 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

In March 2016, the Corporation’s information technology systems were subject to a malware attack. All systems were returned to normal operating conditions within a short period of time and the operational impact was nominal. In addition, the Corporation has no evidence that patient or associate data was compromised due to the malware attack after a third party review. This event did not have a material adverse impact on the Corporation’s consolidated financial statements.

(10) Self-Insurance Programs The Corporation maintains self-insurance programs for professional and general liability risks, employee health and workers’ compensation. Estimated liabilities have been recorded based on actuarial estimation of reported and incurred but not reported claims. The combined accrued liabilities for these programs at June 30, 2016 and 2015 were as follows: 2016 2015 Professional and general liability $ 342.3 344.6 Employee health 22.0 20.2 Workers’ compensation 32.9 34.2 Total self-insurance liabilities 397.2 399.0 Less current portion (89.8) (88.4) Total self-insurance liabilities, net of current portion $ 307.4 310.6

The Corporation’s self-insurance program for professional and general liability is responsible for the following exposures as of June 30, 2016:

(a) For professional liability during the periods of July 1, 2014 to June 30, 2015 and July 1, 2015 to June 30, 2016, for all MedStar entities except MedStar Montgomery Medical Center (MMMC) and MedStar St. Mary’s Hospital (MSMH), the Corporation is responsible for the first $5.0 exposure for each and every claim plus an additional exposure above the first $5.0 self-insured retention referred to as an “inner aggregate.”

For the period July 1, 2014 to December 31, 2015, the inner aggregate exposes the Corporation to up to $3.0 per claim with an aggregate of $6.0 above the $5.0 per claim self-insured retention for all claims incurred for each 12-month period ended December 31.

For the period January 1, 2016 to June 30, 2016, the applicable inner aggregate was in effect for the 12 month period of January 1, 2016 to December 31, 2016. This inner aggregate exposes the Corporation to up to $3.0 per claim with a $6.0 annual aggregate above the Corporation’s $5.0 per claim self-insured retention for all claims incurred during the period January 1, 2016 to December 31, 2016.

For MMMC and MSMH, the Corporation is responsible for the first $2.0 exposure for each claim (not subject to the inner aggregate structures noted above).

41 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(b) For general liability, the Corporation is responsible for the first $3.0 exposure for each claim (for MMMC and MSMH, the first $2.0 exposure for each claim). General liability claims are not subject to the inner aggregate excess retention as described above. MSMHC is covered for general liability exposure for activities on or after December 10, 2012 under the Corporation’s general liability program.

(c) Commercial excess re-insurance has been purchased above the self-insured retentions described above in multiple layers and in twin towers; one for professional and one for general liability. During the period of January 1, 2013 through December 31, 2015, each tower has eight layers of excess re-insurance which provides coverage of up to $125.0 per claim and $125.0 in the annual aggregate. Effective January 1, 2016, the Corporation purchased additional layers of commercial excess re- insurance above the aforementioned $125.0 per claim and $125.0 annual aggregate. During the period of January 1, 2016 to December 31, 2016, each tower has 10 layers of excess re-insurance which provides coverage of up to $175.0 per claim and $175.0 annual aggregate. The Corporation maintains reinsurance contracts with various “A” rated commercial insurance companies.

The professional and general liabilities as of June 30, 2016 and 2015 have been discounted at a rate of 1.75%. The workers’ compensation liabilities as of June 30, 2016 and 2015 have been discounted at a rate of 1.50%.

Assets available to fund these liabilities are held in separate accounts (see note 2). Contributions required to fund professional and general liability, employee health benefits and workers’ compensation programs are determined by the plans’ administrators based on appropriate actuarial assumptions. The professional and general liability programs are administered through an offshore wholly owned captive insurance company, Greenspring Financial Insurance, LTD (GFIL), which is domiciled in the Grand Cayman Islands.

42 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(11) Unrestricted Net Assets The Corporation accounts for and presents noncontrolling interests in a consolidated subsidiary as a separate component of the appropriate class of consolidated net assets. The income attributable to noncontrolling interests is included within operating income on the consolidated statements of operations and changes in net assets. The following table presents a reconciliation of the changes in consolidated unrestricted net assets attributable to the Corporation’s controlling interest and noncontrolling interest, including amounts such as the performance indicator and other changes in unrestricted net assets as of and for the years ended June 30, 2016 and 2015: Total MedStar Noncontrolling unrestricted Health, Inc. interests net assets Balance as of June 30, 2014 $ 1,322.2 5.2 1,327.4 Excess of revenues over expenses 109.1 2.2 111.3 Change in funded status of defined benefit plans (118.5) — (118.5) Net assets released for property and equipment and other 6.2 10.8 17.0 Distributions to noncontrolling interests — (2.9) (2.9) Increase (decrease) in unrestricted net assets (3.2) 10.1 6.9 Balance as of June 30, 2015 1,319.0 15.3 1,334.3 Excess of revenues over expenses $ 43.4 2.7 46.1 Change in funded status of defined benefit plans (255.3) — (255.3) Net assets released for property and equipment 11.1 — 11.1 Distributions to noncontrolling interests — (0.4) (0.4) (Decrease) increase in unrestricted net assets (200.8) 2.3 (198.5) Balance as of June 30, 2016 $ 1,118.2 17.6 1,135.8

43 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(12) Temporarily and Permanently Restricted Net Assets Temporarily and permanently restricted net assets as of June 30, 2016 and 2015 are available for the following purposes: 2016 2015 Temporary restrictions: Interest in net assets of foundation $ 54.6 63.0 Other 70.3 68.9 $ 124.9 131.9 Permanent restrictions: Investments to be held in perpetuity, the income from which is available to support healthcare services $ 40.2 39.5

Temporarily restricted net assets are available for the purposes of purchasing property and equipment, providing health education, research and other healthcare services.

(13) Endowment Net Assets The Corporation’s endowments consist of individual donor-restricted funds established for a variety of purposes. Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.

(a) Interpretation of Relevant Law The Corporation has interpreted the State Prudent Management of Institutional Funds Act (SPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Corporation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the Corporation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:

(1) The duration and preservation of the fund

(2) The purposes of the Corporation and the donor-restricted endowment fund

(3) General economic conditions

44 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(4) The possible effect of inflation and deflation

(5) The expected total return from income and the appreciation of investments

(6) Other resources of the Corporation

(7) The investment policies of the Corporation

(b) Donor-restricted endowment funds within temporarily restricted net assets were $3.1 and $5.2 as of June 30, 2016 and 2015, respectively. Donor-restricted endowment funds within permanently restricted net assets were $40.2 and $39.5 as of June 30, 2016 and 2015, respectively. (c) Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or SPMIFA requires the Corporation to retain as a fund of perpetual duration. In accordance with U.S. GAAP, there were no deficiencies of this nature that are reported in unrestricted net assets as of June 30, 2016 and 2015.

(d) Investment Strategies The Corporation has adopted policies for corporate investments, including endowment assets, that seek to maximize risk-adjusted returns with preservation of principal. Endowment assets include those assets of donor-restricted funds that the Corporation must hold in perpetuity or for a donor-specified period(s). The endowment assets are invested in a manner that is intended to hold a mix of investment assets designed to meet the objectives of the account. The Corporation expects its endowment funds, over time, to provide an average rate of return that generates earnings to achieve the endowment purpose.

To satisfy its long-term rate-of-return objectives, the Corporation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Corporation employs a diversified asset allocation structure to achieve its long-term return objectives within prudent risk constraints.

The Corporation monitors the endowment funds returns and appropriates average returns for use. In establishing this practice, the Corporation considered the long-term expected return on its endowment. This is consistent with the Corporation’s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return.

(14) Income Taxes The Corporation and the majority of its subsidiaries are not-for-profit corporations as defined in Section 501(c)(3) of the Internal Revenue Code (the Code) and are exempt from federal income taxes under Section 501(a) of the Code. The Corporation’s tax-exempt businesses generate nominal amounts of unrelated business income subject to income tax. For corporate income tax purposes, the Corporation has

45 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

two consolidated groups of for-profit, taxable entities. The parent companies of these groups are Parkway Ventures, Inc. and MedStar Enterprises, Inc.

The Corporation’s taxable subsidiaries have approximately $245.0 of net operating loss (NOL) carryforwards as of June 30, 2016, which expire in varying periods through 2036, available to offset future taxable income. This NOL carryforward represents $93.1 of gross deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. During the years ended June 30, 2016 and 2015, the Corporation decreased its net deferred tax asset by $3.4 and $6.1, respectively, which was recorded in nonoperating income. The remaining amount of the deferred tax asset considered realizable, $18.4 as of June 30, 2016, could be reduced if estimates of future taxable income during the carry forward period are reduced. The current tax provisions for the years ended June 30, 2016 and 2015 were immaterial.

(15) Charity Care and Other Community Benefits MedStar Health is committed to ensuring that patients within the communities it serves who lack financial resources have access to necessary hospital services. MedStar Health and its healthcare facilities serve the emergency health care needs of everyone who visits the facilities regardless of a patient's ability to pay for care; and assist those patients who are admitted through the admissions process for non-urgent and urgent, medically necessary care who cannot pay for the care they receive.

In meeting this commitment, MedStar Health’s facilities work with uninsured patients to gain an understanding of each patient’s financial resources prior to admission (for scheduled services) or prior to billing (for emergency services). Based on this information and patient eligibility, the Corporation’s facilities assist uninsured and certain underinsured patients that meet medical hardship criteria who reside within the communities served. This assistance is provided in one or more of the following ways:

 Assist with enrollment in publicly-funded entitlement programs (e.g. Medicaid and Medicare programs).  Assist with consideration of funding that may be available from other charitable organizations.  Provide charity care and financial assistance according to applicable guidelines, including considerations for patients that may be underinsured and for those that may be suffering from a medical hardship.  Provide financial assistance for payment of facility charges using a sliding scale based on patient family income and financial resources.  Offer periodic payment plans to assist patients with financing their healthcare services.

Eligibility criteria for financial assistance consider patient’s household income in relation to the federal poverty guidelines and the equity value of real property and/or other assets. By definition, free care is

46 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

available to uninsured patients in households between 0% and 200% of the federal poverty line. Reduced cost-care is based on a sliding-scale and is available to uninsured patients in households between 200% and 400% of the federal poverty line. The Corporation’s hospitals utilize a cost to charge ratio methodology to convert charity care to cost. The estimated cost of services provided is determined based on the relationship of total operating costs to gross charges. Total operating costs for purposes of this ratio exclude bad debt expense as well as costs associated with community benefit activities. Total gross patient charges are then offset with any related reimbursements. The Corporation provided $23.9 and $26.1 of charity care at cost during the years ended June 30, 2016 and 2015, respectively, based on the cost to charge ratio. The reduction in charity care is a result of expanded coverage under the Affordable Care Act (ACA), contributing to a shift from self-pay to Medicaid and Medicaid managed care. In addition, the ACA contains a number of provisions intended to improve quality and reduce spending related to the Medicare program. The reduction in spending on the Medicare program, which includes readmission penalties, a reduction in disproportionate share payments, and reduction in payment rates, is intended to offset the cost of expanding coverage under the ACA.

In addition to charity care, the Corporation also funds costs of services provided to persons covered by publicly-funded programs and numerous programs designed to benefit the healthcare interests of the communities it serves. Examples of these programs are health professions education, community health services, and research to advance care. The costs associated with these programs are recorded in the appropriate operating expense categories. In 2015, the most current period for which the Corporation’s community benefits report is available, the total cost of these programs, including charity care services provided and the cost of bad debt, was approximately $312.7.

(16) Leases The Corporation is obligated under various operating leases with initial terms of one year or more. Aggregate future minimum payments as of June 30, 2016 are as follows: 2017 $ 67.7 2018 60.0 2019 53.1 2020 46.0 2021 37.9 2022 and Thereafter 160.1 $ 424.8

Certain leases include provisions allowing the minimum rental payments to be adjusted annually for increases in operating costs and, in some cases, real estate taxes attributable to leased property. Total rental expense for all operating leases amounted to approximately $79.6 and $72.7 during the years ended June 30, 2016 and 2015, respectively.

47 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

(17) Commitments and Contingencies In February 2000 and on June 30, 2000, the Corporation and Georgetown University (the University) signed certain definitive agreements whereby the Corporation would receive through purchase or capital lease substantially all of the assets (including working capital) owned by the University that constitutes the MedStar Georgetown University Hospital, the Community Practice Network, the Faculty Practice Group and certain office buildings and a parking lot on the campus (collectively referred to as the Transferred Businesses). These agreements became effective July 1, 2000 and transferred control of the identified physical plant and other real property assets of the Transferred Businesses to the Corporation for use as an academic medical center for a minimum of ninety-eight years. At the end of the one hundred and fifty year lease term (including a fifty-two year renewal), the University shall convey all leased assets, excluding the underlying land, to the Corporation for a nominal amount and enter into a rent-free ground lease for the Corporation’s use. This transaction was accounted for under the purchase method of accounting effective July 1, 2000.

In recognition of the value of the transaction, the Corporation shall annually pay the University 50% of the amount by which the combined operating earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the asset purchase agreement, of certain entities of the Corporation in the Washington D.C. area (collectively referred to as the Washington Clinical Enterprises) exceeds $60.0, subject to certain adjustments. These additional payments expired in 2016 when the Corporation paid $17.0 and cumulative payments reached $70.0.

The Corporation also entered into an Academic Affiliation and Operations Agreement (Affiliation Agreement) with the University. The purpose of this agreement is to make available to the University the facilities of the Transferred Businesses and provide the Corporation with a first-class University medical center. The University shall make payments to the Corporation determined by multiplying the University School of Medicine’s total undergraduate tuition revenue by 36% for providing teaching services. The Corporation recognized $12.3 and $12.9 of tuition revenue during the years ended June 30, 2016 and 2015, respectively. In support of academic programs at the University, for each fiscal year following the termination of the additional payment terms in the asset purchase agreement described above, the Corporation shall pay to the University 17.5% of the operating EBITDA of the Washington Clinical Enterprises in excess of $60.0, subject to certain adjustments. The Corporation has paid $5.0 to the University as of June 30, 2016.

The Corporation and the University also entered into a Research Agreement to sustain and advance a program of health-related University research at the Transferred Business facilities. Under this agreement the University is required to reimburse the Corporation for certain costs incurred by the Corporation in support of University sponsored research. Amounts reimbursed to the Corporation were $2.9 and $2.8 for the years ended June 30, 2016 and 2015, respectively.

MedStar Georgetown University Hospital and the University are parties to a fixed fee shared services agreement. Georgetown University provided to MedStar Georgetown University Hospital the following services: utilities, telephone/IT services, transportation services and library services. Expenses charged for such services were $12.4 and $14.3 for the years ended June 30, 2016 and 2015, respectively.

48 (Continued) MEDSTAR HEALTH, INC. Notes to Consolidated Financial Statements June 30, 2016 and 2015 (Dollars in millions)

The MedStar Washington Hospital Center campus is subject to the lien of a Permitted Encumbrance in the amount of $21.5 to the United States government. This encumbrance was created in the deed of the hospital property from the United States government to MedStar Washington Hospital Center in February 1960. There is no repayment date for this lien stated in the deed. Under enabling legislation, repayment could be required after a determination that the property is no longer required for hospital services or the property is disposed of, in which event all or a portion of the lien may be payable to the government. This lien is subordinated to the Deed of Trust on the MedStar Washington Hospital Center campus.

(18) Functional Expenses The Corporation considers integrated health services, research and management and general to be its primary functional categories for purposes of expense classification. Management and general include information systems, general corporate management, advertising and marketing. Functional categories of expenses for the years ended June 30, 2016 and 2015 are as follows: 2016 2015 Integrated health services $ 4,107.8 3,885.9 Management and general 990.0 941.2 Research 31.8 30.0 Fundraising 10.7 9.3 $ 5,140.3 4,866.4

(19) Subsequent Events Management evaluated all events and transactions that occurred after June 30, 2016 and through October 7, 2016. The Corporation did not have any events that were required to be recognized or disclosed.

49 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX B-1

Selected Interim Unaudited Financial Information of MedStar Health, Inc. and its Subsidiaries

[THIS PAGE INTENTIONALLY LEFT BLANK] MEDSTAR HEALTH, INC. Condensed Consolidated Balance Sheets March 31, 2017 and June 30, 2016 (Dollars in millions)

3/31/2017 6/30/2016 Assets (unaudited) (audited) Current assets: Cash and cash equivalents $ 542.4 $ 572.1 Investments 81.6 122.0 Assets whose use is limited or restricted 60.1 60.2 Receivables: From patient services (less allowances for uncollectible accounts of $197.3 at March 31, 2017 and $183.0 at June 30, 2016) 662.2 653.6 Other 89.9 92.0 752.1 745.6 Inventories 62.7 60.3 Prepaids and other current assets 55.5 41.6 Total current assets 1,554.4 1,601.8 Investments, net of current portion 1,030.9 921.0 Assets whose use is limited or restricted, net of current portion 518.2 487.7 Property and equipment, net 1,311.3 1,272.7 Interest in net assets of foundation 58.6 54.6 Goodwill and other intangible assets, net 250.8 253.0 Other assets 116.3 128.0 Total assets $ 4,840.5 $ 4,718.8

Liabilities and Net Assets Current liabilities: Accounts payable and accrued expenses $ 484.7 $ 499.8 Accrued salaries, benefits, and payroll taxes 320.8 376.7 Amounts due to third-party payors, net 83.7 94.7 Current portion of long-term debt 64.3 103.3 Current portion of self insurance liabilities 85.1 89.8 Other current liabilities 161.7 103.5 Total current liabilities 1,200.3 1,267.8 Long-term debt, net of current portion 1,223.8 1,214.3 Self insurance liabilities, net of current portion 315.9 307.4 Pension liabilities 457.8 495.9 Other long-term liabilities, net of current portion 140.3 132.5 Total liabilities 3,338.1 3,417.9 Net assets: Unrestricted net assets: MedStar Health, Inc. 1,312.4 1,118.2 Noncontrolling interests 18.6 17.6 Total unrestricted net assets 1,331.0 1,135.8 Temporarily restricted 130.5 124.9 Permanently restricted 40.9 40.2 Total net assets 1,502.4 1,300.9 Total liabilities and net assets $ 4,840.5 $ 4,718.8

See accompanying notes to condensed consolidated financial statements. B-1-1

MEDSTAR HEALTH, INC. Condensed Consolidated Statements of Operations

For the nine months ended March 31, 2017 and March 31, 2016

(Dollars in millions) (unaudited)

Nine months ended March 31, 2017 March 31, 2016 Operating revenues: Net patient service revenue $ 3,492.9 $ 3,449.8 Provision for bad debts (161.9) (172.7) Total net patient service revenue, net of provision for bad debts 3,331.0 3,277.1 Premium revenue 606.0 483.6 Other operating revenue 153.0 154.8 Net operating revenues 4,090.0 3,915.5 Operating expenses: Personnel 2,192.9 2,058.9 Supplies 571.8 578.9 Purchased services 684.8 665.1 Other operating 384.4 366.5 Interest expense 33.8 33.1 Depreciation and amortization 144.9 138.5 Total operating expenses 4,012.6 3,841.0 Earnings from operations 77.4 74.5 Nonoperating gains (losses): Investment income 9.7 8.9 Net realized gains on investments 17.1 9.8 Change in unrealized gains (losses) on derivative instrument 5.0 (1.2) Change in unrealized gains (losses) on investments, net 98.3 (112.9) Income tax provision (18.5) (3.5) Other nonoperating losses — (5.6) Total nonoperating gains (losses) 111.6 (104.5) Excess (deficiency) of revenues over expenses $ 189.0 $ (30.0)

See accompanying notes to condensed consolidated financial statements.

B-1-2

MEDSTAR HEALTH, INC. Condensed Consolidated Statement of Changes in Net Assets

For the nine months ended March 31, 2017

(Dollars in millions) (unaudited) March 31, 2017 Unrestricted net assets: Excess of revenues over expenses $ 189.0 Net assets released from restrictions used for purchase of property and equipment 6.2

Increase in unrestricted net assets 195.2

Temporarily restricted net assets: Contributions 8.5 Realized net gains on restricted investments 0.9 Change in unrealized gains on restricted investments, net 2.6 Increase in net assets of foundation 4.0 Net assets released from restrictions (10.4) Increase in temporarily restricted net assets 5.6

Permanently restricted net assets:

Contributions 0.3 Realized net gains on restricted investments 0.1 Change in unrealized gains on restricted investments, net 0.3 Increase in permanently restricted net assets 0.7

Increase in net assets 201.5

Net assets, beginning of year 1,300.9 Net assets, end of period $ 1,502.4

See accompanying notes to condensed consolidated financial statements.

B-1-3

MEDSTAR HEALTH, INC. Condensed Consolidated Statements of Cash Flows For the nine months ended March 31, 2017 and March 31, 2016 (Dollars in millions) (unaudited) Nine months ended March 31 2017 2016 Cash flows from operating activities: Change in net assets $ 201.5 $ (31.0) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 144.9 138.5 Loss on sale of property and equipment 0.3 0.8 Realized net gains on marketable investments (22.2) (10.5) Change in unrealized (gains) losses of marketable investments (101.2) 116.3 (Increase) decrease in net assets of foundation (4.0) 3.5 Unrealized (gain) loss on derivative instrument (5.0) 1.2 Net settlement payment on derivative instrument 2.1 2.4 Distributions to noncontrolling interests — 0.4 Deferred income tax provision 18.4 3.4 Provision for bad debts 161.9 172.7 Temporarily and permanently restricted contributions (8.8) (10.6) Changes in operating assets and liabilities: Receivables (168.4) (173.8) Inventories and other assets (23.6) (18.0) Accounts payable and accrued expenses (53.9) (0.6) Amounts due to third-party payors (11.0) (3.7) Other liabilities 36.7 (34.6) Net cash provided by operations 167.7 156.4 Cash flows from investing activities: Proceeds from sales of investments and assets whose use is limited or restricted, net 23.5 43.7 Purchases of alternative investments (2.1) (47.6) Proceeds from sales of alternative investments 2.1 2.2 Net settlement payment on derivative instrument (2.1) (2.4) Purchases of property and equipment, and other (198.0) (202.6) Net cash used in investing activities (176.6) (206.7) Cash flows from financing activities: Repayments of long-term borrowings (29.5) (23.4) Payment of deferred issuance costs (0.1) — Temporarily and permanently restricted contributions 8.8 10.6 Distributions to noncontrolling interests — (0.4) Net cash used in financing activities (20.8) (13.2) Decrease in cash and cash equivalents (29.7) (63.5) Cash and cash equivalents at beginning of year 572.1 572.3 Cash and cash equivalents at end of period $ 542.4 $ 508.8 Supplemental disclosure of cash flow information: Cash paid for interest $ 48.9 $ 50.1 Noncash investing and financing activities: Noncash purchases of property, plant and equipment $ 4.2 $ 12.0

See accompanying notes to condensed consolidated financial statements. B-1-4

MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions)

(1) Organization and Summary of Significant Accounting Policies

The organizational structure and summary of significant accounting policies of MedStar Health, Inc. (MedStar or the Corporation) are presented in Appendix B of this Official Statement. The accompanying unaudited condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements of the Corporation. Eliminations and reporting adjustments have been made to present the information in accordance with U.S. generally accepted accounting principles. The data should be read in conjunction with the audited consolidated financial statements for the years ended June 30, 2016 and 2015 and related notes included in Appendix B. Information for the nine-month periods ended March 31, 2017 and 2016 is not based upon audited financial information but, in the opinion of management, is presented on a basis consistent with the audited consolidated financial statements in Appendix B, and includes adjustments consisting of normal recurring adjustments necessary for a fair presentation therein. Adjustments to these financial statements, while not expected by management, may occur as a result of the more comprehensive review undertaken as part of the audit process for the fiscal year ended June 30, 2017 and could result in adjustments which relate to prior quarters. The results of operations for the nine months ended March 31, 2017 are not necessarily indicative of the operating results to be expected for the entire year ending June 30, 2017. The condensed consolidated balance sheet at June 30, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all the information and notes required by U.S. generally accepted accounting principles for complete financial statements. (2) Debt The Corporation maintains a $250.0 revolving credit agreement provided by a group of banks and has a three-year term expiring in April 2019. The facility is evidenced by an obligation issued under the Master Trust Indenture. The outstanding balance on the facility was $129.8 at March 31, 2017 and June 30, 2016. The facility includes certain covenants, including a requirement to maintain Days Cash on Hand of 70 days, measured semi-annually at each June 30 and December 31, and a Debt Service Coverage ratio of 1.25, measured quarterly on a rolling four quarters basis. In addition, the Corporation is required to maintain a minimum credit rating of Baa2 from Moody’s Investor’s Service, and BBB from Standard & Poor’s and Fitch Ratings. In connection with the issuance of the District of Columbia 1998 Bonds, the Corporation entered into an interest rate swap with Wells Fargo Bank, National Association in a notional amount totaling $150.0 million (reduced to $84.8 at August 2016). The swap agreement expires in fiscal year 2027. Under the terms of the swap, the Corporation pays a fixed rate and receives a variable rate. Collateral is only required to be posted under the swap in the event that the Corporation’s credit ratings are downgraded by two rating agencies below the BBB – or Baa2 – level. To date, no collateral postings have been required. As of March 31, 2017 and June 30, the variable interest rate under these agreements was 0.64% and 0.30%, respectively. The fixed rate was 3.6875% as of March 31, 2017 and June 30, 2016. The variable rates are capped at 14.0%. The interest rate swap was secured by obligations issued under the Master Trust Indenture. B-1-5

MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions)

(3) Risks and Uncertainties The healthcare industry is subject to numerous laws and regulations from federal, state and local governments, and the government has increased enforcement of Medicare and Medicaid anti-fraud and abuse laws, as well as the physician self referral law (Stark Law). The Corporation’s compliance with these laws and regulations is subject to periodic governmental inquiries, and the Corporation has responded appropriately to any such inquiries. The Corporation is aware of certain asserted and unasserted legal claims by the government, and from time to time, the Corporation may agree to resolve certain legal claims asserted by the government. The Corporation will continue to monitor all government inquiries and respond appropriately. The final outcomes of these government investigations cannot be determined at this time.

Recent government initiatives have focused on curtailing fraud, waste, and abuse in government-funded healthcare programs. To this end, the federal government and many states, have implemented programs to audit and recover potential overpayments to providers from the Medicare and Medicaid programs. The Corporation’s hospitals and providers have periodically received audit requests from Medicare and Medicaid audit contractors, as well as the Office of Inspector General of the U.S. Department of Health & Human Services (OIG). These audit requests have targeted, among other things, medical necessity of inpatient admissions and provider documentation and coding practices. The Corporation’s hospitals and providers have cooperated with each of these audit requests and implemented a program to track and manage their effect.

As a result of federal healthcare reform legislation, rules and regulations, substantial changes are occurring in the United States healthcare system. These include numerous provisions affecting the delivery of healthcare services, the financing of healthcare costs, reimbursement to healthcare providers, the privacy and security of health information, and the legal obligations of health insurers, providers and employers.

The Corporation, in the normal course of business, is a party to a number of other legal and regulatory proceedings. In June 2008, the OIG served a subpoena requesting documents relating to MedStar Union Memorial Hospital’s (MUMH) business arrangements with a private cardiology group. The U.S. Attorney’s Office for the District of Maryland (USAO) subsequently indicated to MedStar that MUMH’s business arrangements with the cardiology group were under investigation for potential violations of laws and regulations governing Federal health care programs. After extensive periods of government inactivity, beginning in February 2016 the USAO issued civil investigative demands compelling production of additional documents and witness interviews. MedStar has cooperated with this investigation.

On April 26, 2016, the Corporation was notified of a whistleblower lawsuit filed in the U.S. District Court in Northern District of Illinois alleging False Claims Act violations against Accretive Health and MedStar. The unsealing of the complaint was the result of the federal government’s decision not to intervene in the lawsuit at the time, which decision permits the whistleblower to proceed with the lawsuit against the defendants. The System is defending against the lawsuit.

At the present time, management cannot conclude, based on the preliminary nature of these matters, how these matters will be resolved or whether such resolutions will have a material adverse financial impact on the System.

B-1-6

MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions)

In January 2014, the Centers for Medicare and Medicaid Services (CMS) approved Maryland’s waiver for a five-year period beginning January 1, 2014 for inpatient and outpatient hospital services. The waiver ties hospital per capita revenue growth to the state’s economic growth of 3.58% and will require growth in Medicare spending per beneficiary in Maryland to be 0.5% below the national average. CMS can require the State to submit a corrective action plan if targets for a given performance year are not met. The waiver also imposes quality measures and encourages population health management.

In connection with the waiver, the HSCRC introduced the Global Budget Revenue (GBR) model, which covers the Corporation’s seven Maryland hospitals. This model moves payment to hospitals from each individual service to a total revenue for each hospital (or a combination of hospitals) to provide hospitals flexibility in the objectives of better care for individuals, higher levels of overall population health, and improved health care affordability. The model removes the financial incentive from increasing volume and provides incentive to work with partners to provide care in the appropriate setting. Additionally, the GBR model has the potential of including both prospective and retrospective rate adjustments. Management believes the impact of such adjustments would not be material to the condensed consolidated financial statements. The GBR arrangement has been renewed for fiscal year 2017, although it can be terminated by either party with 180 days prior notice. The State of Maryland and CMS have started discussions on Phase 2 of the waiver that would go into effect January 1, 2018 that could add additional population health metrics to include total cost of care benchmarks and savings.

On January 1, 2016, MedStar Accountable Care, LLC (ACO) became active as a Medicare Shared Savings Program Track 3 ACO to improve the quality of care for Medicare Fee-For-Service (FFS) beneficiaries and reduce unnecessary costs. Under this three-year agreement with CMS, the ACO is eligible for annual bonus payments from CMS if it is able to achieve certain quality and savings benchmarks. Conversely, the ACO is at financial risk to the extent that costs exceed the CMS established benchmarks. The agreement includes a provision allowing cancellation with 60 days written notification. The ACO currently has approximately 47,000 attributed members tied to the Corporation’s primary care network.

(4) Agreements with Georgetown University (See Subsequent Events) In 2000, the Corporation and Georgetown University (the University) signed certain definitive agreements whereby the Corporation received substantially all of the assets owned by the University that constitutes the MedStar Georgetown University Hospital (MGUH), the Community Practice Network, the Faculty Practice Group and certain office buildings and a parking lot on the campus (collectively referred to as the Transferred Businesses). These agreements became effective July 1, 2000 and transferred control of the identified physical plant and other real property assets of the Transferred Businesses to the Corporation for use as an academic medical center for a minimum of ninety-eight years. At the end of the one hundred and fifty year lease term (including a fifty-two year renewal), the University shall convey all leased assets, excluding the underlying land, to the Corporation for a nominal amount and enter into a rent-free ground lease for the Corporation’s use. This transaction was accounted for under the purchase method of accounting effective July 1, 2000. Payments under the original purchase agreement expired in fiscal year 2016 when the Corporation paid $17.0 million and cumulative payments reached $70.0 million.

The Corporation also entered into an Academic Affiliation and Operations Agreement (Affiliation Agreement) with the University in 2000. Under this agreement, the University makes payments to the Corporation determined by multiplying the University School of Medicine’s total undergraduate tuition B-1-7

MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions)

revenue by 36% for providing teaching services. The Corporation recognized $9.6 and $9.5 million of tuition revenue during the nine-months ended March 31, 2017 and 2016, respectively. Also, in support of academic programs at the University, for each fiscal year following the termination of the additional payments terms in the asset purchase agreement described above, the Corporation agreed to pay to the University 17.5% of the operating EBITDA of certain entities of the Corporation in the Washington D.C. area in excess of $60.0 million, subject to certain adjustments. The Corporation has paid $20.4 million, cumulatively, to the University as of March 31, 2017.

MGUH and the University are parties to a fixed fee shared services agreement, under which the University provides the following services to MGUH: utilities, telephone/IT services, transportation services and library services. Expenses charged for all shared services were $9.5 and $12.4 million for the nine-months ended March 31, 2017 and 2016, respectively.

(5) Subsequent Events Management evaluated all events and transactions that occurred after March 31, 2017 and through June 9, 2017.

Agreements with Georgetown University In June 2017, the Corporation and the University entered into a refreshed and extended partnership agreement to expand the partnership across the system, provide enhanced clinical and academic alignment for the next 50 years, and support the construction of a new surgical pavilion at MGUH. As part of the new agreement, an Asset Purchase Agreement (“2017 APA”) between the Corporation and the University, which amended and extended several existing agreements, went into effect for the fiscal year ended June 30, 2017. Additionally, the Corporation signed a Conditional Pledge Agreement and amended the existing lease agreement to include an additional parcel of land for construction of the new surgical pavilion.

Depending on the Corporation’s operating performance, payments under these agreements are expected to total approximately $22.0 million per year for the first five years and $33.0 million per year in years 6-20. After 20 years, payments are expected to be comparable to years 6-20 after adjusting for inflation for the remaining term of the agreement. Over the past four years, annual payments to the University have averaged $19.0 million per year.

The following are components of the transaction included in the payments noted above:

• Under the terms of the 2017 APA, the Corporation acquired the right to use the University’s trade name and trademarks system-wide for a period of 50 years in connection with the following service lines: oncology, neurology, cardiac, rehabilitation, behavioral health/psychiatry, orthopedics, radiology and neurosurgery. In exchange for these rights, the Corporation will pay the University a total of $200.0 million, payable in equal installments over 20 years. As a result of this transaction, during the fourth quarter of fiscal year 2017, the Corporation anticipates recording an intangible asset of approximately $135.0 million in goodwill and other intangible assets, net and a corresponding liability for the same amount in other long-term liabilities. Amortization of the intangible asset will be recorded on a straight-line basis over the 50-year term.

B-1-8

MEDSTAR HEALTH, INC. Notes to Condensed Consolidated Financial Statements (Dollars in millions)

• Under an amendment to the existing agreement, the Affiliation Agreement term was extended through June 30, 2066 and the existing gain-sharing provision was eliminated effective for fiscal year 2017. Commencing after the close of the 6th year of the amended agreement, the Corporation shall pay the University an annual gain-sharing payment based on the Corporation’s audited consolidated Earnings from Operations margin for the prior fiscal year. No payment shall be required for a fiscal year if in the prior fiscal year the Corporation’s consolidated Earnings from Operations margin is less than 1.5%.

• To support the purpose and operations of the School of Medicine (SOM), including research, academics, and the training of medical students, MedStar also entered into a 50-year Conditional Pledge Agreement with the University. Beginning in fiscal year 2017, if the SOM meets certain annual conditions, MedStar will make an annual conditional contribution, which will be recorded in nonoperating gains/losses on the consolidated statements of operations and changes in net assets.

MedStar Family Choice MedStar Family Choice (MFC) has been operating in the District of Columbia’s Medicaid program under a contract that expires September 30, 2017. MFC was recently notified that it was not selected to continue to provide services under this program after the conclusion of its existing contract. Management continues to have discussions with the District government related to MFC’s participation in this program and a Resolution of Disapproval has been filed by certain city council members to trigger a 45-day review period. Additionally, MedStar has filed a formal protest of the proposed contract awards with the District’s Contract Appeals Board. In the event these efforts are not successful and the contract is not renewed, MedStar expects to continue to provide medical care at our facilities for many of these Medicaid participants.

B-1-9

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APPENDIX C

SUMMARIES OF PRINCIPAL LEGAL DOCUMENTS

TABLE OF CONTENTS

PAGE PAGE

EVENTS OF DEFAULT ...... 47 DEFINITIONS OF CERTAIN TERMS USED IN THE ACCELERATION ...... 49 BOND INDENTURE AND LOAN AGREEMENT ...... 1 REMEDIES; RIGHTS OF OBLIGATION HOLDERS ...... 49 DIRECTION OF PROCEEDINGS BY HOLDERS ...... 50 SUMMARY OF CERTAIN PROVISIONS OF THE APPLICATION OF MONEYS ...... 51 BOND INDENTURE ...... 4 RIGHTS AND REMEDIES OF OBLIGATION HOLDERS ...... 52 CREATION OF FUNDS TO BE HELD FOR BONDS ...... 4 TERMINATION OF PROCEEDINGS ...... 53 DEPOSIT OF REVENUES ...... 4 WAIVER OF EVENTS OF DEFAULT ...... 53 DEBT SERVICE FUND ...... 5 SUCCESSOR MASTER TRUSTEE ...... 54 REDEMPTION FUND ...... 5 CORPORATE MASTER TRUSTEE REQUIRED; ELIGIBILITY 5 4 INVESTMENT OF MONEYS ...... 5 RESIGNATION BY THE MASTER TRUSTEE ...... 54 REBATE FUND ...... 6 REMOVAL OF THE MASTER TRUSTEE ...... 55 AMENDMENTS OR MODIFICATIONS OF BOND INDENTURE APPOINTMENT OF SUCCESSOR MASTER TRUSTEE BY AND LOAN AGREEMENT ...... 6 THE OBLIGATION HOLDERS; TEMPORARY MASTER ENFORCEMENT OF LOAN AGREEMENT AND NOTE ...... 7 TRUSTEE...... 55 EVENTS OF DEFAULT AND REMEDIES ...... 7 SUPPLEMENTAL MASTER INDENTURES NOT REQUIRING SPECIAL RECORD DATES ...... 10 CONSENT OF OBLIGATION HOLDERS ...... 55 DEFEASANCE ...... 10 SUPPLEMENTAL MASTER INDENTURES REQUIRING AUTHORITY PROTECTED IN ACTING IN GOOD FAITH ...... 11 CONSENT OF OBLIGATION HOLDERS ...... 57 CONCERNING THE BOND TRUSTEE ...... 12 OBLIGATION AND DOCUMENT SUBSTITUTION ...... 58 DEFEASANCE ...... 60 SUMMARY OF CERTAIN PROVISIONS OF THE PROVISION FOR PAYMENT OF A PARTICULAR SERIES OF LOAN AGREEMENT ...... 13 OBLIGATIONS OR PORTION THEREOF ...... 61 SATISFACTION OF RELATED BONDS ...... 62 LOAN PAYMENTS ...... 13 FEDERAL TAX EXEMPTIONS ...... 14 SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE ...... 14 GUARANTY AGREEMENT ...... 62 EVENTS OF DEFAULT ...... 14 GUARANTY ...... 62 SUMMARY OF CERTAIN PROVISIONS OF THE COVENANTS OF GUARANTORS ...... 63 MASTER INDENTURE ...... 15 EVENTS OF DEFAULT ...... 63 REMEDIES ...... 64 DEFINITIONS ...... 15 TERMINATION OF GUARANTY AGREEMENT ...... 65 SERIES, DESIGNATION AND AMOUNT OF OBLIGATIONS .. 31 PAYMENT OF OBLIGATIONS ...... 31 SUMMARY OF CERTAIN PROVISIONS OF THE SECURITY FOR OBLIGATIONS ...... 32 DEEDS OF TRUST ...... 65 SUBSTITUTE OBLIGATIONS UPON WITHDRAWAL OF A MEMBER ...... 33 GRANT OF PROPERTY ...... 65 APPOINTMENT OF OBLIGATED GROUP AGENT ...... 33 COVENANTS AND AGREEMENTS RELATING TO THE PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, RELEASE OF PROPERTY AND SUBORDINATION AND INTEREST; SYSTEM AFFILIATES ...... 33 OF LIENS ...... 67 PERFORMANCE OF COVENANTS ...... 34 EVENTS OF DEFAULT; REMEDIES ...... 68 ENTRANCE INTO THE OBLIGATED GROUP ...... 35 CESSATION OF STATUS AS A MEMBER OF THE OBLIGATED GROUP ...... 36 GENERAL COVENANTS; RIGHT OF CONTEST ...... 37 INSURANCE ...... 38 DEBT SERVICE COVERAGE RATIO ...... 39 MERGER, CONSOLIDATION, SALE OR CONVEYANCE ...... 40 FINANCIAL STATEMENTS...... 42 INDEBTEDNESS ...... 4 4 PARTIES TO GUARANTY AGREEMENT ...... 45 SALE, LEASE OR OTHER DISPOSITION OF PROPERTY ...... 45 LIENS ON PROPERTY ...... 46 PLEDGE OF REVENUES OF CORPORATION ...... 47 RIGHT TO CONSENT ...... 47

- i -

DEFINITIONS OF CERTAIN TERMS USED IN THE BOND INDENTURE AND LOAN AGREEMENT

In addition to terms defined elsewhere in this Official Statement, the following are definitions of certain terms used in this Official Statement. Terms used but not defined herein shall have the meanings set forth in the Bond Indenture and the Loan Agreement.

“Administrative Expenditures” means any expenditures of the Authority for insurance, fees and expenses of auditing, fees and expenses of the Bond Trustee (whether as Bond Trustee, paying agent or Registrar for the Bonds) and all other expenditures reasonably and necessarily incurred by the Authority by reason of the issuance of any Bonds, including (without limitation) legal, financing and administrative expenses and expenses incurred by the Authority or the Bond Trustee to compel full and punctual performance of the provisions of the Loan Agreement and the Note in accordance with the terms thereof.

“Agency Obligations” means direct obligations (including bonds, notes or participation certificates) of, or obligations the timely payment of the principal of and the interest on which are unconditionally guaranteed by, any agency or instrumentality of the United States of America.

“Annual Administrative Fee” means the annual fee for the general administrative services of the Authority in such amount per year not exceeding an amount equal to one-tenth of one percent (1/10%) of the aggregate principal amount of Bonds issued under the Bond Indenture as shall be prescribed by the Authority from time to time.

“Bond Counsel” means a law firm, appointed by the Authority, having a national reputation in the field of municipal law, whose legal opinions are generally accepted by purchasers of municipal bonds. The firm of McKennon Shelton & Henn LLP is recognized as constituting Bond Counsel, subject to further action by the Authority.

“Business Day” means a day other than (i) a Saturday, Sunday or legal holiday in the State of Maryland observed as such by the Authority, (ii) a day on which banking institutions in the state in which the Designated Office of the Bond Trustee is located or the state in which the principal office of the Obligated Group Agent (as defined in the Master Indenture) is located are authorized by law to close or (iii) a day on which the New York Stock Exchange is closed.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor federal income tax statute or code, and the applicable regulations thereunder.

“Favorable Opinion of Bond Counsel” means, when used with respect to or in connection with any action, a written opinion of Bond Counsel to the effect that such action will not adversely affect the excludability from gross income of interest paid on any Bond for federal income tax purposes.

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“Government Obligations” means direct obligations of, or obligations the timely payment of the principal of and the interest on which are unconditionally guaranteed by, the United States of America.

“Investment Obligations” means:

(a) Government Obligations;

(b) Agency Obligations;

(c) negotiable or nonnegotiable certificates of deposit issued by commercial banks, trust companies or savings and loan associations (including the Bond Trustee) and continuously secured (to the extent not fully insured by the Federal Deposit Insurance Corporation), for the benefit of the Authority and the Bond Trustee, either (i) by lodging with a bank or trust company, acting as agent for the Bond Trustee or the Authority, as the case may be, as collateral security, Government Obligations or Agency Obligations or, with the approval of the Authority, other marketable securities eligible as security for the deposit of trust funds under applicable regulations of the Comptroller of the Currency of the United States of America or applicable state law or regulations, having a market value not less than the amount of such deposit, or (ii) if the furnishing of security as provided in clause (i) of this paragraph is not permitted by applicable law, in such other manner as may then be required or permitted by applicable state or federal laws and regulations regarding the security for, or granting a preference in the case of, the deposit of trust funds;

(d) repurchase agreements for Government Obligations or Agency Obligations or investment agreements which are, or are issued or guaranteed by an entity, rated by a Rating Agency in at least its second highest rating category (each, a “Qualified Investment Agreement”) or fully collateralized by Government Obligations or Agency Obligations (any such collateralized investment agreement being referred to herein as a “Collateralized Investment Agreement”); provided that (i) such Government Obligations or Agency Obligations shall be (A) if issued in certificated form, delivered to the Bond Trustee or supported by a safekeeping receipt issued by a depository satisfactory to the Authority or (B) if issued in book- entry form, supported by a receipt or other confirmatory documentation satisfactory to the Authority; (ii) the Bond Trustee or the Authority (as the case may be) shall have a perfected security interest in such Government Obligations or Agency Obligations; (iii) such Government Obligations or Agency Obligations shall be free and clear of any other liens or encumbrances; and (iv) such repurchase agreements or Collateralized Investment Agreements shall provide that the value of the underlying Government Obligations or Agency Obligations shall be continuously maintained at a current market value of not less than 102% of the repurchase price or the amount deposited thereunder, as the case may be (the value of such Government Obligations or Agency Obligations to be determined by the Bond Trustee at least once in each 30-day period);

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(e) general obligations issued by or on behalf of any state of the United States of America;

(f) obligations of any state of the United States of America or any political subdivision thereof for the payment of the principal or redemption price of and interest on which there shall have been irrevocably deposited Government Obligations maturing as to principal and interest at times and in amounts sufficient to provide such payment;

(g) commercial paper or finance company paper; and

(h) any mutual fund, money market fund or short term investment fund, the portfolio of which is limited to obligations described in clauses (a) through (g) above (including, without limitation, any proprietary mutual fund, money market fund or short term investment fund maintained by the Bond Trustee and for which the Bond Trustee or an affiliate is investment advisor, or provides other services, and receives reasonable compensation for such services);

provided, that the issuer of each obligation described in clause (c) above and each obligation described in clause (e) above shall be rated by Moody’s Investors Service, Inc. (“Moody’s”) and S&P Global Ratings (“S&P”) in one of its three highest rating categories and each obligation described in clause (g) above shall be rated by Moody’s and S&P in its highest rating category.

“Note” means MedStar Obligation No. 48 issued by the Corporation to secure the obligations of the Corporation under the Loan Agreement.

“Operating Assets” means any land, building, machinery, equipment, hardware, inventory or other property or any interest therein (except cash, investment securities and other property held for investment purposes) of the Corporation or any Member of the Obligated Group or System Affiliate used in its trade or business.

“Outstanding,” when used with reference to Bonds, means as of any particular date, all Bonds authenticated and delivered under the Bond Indenture except (i) any Bond cancelled by the Bond Trustee (or delivered to the Bond Trustee for cancellation) at or before such date, (ii) any Bond for the payment of the principal or Redemption Price of and interest on which provision shall have been made as provided in the Bond Indenture and (iii) any Bond in lieu of or in substitution for which a new Bond shall have been authenticated and delivered pursuant to the Bond Indenture.

“Rating Agency” means Fitch Ratings, Moody’s Investors Service, Inc., S&P Global Ratings, or any other securities rating agency that, at the request of the Authority, shall have assigned a rating that is in effect with respect to any Bonds, and their successors and assigns, and “Rating Agencies” means each such Rating Agency, collectively.

For the definition of “Revenues,” see “Security and Sources of Payment for the Bonds -- Pledge of Revenues.”

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“Redemption Price” means, when used with respect to any Bond or portion thereof, the principal amount of such Bond or such portion thereof plus the applicable premium, if any, payable upon redemption thereof pursuant to the Bond Indenture.

“Sinking Fund Installment” means the amount of money provided in the Bond Indenture to redeem or pay at maturity the Term Bonds at the times and in the amounts provided in the Bond Indenture, less the amount of any credit against such amount arising from the purchase or redemption of the Term Bonds in any prior Fiscal Year as provided in the Bond Indenture.

SUMMARY OF CERTAIN PROVISIONS OF THE BOND INDENTURE

The following is a summary of certain provisions of the Bond Indenture. It is not a complete recital of the terms of the Bond Indenture, and reference should be made to the Bond Indenture for a complete statement of its terms. Words and terms used in this summary shall have the same meanings as in the Bond Indenture, except where otherwise noted.

Creation of Funds to be Held for Bonds (Section 4.01)

The following funds and separate accounts within funds are created by the Bond Indenture for the benefit of the holders of all Bonds Outstanding under the Bond Indenture: Construction Fund (Capitalized Interest Account and Costs of Issuance Account); Debt Service Fund (Interest Account and Principal Account); Redemption Fund; and Rebate Fund. The Construction Fund, the Debt Service Fund, the Redemption Fund and the Rebate Fund shall be held by the Bond Trustee.

Deposit of Revenues (Section 4.02)

Except as otherwise expressly provided in the Bond Indenture, the Bond Trustee shall deposit Revenues upon receipt thereof as follows and in the following order of priority:

FIRST: to the Interest Account, the amount, if any, necessary to make the amount on deposit in the Interest Account equal to the accrued and unpaid interest on the Outstanding Bonds on the immediately succeeding interest payment date;

SECOND: to the Principal Account, the amount required to make the amount on deposit in the Principal Account equal to the principal amount and the Sinking Fund Installment for such Bonds, if any, due on the Outstanding Bonds on the immediately succeeding May 15; and

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THIRD: to the Authority, the Annual Administrative Fee and the accrued and unpaid Administrative Expenditures, as and when the same shall become due and payable.

Debt Service Fund (Section 4.05)

The Bond Trustee shall pay from the Interest Account the interest due on the Outstanding Bonds on each interest payment date and any amounts required for the payment of accrued interest upon any redemption of Outstanding Bonds.

The Bond Trustee shall on each May 15 pay from the Principal Account the principal amount due and Sinking Fund Installment, if any, on the Outstanding Bonds, upon presentation and surrender of the requisite Bonds. The Bond Trustee shall take all action necessary to effect the timely redemption of Outstanding Term Bonds from the Principal Account in accordance with the Sinking Fund Installments as described under “The Bonds -- Redemption Provisions -- Sinking Fund Redemption.”

Redemption Fund (Section 4.06)

Upon the Request of the Corporation, the Authority may set aside any available amount on deposit in the Redemption Fund for the redemption of particular Bonds by the delivery of irrevocable written instructions to the Bond Trustee directing the Bond Trustee to set aside such amount for such purpose. Amounts set aside for the redemption of Bonds and investment earnings on such amounts shall be applied to the payment of the interest due on such Bonds on or prior to the redemption date of such Bonds to the extent provided in such instructions.

Available moneys in the Redemption Fund shall be applied by the Bond Trustee to the purchase or redemption of Bonds of such maturities as the Authority, upon the Request of the Corporation, shall direct.

Investment of Moneys (Section 4.07)

Moneys in the Interest Account, the Principal Account and the Redemption Fund established pursuant to the Bond Indenture that are held by the Bond Trustee shall be invested by the Bond Trustee as directed in writing by the Authority only in Investment Obligations maturing in such amounts and on such dates as may be necessary to provide moneys to meet the payments from such funds and accounts.

Subject to certain provisions of the Bond Indenture, interest earned, profits realized and losses suffered by reason of any investment of any of the funds and accounts created by the Bond Indenture shall be credited or charged to the fund or account for which such investment shall have been made. Upon the Request of the Corporation, interest earned from the investment of

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all or any portion of any money in the Redemption Fund shall be paid from the Redemption Fund to the Interest Account during any period set forth in such request.

Investments shall be valued at current market value.

Neither the Bond Trustee nor the Authority shall be liable for any depreciation in the value of any obligation in which moneys of the funds or accounts created by the Bond Indenture shall be invested, or for any loss arising from any permitted investment.

Rebate Fund (Section 4.09)

Upon the direction of the Authority, the Bond Trustee shall transfer amounts on deposit in any fund or account created by the Bond Indenture to the Rebate Fund, any other provision of the Bond Indenture to the contrary notwithstanding. Amounts on deposit in the Rebate Fund from time to time required to be paid to the United States of America pursuant to Section 148 of the Code as a rebate or payment in lieu thereof shall be made available by the Bond Trustee to the Authority for such payments upon the written direction of an Authorized Officer of the Authority and shall not be pledged to the payment of the principal or Redemption Price of or interest on any Bonds.

Amendments or Modifications of Bond Indenture and Loan Agreement (Sections 8.01, 8.02 and 8.04)

Without notice to or the consent of the holders of the Bonds, the Authority and the Bond Trustee may from time to time enter into a Supplemental Bond Indenture supplementing, modifying or amending the Bond Indenture or any Supplemental Bond Indenture for the following purposes, among others: (i) to grant to or confer upon the Bond Trustee for the benefit of the holders of the Bonds any additional rights, remedies, powers, authority or security; (ii) to add to the covenants and agreements of the Authority contained in the Bond Indenture; (iii) to surrender any right, power or privilege reserved to or conferred upon the Authority by the Bond Indenture; (iv) to confirm any pledge of the Revenues; (v) to cure any ambiguity or to cure or correct any defect or inconsistent provisions in the Bond Indenture or to make such provisions in regard to matters or questions arising under the Bond Indenture as may be necessary or desirable and not contrary to or inconsistent with the Bond Indenture; (vi) to permit the qualification of the Bond Indenture or any Supplemental Bond Indenture under any federal statute or state blue sky law; (vii) to obtain or maintain ratings on the Bonds; (viii) to preserve the excludability from gross income for federal income tax purposes of the interest paid on the Bonds theretofore issued; and (ix) to make any other change in the Bond Indenture that shall not prejudice in any material respect the rights of the holders of the Bonds Outstanding at the date as of which such change shall become effective.

With the prior written consent of the holders of a majority of the Outstanding Bonds, a Supplemental Bond Indenture may be adopted modifying any of the provisions of the Bond Indenture, any Supplemental Bond Indenture or any Bond, but no such modification may (i)

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change any terms of redemption of any Bond or the due date for the payment of principal of or interest on any Bond or make any reduction in the principal, Redemption Price or interest rate on any Bond without the consent of the Holders thereof or (ii) except as expressly permitted by the Bond Indenture, create a claim or lien upon, or a pledge of, the Revenues ranking prior to or on a parity with the claim, lien and pledge created by the Bond Indenture or a reduction in the percentage of Bonds the consent of the Holders of which is required for any modification of the Bond Indenture except with the unanimous consent of the Holders of all Outstanding Bonds.

Without notice to or the consent of the holders of Outstanding Bonds, the Authority may at any time and from time to time enter into any amendment of the Loan Agreement that is (i) required or permitted by the provisions of the Loan Agreement, or (ii) required to cure any ambiguity or formal defect or omission therein, or (iii) permitted pursuant to the provisions of the Bond Indenture with respect to amendments to the Project, or (iv) required to obtain or maintain any ratings on Bonds from any nationally recognized securities rating agency, or (v) not prejudicial in any material respect to the rights of the holders of Outstanding Bonds. Otherwise, the Authority shall not enter into any amendment, change or modification of the Loan Agreement without the prior written consent of the holders of a majority of the Outstanding Bonds at the effective date of such amendment, change or modification.

Enforcement of Loan Agreement and Note (Section 5.03)

The Authority shall be deemed to be the holder of the Note for all purposes of the Master Indenture and the Bond Indenture. The Authority shall take reasonable action to cause the Corporation to perform fully all duties and acts and comply fully with the covenants of the Corporation contained in the Loan Agreement and the Note.

The holders of a majority of the Outstanding Bonds shall have the right, by an instrument in writing executed and delivered to the Authority, to direct the method and place of conducting all remedial proceedings to be taken by the Authority under the Loan Agreement, provided that such direction shall not be otherwise than in accordance with law or the provisions of the Loan Agreement and shall not be unjustly prejudicial to holders of Bonds not parties to such direction.

Notwithstanding the pledge and assignment made by the Bond Indenture, prior to the occurrence of an Event of Default, the Bond Trustee shall not be entitled to exercise or enforce, or to seek to exercise or enforce, any of the right, title or interest of the Authority, in, to or under the Loan Agreement or the Note.

Events of Default and Remedies

Events of Default (Section 7.01)

Each of the following events constitutes an event of default under the Bond Indenture: (a) payment of the principal of any Bond shall not be made when the same shall become due and payable, either at maturity or by proceedings for redemption or otherwise; or (b) payment of

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interest on any Bond shall not be made when the same shall become due and payable; or (c) the Authority shall default in the due and punctual performance of any of the covenants, conditions, agreements and provisions contained in any Bond or in the Bond Indenture on the part of the Authority to be performed, which default shall continue for 30 days after Notice specifying such default and requiring the same to be remedied shall have been given to the Authority by the Bond Trustee, which may give such notice in its discretion and shall give such notice at the Request of not less than five percent of the holders of the Bonds.

Remedies (Sections 7.02 and 7.03)

Upon the happening and continuance of any Event of Default under the Bond Indenture, the Bond Trustee may, and upon the written request of the holders of not less than 25% in aggregate principal amount of the Outstanding Bonds shall declare the principal of all of the Outstanding Bonds to be due and payable. The Bond Trustee also shall declare the principal of all Outstanding Bonds due and payable upon the written direction of the Authority following the occurrence of any Event of Default under the Loan Agreement. At the expiration of 30 days from the giving of notice of such declaration, such principal shall become and be immediately due and payable anything in the Bonds or in the Bond Indenture to the contrary notwithstanding. The Bond Trustee may annul such declaration under certain circumstances set forth in the Bond Indenture.

Upon the happening and continuance of any Event of Default, the Bond Trustee may proceed, and upon the written request of the holders of not less than 25% of the Outstanding Bonds shall proceed to protect and enforce its rights and the rights of the holders of Bonds under the laws of the State of Maryland and under the Bond Indenture.

By the terms of the Bond Indenture, the Corporation is not prohibited from taking any action, to the extent permitted by applicable law, to remedy any Event of Default.

Priority of Payments Following Default (Section 7.04)

If at any time there shall have occurred and be continuing an Event of Default, amounts held by the Bond Trustee under the Bond Indenture together with any moneys thereafter becoming available for such purpose (after payment of all amounts owing to the Bond Trustee under the Bond Indenture) shall be paid to the persons entitled thereto as provided in the following paragraphs (a) and (b):

(a) unless the principal of all Outstanding Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied:

FIRST: to the payment to the persons entitled thereto of all installments of interest then due on the Bonds Outstanding, in the order in which such installments became due and payable and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment of such installment, ratably, according to the amounts due on such installment, to the

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persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in such Bonds; and

SECOND: to the payment to the persons entitled thereto of the unpaid principal of any Outstanding Bonds that shall have become due and payable, in the order of the due dates of such Bonds, with interest upon the principal amount of such Bonds from the respective dates upon which they shall have become due and payable and, if the amount available shall not be sufficient to pay in full the principal of such Bonds due and payable on any particular date, together with such interest, then first to the payment of such interest, ratably, according to the amount of interest due on such date, and then to the payment of such principal, ratably, according to the amount of principal due on such date, to the persons entitled thereto, without any discrimination or preference, except as to any difference in the respective rates of interest specified in such Bonds.

(b) if the principal of all Outstanding Bonds shall have become due by their terms or the principal of all Outstanding Bonds subject to acceleration shall have become due and payable by a declaration of acceleration, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon such Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in such Bonds.

Majority of the Holders May Control Proceedings (Section 7.06)

The holders of a majority of the Bonds shall have the right, by an instrument in writing executed and delivered to the Bond Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Bond Trustee under the Bond Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Bond Indenture, that the Bond Trustee is indemnified to its satisfaction against costs related to such proceedings and that the Bond Trustee shall have the right to decline to follow any such direction which in the opinion of the Bond Trustee would be unjustly prejudicial to holders of the Bonds not parties to such direction.

Restrictions Upon Action by Individual Holders (Section 7.07)

No holder of any Bonds shall have any right to institute any suit, action or other proceeding in equity or at law on any Bonds for the execution of any trust under the Bond Indenture or for any other remedy under the Bond Indenture unless (i) such Holder previously shall have given to the Bond Trustee written notice of the Event of Default on account of which such proceeding is to be instituted, and (ii) the holders of not less than 25% of the Outstanding Bonds shall have made request to the Bond Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and shall have afforded the Bond Trustee a reasonable opportunity either to proceed to exercise the powers granted by the Bond Indenture

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or to institute such proceeding in its or their name, and (iii) there shall have been offered to the Bond Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby and the Bond Trustee shall have refused or neglected to comply with such request within a reasonable time; provided, however, that the Holders of not less than 25% of the Outstanding Bonds may institute any such proceeding in their own names for the benefit of all holders of Outstanding Bonds.

Special Record Dates (Section 2.02)

If there is a default in the payment of the interest due on the Bonds on any interest payment date, such defaulted interest shall be paid on a subsequent date established by the Bond Trustee to the persons in whose names such Bonds are registered as of the close of business on a special record date established by the Bond Trustee, which will be at least 10 and not more than 15 days before the date set for payment of the defaulted interest. Notice of such special record date will be mailed first class, postage prepaid, not fewer than 10 days before such special record date, to the registered owners of such Bonds.

Defeasance (Section 9.01)

If the Authority shall pay or cause to be paid the principal or Redemption Price of and interest on all Bonds at the times and in the manner stipulated therein and in the Bond Indenture, all amounts owed and to be owed to the Bond Trustee hereunder shall have been paid or provided for to the satisfaction of the Bond Trustee, then the pledge of any Revenues and other property pledged by the Bond Indenture to the Bonds and all other rights granted by the Bond Indenture to the Bonds shall be discharged and satisfied. In such event, upon the request of the Authority, the Bond Trustee shall execute and deliver to the Authority all such instruments as may be desirable to evidence such discharge and satisfaction, and the Bond Trustee shall pay or deliver to the Authority, or to such officer, board or body as may then be entitled by law to receive the same, all property held by it pursuant to the Bond Indenture (other than any moneys and securities required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption).

A Bond shall be deemed to have been paid within the meaning of and with the effect expressed in the Bond Indenture if (i) money for the payment or redemption of such Bond shall be held by the Bond Trustee (through deposit by the Authority of moneys for such payment or redemption or otherwise, regardless of the source of such moneys), whether at or prior to the maturity or the redemption date of such Bond, or (ii) if the maturity or redemption date of such Bond shall not have arrived, provision shall have been made by the Authority by deposit of moneys with the Bond Trustee or other method satisfactory to the Bond Trustee of noncallable Defeasance Obligations (as defined herein), the principal of and the interest on which when due will provide sufficient moneys for such payments and the Authority shall have made provision, satisfactory to the Bond Trustee, for the mailing of notice to the holder of such Bond of a notice that such moneys are so available for such payment; provided that if such Bond is to be

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redeemed prior to the maturity thereof, the Authority shall have taken all action necessary to redeem such Bond and notice of such redemption shall have been duly given or provisions satisfactory to the Bond Trustee shall have been made for the giving of such notice.

As used herein, “Defeasance Obligations” includes any of the following securities, if and to the extent the same are at the time legal for investment:

(i) Government Obligations;

(ii) Direct obligations of, or obligations the timely payment of the principal of and interest on which are unconditionally guaranteed by, any agency or instrumentality of the United States of America, including (without limitation) obligations of the Farmers Home Administration, the Federal Farm Credit Banks, the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Student Loan Marketing Association;

(iii) Certificates of deposit of, banker’s acceptances drawn on and accepted by, and interest bearing deposit accounts of a bank or trust company which has a combined capital and surplus of not less than $50,000,000 which, to the extent not insured by the Federal Deposit Insurance Corporation, shall be secured, pursuant to arrangements satisfactory to the Authority by securities described above;

(iv) Debt obligations, the income from which is exempt from federal income taxation under Section 103 of the Code, or the National Housing Act of 1939, as amended, rated by a Rating Agency in its highest rating category; and

(v) Certificates evidencing an ownership interest in obligations described in (i) and (ii) above.

Anything in the Bond Indenture to the contrary notwithstanding, at the Request of the Authority, any moneys held by the Bond Trustee in trust for the payment of any of the Bonds which remain unclaimed for three years after the later of the date at which such Bonds became due and payable and the date of deposit of such moneys, shall be repaid by the Bond Trustee to the Authority or to such officer, board or body as may then be entitled by law to receive such moneys, as its absolute property and free from trust, and the Bond Trustee shall thereupon be released and discharged with respect thereto.

Authority Protected in Acting in Good Faith (Section 10.06)

In the exercise of the powers of the Authority and its members, officers, employees and agents under the Bond Indenture or the Loan Agreement including (without limitation) the application of moneys, the investment of funds and the pursuit of or failure to pursue any remedy in the event of default by the Corporation, the Authority and its members, officers, employees and agents shall not be accountable to the Corporation, the Bond Trustee or any holder of any Bonds for any action taken or omitted by it or its members, officers, employees and agents in

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good faith and believed in good faith by it or them to be authorized or within the discretion or rights or powers conferred by the Bond Indenture or the Loan Agreement.

No recourse shall be had by the Corporation, the Bond Trustee or any holder of any Bonds for any claims based on the Bond Indenture, the Loan Agreement or on any Bond, against any member, officer, employee or agent of the Authority alleging personal liability on the part of such person unless such claims are based upon the bad faith, fraud or deceit of such person.

Concerning the Bond Trustee

Responsibilities of the Bond Trustee; Indemnification (Sections 6.02 and 6.03)

Except as otherwise expressly provided in the Bond Indenture, the Bond Trustee shall have no responsibility or duty with respect to: (i) the issuance of the Bonds for value; (ii) the application of the proceeds thereof, except to the extent that such proceeds are received by it in its capacity as Bond Trustee; or (iii) the application of any moneys paid to the Authority or others in accordance with the Bond Indenture except as to the application of any moneys paid to it in its capacity as Bond Trustee. The duties of the Bond Trustee shall be determined by the express provisions of the Bond Indenture, and the Bond Trustee shall not be liable except for the performance of such duties as are specifically set forth in the Bond Indenture and no implied covenants or obligations shall be read into the Bond Indenture against the Bond Trustee. The Bond Trustee shall not be liable for any action taken or omitted by it in the performance of its duties under the Bond Indenture except for its own negligence or willful default.

The Bond Trustee shall be under no obligation to institute suit, to undertake any proceeding under the Bond Indenture or to take any steps in the execution of the trusts created thereby or in the enforcement of any rights and powers thereunder until it shall be indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements, and against all liability except as a consequence of its own negligence or willful default. Nevertheless, the Bond Trustee may take such action without indemnity, and in such case the Authority shall reimburse the Bond Trustee from the Revenues for all costs and expenses properly incurred in connection therewith. If the Authority shall fail to make such reimbursement, the Bond Trustee may reimburse itself from any moneys in its possession under the provisions of the Bond Indenture and shall be entitled to a preference therefor over any Bonds Outstanding under the Bond Indenture.

Resignation and Removal (Sections 6.08 and 6.09)

The Bond Trustee may resign and be discharged by giving not fewer than 30 days’ Notice, specifying the date when such resignation shall take effect, to the Authority and each holder of any Outstanding Bonds. Such resignation shall take effect upon the appointment of a successor by the Authority or the holders of Bonds as provided in the Bond Indenture and acceptance of such appointment by such successor. The Bond Trustee may be removed at any time by the holders of a majority of the Outstanding Bonds, or so long as no Event of Default shall have occurred and be continuing, by the Authority. The Bond Trustee may also be

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removed for any breach of trust or for acting, or for failing to act, or proceeding in violation of any provision of the Bond Indenture, by any court upon the application of the Authority or of the holders of not less than ten percent of the Bonds. No removal of the Bond Trustee shall be effective until a successor Bond Trustee shall have been appointed.

Successor Bond Trustee (Section 6.10)

If the Bond Trustee shall resign, be removed, be dissolved or become incapable of acting, or shall be adjudged as bankrupt or insolvent, or if a receiver, liquidator or conservator shall be appointed for the Bond Trustee’s property, or if any public officer shall take charge or control of the Bond Trustee or of its property or affairs, the position of the Bond Trustee shall become vacant and a successor Bond Trustee shall be appointed by the Authority. Notwithstanding the foregoing, if the position of Bond Trustee shall become vacant during any period in which an Event of Default shall have occurred and be continuing, then a successor Bond Trustee may be appointed within one year after any such vacancy shall have occurred by the holders of a majority of the Outstanding Bonds. If no appointment of a successor Bond Trustee is made within 45 days after the giving of notice of resignation by any Bond Trustee, or after the occurrence of any other event requiring or authorizing such appointment, the Bond Trustee or any holder of Bonds may apply to any court of competent jurisdiction for the appointment of such a successor. Any successor Bond Trustee shall be a commercial bank or trust company or national banking association (i) having a capital and surplus aggregating at least $50,000,000, if there be such a commercial bank or trust company or national banking association willing and able to accept the appointment on reasonable and customary terms, and (ii) authorized by law to perform all the duties of the Bond Trustee required by the Bond Indenture.

SUMMARY OF CERTAIN PROVISIONS OF THE LOAN AGREEMENT

The following is a summary of certain provisions of the Loan Agreement. This is not a complete recital of the terms of the Loan Agreement and reference should be made to it for its complete terms. Words and terms used in this summary shall have the same meaning as in the Loan Agreement, except where otherwise noted.

Loan Payments (Sections 3.02 and 3.03)

The Corporation shall pay or cause to be paid to the Bond Trustee, as and when the same shall become due and payable in accordance with the terms of the Bonds, the Bond Indenture and the Loan Agreement, an amount equal to the sum of (i) the total interest becoming due on all Bonds to the respective dates of payment thereof; (ii) the total principal amount of the Bonds; and (iii) all redemption premiums, if any, payable on the redemption of Bonds prior to stated maturity dates, in each case less any amount available for such payments from the funds and accounts established in the Bond Indenture. In addition, the Corporation shall pay to the Authority the Annual Administrative Fees and the Administrative Expenditures upon certification of such amounts by the Authority to the Corporation in writing.

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The Loan Agreement is a general obligation of the Corporation, and the full faith and credit of the Corporation is pledged to the payments required thereunder.

Federal Tax Exemptions (Section 5.01)

The Corporation covenants that (i) it shall take any and all action necessary to maintain the excludability from gross income for federal income tax purposes of the interest on the Bonds and (ii) it shall not perform any act or enter into any agreement, or use or permit the use of any property financed or refinanced with proceeds of the Bonds or any portion thereof in a manner that shall have the effect of terminating the exclusion from gross income for federal income tax purposes of interest on the Bonds, including (without limitation) leasing or selling all or any portion of such property, contracting with a third party for the use or operation of all or any portion of such property or entering into any merger, consolidation or corporate reorganization if entering into such lease, contract, merger, consolidation or corporate reorganization would have such effect.

Master Indenture (Section 5.04)

The Corporation covenants and agrees that it shall comply, and shall cause the System Affiliates (as defined in the Master Indenture) to comply (subject to contractual and organizational limitations, as the case may be), with the provisions of the Master Indenture and the Guaranty Agreement. The Master Indenture can be amended in accordance with its terms, as described below under “Summary of Certain Provisions of the Master Indenture.” The Master Indenture shall not be replaced or substituted in its entirety so long as the Bonds remain Outstanding, and the Corporation agrees that any purported substitution in its entirety shall be of no force or effect unless the consent of the majority in the aggregate principal amount of the holders of Outstanding Bonds has been secured.

Events of Default (Section 6.01)

“Events of Default” under the Loan Agreement include, among others: failure by the Corporation to pay when due amounts sufficient to pay the principal or Redemption Price of or interest on any Bonds and the Note; failure by the Corporation to pay when due any other payment required to be made under the Loan Agreement, which failure shall continue for a period of 60 days after Notice thereof is given to the Corporation by the Authority; failure by the Corporation to comply with any other of the terms of the Loan Agreement, which failure shall continue for a period of 60 days after Notice thereof shall have been given to the Corporation by the Authority, or for a longer period permitted under the Loan Agreement to cure such failure, unless such failure is due to any cause or event not reasonably within the control of the Corporation, in which case the Corporation shall not be deemed in default during the continuance of its inability to comply due to such cause or event; certain events of insolvency or bankruptcy of the Corporation; loss of federal tax-exempt status for the interest on the Bonds as

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a result of any action or inaction by the Corporation; and an Event of Default under and as defined in the Master Indenture or Bond Indenture shall occur and be continuing.

SUMMARY OF CERTAIN PROVISIONS OF THE MASTER INDENTURE

The following is a summary of certain provisions of the Master Indenture. This summary should not be regarded as a full statement of the Master Indenture or of the portions summarized. Reference is made to the Master Indenture in its entirety for the complete statements of the provisions thereof, a copy of which is on file at the principal corporate trust office of the Master Trustee.

Definitions

“Accelerable Instrument” means any Obligation or any mortgage, indenture, loan agreement or other instrument under which there has been issued or incurred, or by which there is secured, any Indebtedness evidenced by an Obligation, which Obligation or instrument provides that, upon the occurrence of an event of default under such Obligation or instrument, the holder thereof (or a credit enhancer exercising the rights of such holder) may declare such Obligation or Indebtedness due and payable prior to the date on which it would otherwise become due and payable.

“Adjusted Expenses” means, for any period, the aggregate of all expenses calculated under generally accepted accounting principles, including without limitation any taxes, incurred by the Person or group of Persons involved during such period, minus (a) interest on Long-Term Indebtedness, (b) Obligation Payments to the extent that such Obligation Payments are treated as an expense during such period of time in accordance with generally accepted accounting principles and are included in the definition of Debt Service Requirements, (c) depreciation and amortization, (d) any unrealized loss resulting from changes in the value of investment securities, (e) extraordinary expenses (including without limitation losses on the sale of assets other than in the ordinary course of business and losses on the extinguishment of debt), (f) any expenses resulting from a forgiveness of or the establishment of reserves against Indebtedness of an Affiliate subject to the provisions of the Master Indenture which does not constitute an extraordinary expense and, if such calculation is being made with respect to the System, excluding any such expenses attributable to transactions between any System Affiliate and any other System Affiliate, (g) losses resulting from any reappraisal of a non-recurring nature, revaluation or write-down of assets, and (h) any items which would be considered by nationally recognized independent certified public accountants to be non-cash items of a non-recurring nature of the Person or group of Persons involved in accordance with generally accepted accounting principles.

“Affiliate” means a corporation, limited liability company, partnership, joint venture, association, business trust or similar entity (a) which is controlled directly or indirectly by a Member; or (b) a majority of the members of the Directing Body of which are members of the

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Directing Body of a Member. For the purposes of this definition, control means with respect to: (a) a corporation having stock, the ownership, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the directors of such corporation; (b) a not for profit corporation not having stock, having the power to elect or appoint, directly or indirectly, a majority of the members of the Directing Body of such corporation; or (c) any other entity, the power to direct the management of such entity through the ownership of at least a majority of its voting securities or the right to designate or elect at least a majority of the members of its Directing Body, by contract or otherwise. For the purposes of this definition, “Directing Body” means with respect to: (a) a corporation having stock, such corporation’s board of directors and the owners, directly or indirectly, of more than 50% of the securities (as defined in Section 2(1) of the Securities Act of 1933, as amended) of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporation’s directors (both of which groups shall be considered a Directing Body); (b) a not for profit corporation not having stock, such corporation’s members if the members have complete discretion to elect the corporation’s directors, or the corporation’s directors if the corporation’s members do not have such discretion; and (c) any other entity, its governing board or body. For the purposes of this definition, all references to directors and members shall be deemed to include all entities performing the function of directors or members however denominated.

“Balloon Indebtedness” means any Long-Term Indebtedness of a System Affiliate other than a Demand Obligation, more than 25% of the principal amount of which is payable in the same period of twelve consecutive calendar months (after taking into account all scheduled mandatory redemptions or prepayments payable over the life of the Indebtedness).

“Board Resolution” means a resolution certified by the Secretary or an Assistant Secretary of a Person to have been duly adopted by the Governing Body of such Person and to be in full force and effect on the date of such certification, and delivered to the Master Trustee.

“Book Value” when used with respect to Property, means the value of such Property, net of accumulated depreciation and amortization, as reflected in the most recent consolidated audited financial statements of the System (or, if the financial statements of the owner of such Property are not included in the most recent consolidated audited financial statements of the System, as reflected in the most recent audited financial statements of such owner) which have been prepared in accordance with generally accepted accounting principles, provided that such aggregate shall be calculated in such a manner that no portion of the value of any Property of any System Affiliate is included more than once.

“Business Day” means a day which is not (a) a Saturday, Sunday or legal holiday on which banking institutions in the State of New York or the state in which the principal office of the Obligated Group Agent or a Related Bond Trustee is located are authorized or required by law to close or (b) a day on which the New York Stock Exchange is closed.

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“Capitalized Interest” means amounts deposited in escrow to pay interest on Long- Term Indebtedness or Related Bonds and interest earned on amounts deposited in escrow to the extent such interest earned is available to be applied to pay interest on Long-Term Indebtedness or Related Bonds.

“Capitalized Lease” means any lease of real or personal property which, in accordance with generally accepted accounting principles, is required to be capitalized on the balance sheet of the lessee.

“Capitalized Rentals” means, as of the date of determination, the amount at which the aggregate Net Rentals due and to become due under a Capitalized Lease under which a Person is a lessee would be reflected as a liability on a balance sheet of such Person.

“Code” means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code herein shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations, relating to such section which are applicable to the Related Bonds or the use of the proceeds thereof.

“Consultant” means a professional consulting, financial advisory, accounting, investment banking or commercial banking firm selected by the Obligated Group Agent and not unacceptable to the Master Trustee, having the skill and experience necessary to render the particular report required and having a favorable and nationally recognized reputation for such skill and experience, which firm does not control any Member of the Obligated Group or any Affiliate thereof and is not controlled by or under common control with any Member of the Obligated Group or an Affiliate thereof.

“Contract Participant” means any Person (other than a System Affiliate) designated by the Obligated Group Agent with whom a Member or any other System Affiliate has entered into a contract or other agreement under which such Person is obligated to make all or any portion of the payment required with respect to any Obligation issued under the Master Indenture.

“Controlling Member” means the Member designated by the Obligated Group Agent to establish and maintain control over a System Affiliate.

“Corporation” means MedStar Health, Inc. f/k/a Medlantic/Helix Parent, Inc., a Maryland nonstock corporation, and its successors and assigns and any surviving, resulting or transferee corporation.

“Counsel” means an attorney duly admitted to practice law before the highest court of any state or the District of Columbia and, without limitation, may include legal counsel for the Corporation, any other Member or the Master Trustee.

“Credit Facility” means a letter of credit, line of credit, standby bond purchase agreement or other form of liquidity facility, bond insurance policy, guaranty, or an indemnity or

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surety insurance policy or bond which is issued to secure any Related Bonds or other Indebtedness of a System Affiliate.

“Current Assets” means cash and cash equivalent deposits, marketable securities, accounts receivable, accrued interest receivable and any other assets of a Person ordinarily considered current assets under generally accepted accounting principles.

“Current Value” means the estimated fair market value of Property, which fair market value shall be evidenced by an Officer’s Certificate of the Obligated Group Agent delivered to the Master Trustee.

“Days Cash on Hand” means the amount determined by dividing (a) the sum of cash, cash equivalents and marketable securities, including board or management designated assets but excluding (i) funds restricted by the donor in a manner not permitting their use for normal operating expenses of the System and (ii) trustee-held funds including debt service funds, construction funds, debt service reserve funds, malpractice funds, self-insurance or captive insurer funds and pension or retirement funds, by (b) the quotient obtained by dividing the sum of Adjusted Expenses for the most recent Fiscal Year plus interest on Long-Term Indebtedness unless funded with proceeds of such Long-Term Indebtedness by 365.

“Debt Service Coverage Ratio” means the ratio of Income Available for Debt Service of the System to Maximum Annual Debt Service Requirements on all Outstanding Long-Term Indebtedness of all System Affiliates.

“Debt Service Requirements” means, with respect to the period of time for which calculated, (a) the aggregate of the payments required to be made during such period in respect of principal (whether at maturity, as a result of mandatory sinking fund redemption, mandatory prepayment or otherwise) and interest on outstanding Long-Term Indebtedness of each Person or a group of Persons with respect to which calculated; provided that: (i) interest shall be excluded from the determination of the Debt Service Requirements to the extent that Capitalized Interest is available to pay such interest; and (ii) principal of Indebtedness shall be excluded from the determination of Debt Service Requirements to the extent that amounts are on deposit in an irrevocable escrow and such amounts (including, where appropriate, the earnings or other increment to accrue thereon) are required to be applied to pay such principal and such amounts so required to be applied are sufficient to pay such principal and (b) the aggregate amount of Obligation Payments becoming due and payable during such period, provided that with respect to (a) and (b) above, (x) if a Financial Products Agreement has been entered into by any Member with respect to Long-Term Indebtedness, interest on such Long-Term Indebtedness shall be included in the calculation of Debt Service Requirements by including for such period an amount equal to the amount payable on such Long-Term Indebtedness in such period at the rate or rates stated in such Long-Term Indebtedness plus any Financial Products Payments payable in such period minus any Financial Products Receipts receivable in such period; and (y) if a Financial Products Agreement represented by or evidenced by an Obligation has been entered into by any Member without respect to Long-Term Indebtedness, there shall be included in the calculation of

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Debt Service Requirements Financial Products Payments payable during such period minus any Financial Products Receipts receivable during such period.

For purposes of calculating Debt Service Requirements on certain forms of Long-Term Indebtedness, the following shall apply:

(1) Balloon Indebtedness. The Debt Service Requirements on Balloon Indebtedness for each Fiscal Year, including any such year in which 25% or more of the principal amount of the Balloon Indebtedness is due (each such year being herein referred to as a “balloon payment year” and the principal amount payable in any such balloon payment year being herein referred to as a “balloon payment”), shall be an assumed level principal or level debt service payment over thirty years at the actual rate of interest on the Balloon Indebtedness if such rate is fixed or, if such Balloon Indebtedness constitutes Variable Rate Indebtedness, at a rate of interest determined pursuant to paragraph (4) below.

(2) Demand Obligations. The Debt Service Requirements on Demand Obligations shall be determined in the manner described in paragraph (1) above.

(3) Interim Indebtedness. The Debt Service Requirements on Interim Indebtedness shall be determined in the manner described in paragraph (1) above.

(4) Variable Rate Indebtedness. For purposes of determining the Debt Service Requirements on any Variable Rate Indebtedness, the interest rate thereon shall be deemed to be equal to (1) in the case of any period during which such Indebtedness shall have been Outstanding, the weighted average interest rate per annum borne by such Indebtedness during such period and (2) in any other case, the higher of (a) the weighted average interest rate per annum borne by such Indebtedness during the 12-month period ending on the date of calculation (or, in the case of any Variable Rate Indebtedness to be issued or issued during the immediate preceding 12-month period, the weighted average interest rate per annum borne by other outstanding indebtedness having comparable terms and issued by, or secured by agreements issued by, entities of comparable creditworthiness as the obligors with respect to such Variable Rate Indebtedness during the immediately preceding 12-month period) and (b) the interest rate per annum borne by such Indebtedness on the date of calculation.

“Demand Obligation” means any Indebtedness of a System Affiliate which: (a) has a stated maturity later than 365 days after the date of incurrence, (b) is incurred as Long-Term Indebtedness, and (c) is subject to repurchase or repayment as to principal on specified dates, upon the occurrence of specified events or upon demand by the holder thereof (including any Indebtedness which is subject to such repurchase or repayment within 365 days from the date of incurrence).

“Escrow Obligations” means, (i) with respect to any Obligation which secures a series of Related Bonds, the obligations permitted to be used to defease such series of Related Bonds under the Related Bond Indenture, or (ii) with respect to any other Obligation, those securities identified in the Supplemental Master Indenture pursuant to which such Obligations were issued.

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“Facilities” means all land, leasehold interests and buildings and all fixtures and equipment (as defined in the Uniform Commercial Code or equivalent statute in effect in the state where such fixtures or equipment are located) of a Person.

“Financial Products Agreement” means an interest rate swap, cap, collar, option, floor, forward or other hedging agreement, arrangement or security, however denominated, identified to the Master Trustee in an Officer’s Certificate of the Obligated Group Agent as having been entered into by a System Affiliate or Contract Participant with a Qualified Provider.

“Financial Products Payments” means payments periodically required to be paid to a counterparty by a System Affiliate or Contract Participant pursuant to a Financial Products Agreement.

“Financial Products Receipts” means amounts periodically required to be paid to a System Affiliate or a Contract Participant by a counterparty pursuant to a Financial Products Agreement.

“Fiscal Year” means any twelve-month period beginning on July 1 of any calendar year and ending on June 30 of the next calendar year or such other consecutive twelve-month period selected by the Obligated Group Agent as the fiscal year for the System and designated from time to time in writing by the Obligated Group Agent to the Master Trustee; for purposes of making historical calculations or determinations set forth in the Master Indenture on a Fiscal Year basis, or for purposes of combinations or consolidation of accounting information, with respect to those entities whose actual fiscal year is different from that designated above, the actual fiscal year of such entities which ended within the Fiscal Year of the Obligated Group shall be used; provided, however, that for purposes of making any calculations or determinations as set forth in the Master Indenture, the Obligated Group Agent may designate in writing to the Master Trustee as the “Fiscal Year” any twelve-month period. Whenever the Master Indenture refers to a Fiscal Year of a specific entity, such reference shall be to the actual fiscal year adopted by such entity.

“Fitch” means Fitch IBCA, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns.

“Governing Body” means the board of directors, board of trustees or similar group in which the right to exercise the powers of corporate directors or trustees is vested or an executive committee of such board or any duly authorized committee of that board to which the relevant powers of that board have been lawfully delegated.

“Guaranty” means all obligations of a Person guaranteeing, or in effect guaranteeing, any Indebtedness, any obligation under a Financial Products Agreement or other obligation of any Primary Obligor in any manner, whether directly or indirectly including but not limited to obligations incurred through an agreement, contingent or otherwise, by such Person: (1) to purchase such Indebtedness or obligation or any Property constituting security therefor; (2) to advance or supply funds: (i) for the purchase or payment of such Indebtedness or obligation, or

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(ii) to maintain working capital or other balance sheet condition; (3) to purchase securities or other Property or services primarily for the purpose of assuring the owner of such Indebtedness or obligation of the ability of the Primary Obligor to make payment of the Indebtedness or obligation; (4) otherwise to assure the owner of such Indebtedness or obligation against loss in respect thereof; or (5) to make Obligation Payments pursuant to a Financial Products Agreement.

“Historical Debt Service Coverage Ratio” means, for any Fiscal Year, the ratio determined by dividing (i) Income Available for Debt Service for such Fiscal Year by (ii) the Debt Service Requirements on Long-Term Indebtedness or with respect to Financial Products Agreements for such Fiscal Year; provided that, when such calculation is being made with respect to the System, Income Available for Debt Service and Debt Service Requirements shall be determined only with respect to those Persons who are System Affiliates at the close of such Fiscal Year; and provided further that, in making such calculation with respect to any Contract Participant, for purposes of such calculation, such Contract Participant’s Income Available for Debt Service and Debt Service Requirements on Long-Term Indebtedness (or with respect to Financial Products Agreements) shall include only the amounts paid by such Contract Participant pursuant to an agreement between it and a System Affiliate respecting an Obligation issued under or pursuant to the Master Indenture and the amounts required to be paid by such Contract Participant pursuant to such agreement in respect of such Obligation, respectively, and no other income available for debt service or debt service requirements of the Contract Participant shall be taken into consideration in the calculation of Historical Debt Service Coverage Ratio for the purposes hereof. For purposes of calculating the Historical Debt Service Coverage Ratio, a Guaranty which would otherwise be considered Long-Term Indebtedness shall only be included in the calculation if any payments have been made thereon and otherwise, to the extent the aggregate principal amount of all Indebtedness guaranteed exceeds two percent (2%) of System Revenues, the applicable percentage of the guaranteed debt service to be included in Debt Service Requirements shall be calculated as follows: if the beneficiary’s debt service coverage ratio is equal to or less than 1.10 to 1, seventy-five percent (75%); if the beneficiary’s debt service coverage ratio is greater than 1.10 to 1 but less than 1.50 to 1, fifty percent (50%); if the beneficiary’s debt service coverage ratio is greater than 1.50 to 1 but less than or equal to 2.00 to 1, thirty-five (35%); if the beneficiary’s debt service coverage ratio is greater than 2.00 to 1 but less than or equal to 2.50 to 1, twenty percent (20%); and, if the beneficiary’s debt service coverage ratio is greater than 2.50 to 1, zero percent (0%). This ratio shall only apply in the Master Indenture for purposes of calculating the requirements for the funding of a debt service reserve fund in connection with certain applicable Related Bonds.

“Income Available for Debt Service” means for any period, the excess of Revenues over Adjusted Expenses of the Person or group of Persons involved.

“Indebtedness” means, for any Person, (a) indebtedness incurred or assumed by such Person for borrowed money or for the acquisition, construction or improvement of Property other than goods that are acquired in the ordinary course of business of such Person; (b) Capitalized Rentals or Capitalized Lease obligations of such Person; and (c) all Guaranties by such Person, and shall include Non-Recourse Indebtedness; provided that Indebtedness shall not include Indebtedness of one System Affiliate to another System Affiliate, any Guaranty by any

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System Affiliate of Indebtedness of any other System Affiliate, the joint and several liability of any System Affiliate on Indebtedness issued by another System Affiliate, any Financial Products Agreement or any obligation to repay moneys deposited by patients or others with a System Affiliate as security for or as prepayment of the cost of patient care or any rights of residents of life care, elderly housing or similar facilities to endowment or similar funds deposited by or on behalf of such residents.

“Interim Indebtedness” means any Indebtedness of a System Affiliate which (a) is incurred as Long-Term Indebtedness and (b) is anticipated to be paid or refunded with the proceeds of Long-Term Indebtedness; provided that the term ‘Interim Indebtedness’ shall not be deemed to include any Non-Recourse Indebtedness or any Indebtedness incurred as a Demand Obligation by a System Affiliate.

“Lien” means any mortgage, lease or pledge of, security interest in or lien, charge, restriction or encumbrance on any Property of the Person involved which secures Indebtedness (other than from one System Affiliate or Member to another System Affiliate or Member).

“Long-Term Indebtedness” means, with respect to any Person, (a) all Indebtedness of such Person for money borrowed or credit extended which is not Short-Term; (b) all Indebtedness of such Person incurred or assumed in connection with the acquisition or construction of Property which is not Short-Term; (c) the Person’s Guaranties of Indebtedness which are not Short-Term; and (d) Capitalized Rentals under Capitalized Leases entered into by the Person; provided, however, that (i) Indebtedness that could be described by more than one of the foregoing categories shall not in any case be considered more than once for the purpose of any calculation made pursuant to the Master Indenture and (ii) for purposes of calculating the Debt Service Coverage Ratio, a Guaranty which would otherwise be considered Long-Term Indebtedness shall only be included in the calculation of the Debt Service Coverage Ratio if any payments have been made thereon and otherwise, to the extent the aggregate principal amount of Indebtedness guaranteed exceeds two percent (2%) of System Revenues, the applicable percentage of the guaranteed debt service to be included in Debt Service Requirements shall be calculated as follows: if the beneficiary’s debt service coverage ratio is equal to or less than 1.10 to 1, seventy-five percent (75%); if the beneficiary’s debt service coverage ratio is greater than 1.10 to 1 but less than 1.50 to 1, fifty percent (50%); if the beneficiary’s debt service coverage ratio is greater than 1.50 to 1 but less than or equal to 2.00 to 1, thirty-five (35%); if the beneficiary’s debt service coverage ratio is greater than 2.00 to 1 but less than or equal to 2.50 to 1, twenty percent (20%); and, if the beneficiary’s debt service coverage ratio is greater than 2.50 to 1, zero percent (0%).

“Master Indenture” means the Master Trust Indenture dated as of December 1, 1998 between the Corporation and the Master Trustee, as it may from time to time be further amended or supplemented in accordance with the terms thereof.

“Master Trustee” means U.S. Bank National Association, successor to SunTrust Bank, or any other successor trustee under the Master Indenture.

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“Material System Affiliate” means any System Affiliate whose total revenues for the most recently completed Fiscal Year for such System Affiliate exceed 5% of the combined total revenues of the Obligated Group and the System Affiliates as set forth on the combined financial statements for the most recently completed Fiscal Year of the System.

“Maximum Annual Debt Service Requirements” means, as of the date of calculation, the highest annual Debt Service Requirements payable during the then current or any succeeding Fiscal Year over the remaining term of all Outstanding Long-Term Indebtedness of any System Affiliate. If any calculation of Income Available for Debt Service of the System as a percentage of Maximum Annual Debt Service Requirements is required to be made for any period ending between the date of incurrence of any Long-Term Indebtedness to finance or refinance any construction or renovation and the completion date of such construction or renovation, the Maximum Annual Debt Service Requirements to be used for the purpose of such calculation shall be deemed equal to the sum of: (a) the Maximum Annual Debt Service Requirements on all Outstanding Long-Term Indebtedness of any System Affiliate excluding the Long-Term Indebtedness incurred to finance or refinance the construction or renovation in question; and (b) the Debt Service Requirements on the excluded Long-Term Indebtedness for the period in question. The foregoing adjustments may not be made for the purposes of any calculation in which Maximum Annual Debt Service Requirements are compared to Income Available for Debt Service on a pro forma basis for any prior or current Fiscal Year. The foregoing adjustments may be made for the purposes of required projections or forecasts, but only if the projection or forecast period extends through the first two Fiscal Years following the completion of the construction or renovation in question and if the required percentage of Income Available for Debt Service to Maximum Annual Debt Service Requirements (adjusted only for Fiscal Years ending before completion of the construction or renovation) is projected or forecasted to be achieved for each Fiscal Year during such period.

“Member” or “Member of the Obligated Group” means the Corporation and any Person who is listed on Exhibit A to the Master Indenture after designation as a Member of the Obligated Group pursuant to the terms of the Master Indenture. The Obligated Group Agent may from time to time deliver a revised Exhibit A to the Master Trustee, indicating additions or deletions of Members of the Obligated Group.

“Moody’s” means Moody’s Investors Service Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns.

“Net Proceeds” means, when used with respect to any insurance or condemnation award or sale consummated under threat of condemnation, the gross proceeds from the insurance or condemnation award or sale with respect to which that term is used less all expenses (including attorney’s fees and expenses, adjuster’s fees and any expenses of the Master Trustee) incurred in the collection of such gross proceeds.

“Net Rentals” means all fixed rents (including as such all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the Property other than upon termination of the lease for a default thereunder) payable under a lease or sublease of real

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or personal Property excluding any amounts required to be paid by the lessee (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes and similar charges. Net Rentals for any future period under any so-called “percentage lease” shall be computed on the basis of the amount reasonably estimated to be payable thereunder for such period, but in any event not less than the amount paid or payable thereunder during the immediately preceding period of the same duration as such future period; provided that the amount estimated to be payable under any such percentage lease shall in all cases recognize any change in the applicable percentage called for by the terms of such lease.

“Non-Recourse Indebtedness” means any Indebtedness the liability for which is effectively limited to Property, Plant and Equipment and the proceeds therefrom, the cost of which Property, Plant and Equipment shall have been financed solely with the proceeds of such Indebtedness with no recourse, directly or indirectly, to any other Property of any System Affiliate.

“Obligated Group” means the Corporation and any other Person which has fulfilled the requirements for entry into the Obligated Group and which has not ceased such status.

“Obligated Group Agent” means the Corporation or such other Member as may be designated from time to time pursuant to written notice to the Master Trustee, executed by an authorized officer of the Corporation or, if the Corporation is no longer a Member of the Obligated Group, of each Member of the Obligated Group.

“Obligation holder,” “holder” or “owner of the Obligation” means the registered owner of any fully registered or book entry Obligation unless alternative provision is made in the Supplemental Master Indenture pursuant to which such Obligation is issued for establishing ownership of such Obligation, in which case such alternative provision shall control.

“Obligation Payments” means payments (however designated) required under any Obligation then Outstanding which does not constitute Indebtedness.

“Obligations” means any obligation authorized to be issued by a Member pursuant to the Master Indenture which has been authenticated by the Master Trustee including, without limitation, obligations in the form of a Financial Products Agreement.

“Officer’s Certificate” means a certificate signed, in the case of a certificate delivered by a corporation, by the President or any Vice-President or any other officer or designated agent authorized to sign by resolution of such corporation or, in the case of a certificate delivered by any other Person, the chief executive or chief financial officer of such other Person.

“Outstanding” means, in the case of Indebtedness of a Person other than Related Bonds or Obligations, all such Indebtedness of such Person which has been issued except any such portion thereof canceled after purchase on the open market or surrendered for cancellation or because of payment at or redemption prior to maturity, any such Indebtedness in lieu of which other Indebtedness has been duly issued and any such Indebtedness which is no longer deemed

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outstanding under its terms and with respect to which such Person is no longer liable under the terms of such indebtedness.

“Outstanding Obligations” or “Obligations outstanding” means all Obligations which have been duly authenticated and delivered by the Master Trustee under the Master Indenture, except:

(a) Obligations canceled after purchase in the open market or because of payment at or prepayment or redemption prior to maturity;

(b) (i) Obligations for the payment or redemption of which cash or Escrow Obligations shall have been theretofore deposited with the Master Trustee (whether upon or prior to the maturity or redemption date of any such Obligations); provided that if such Obligations are to be prepaid or redeemed prior to the maturity thereof, notice of such prepayment or redemption shall have been given or irrevocable arrangements satisfactory to the Master Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Master Trustee shall have been filed with the Master Trustee and (ii) Obligations securing Related Bonds for the payment or redemption of which cash or Escrow Obligations shall have been theretofore deposited with the Related Bond Trustee whereby such Related Bonds are considered defeased under the Related Bond Indenture (whether upon or prior to the maturity or redemption date of any such Obligations); provided that if such Related Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Related Bond Trustee shall have been made therefor, or waiver of notice satisfactory in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee;

(c) Obligations in lieu of which others have been authenticated under the Master Indenture; and

(d) For the purpose of all consents, approvals, waivers and notices required to be obtained or given under the Master Indenture, Obligations held or owned by a Member of the Obligated Group or by a System Affiliate.

Notwithstanding the foregoing, any Obligation securing Related Bonds shall be deemed outstanding if such Related Bonds are Outstanding.

“Outstanding Related Bonds” or “Related Bonds outstanding” means all Related Bonds which have been duly authenticated and delivered by the Related Bond Trustee under the Related Bond Indenture and are deemed outstanding under the terms of such Related Bond Indenture or, if such Related Bond Indenture does not specify when Related Bonds are deemed outstanding thereunder, all such Related Bonds which have been so authenticated and delivered, except:

(a) Related Bonds canceled after purchase in the open market or because of payment at or redemption prior to maturity;

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(b) Related Bonds for the payment or redemption of which cash or Escrow Obligations shall have been theretofore deposited with the Related Bond Trustee (whether upon or prior to the maturity or redemption date of any such Bonds) in accordance with the Related Bond Indenture whereby such Related Bonds are considered defeased under the Related Bond Indenture; provided that, if such Related Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or arrangements satisfactory to the Related Bond Trustee shall have been made therefor, or waiver of such notice satisfactory in form to the Related Bond Trustee shall have been filed with the Related Bond Trustee;

(c) Related Bonds in lieu of which others have been authenticated under the Related Bond Indenture; and

(d) For the purposes of all covenants, approvals, waivers and notices required to be obtained or given under the Related Bond Indenture, Related Bonds held or owned by a Member or by a System Affiliate.

“Paying Agent” means the bank or banks, if any, designated pursuant to a Related Bond Indenture to receive and disburse the principal of and interest on any Related Bonds or designated pursuant to the Master Indenture to receive and disburse the principal of and interest on any Obligations.

“Permitted Encumbrances” means the Master Indenture and, as of any particular time:

(a) Liens arising by reason of good faith deposits in connection with tenders, leases of real estate, bids or contracts (other than contracts for the payment of money), deposits to secure public or statutory obligations, or to secure or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

(b) any Lien on any Property of any System Affiliate granted in favor of or securing Indebtedness to any other System Affiliate;

(c) any Lien on Property if such Lien equally and ratably secures all of the Obligations and, if the Obligated Group Agent shall so determine, any other Indebtedness of any System Affiliate;

(d) Liens on or in Property given, granted, bequeathed or devised by the owner thereof existing at the time of such gift, grant, bequest or devise;

(e) Liens on proceeds of Indebtedness (or on income from the investment of such proceeds) that secure payment of such Indebtedness and any security interest in any rebate fund established pursuant to the Code, any depreciation reserve, debt service or interest reserve, debt service fund or any similar fund established pursuant to the terms of any Supplemental Master Indenture, Related Bond Indenture or Related Loan Document in favor of the Master Trustee, a Related Bond Trustee, a Related Issuer or the holder of the Indebtedness issued pursuant to such Supplemental Master Indenture, Related Bond Indenture or Related Loan Document or the provider of any liquidity or credit support for such Related Bond or Indebtedness;

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(f) Liens on funds held by an escrow agent in Escrow Obligations for defeased Indebtedness;

(g) any Lien on any Related Bond or any evidence of Indebtedness of any System Affiliate acquired by or on behalf of any System Affiliate by the provider of liquidity or credit support for such Related Bond or Indebtedness;

(h) Liens on accounts receivable arising as a result of the sale of such accounts receivable with or without recourse, if (a) cash is maintained as of the date of such sale or encumbrance in an amount not less than an amount equal to one hundred (100) Days Cash on Hand, in which case up to fifty percent (50%) of the accounts receivable may be so sold or encumbered; (b) cash is maintained as of the date of such sale or encumbrance in an amount not less than an amount equal to sixty-five (65) Days Cash on Hand, in which case up to thirty-five percent (35%) of the accounts receivable may be so sold or encumbered; or (c) cash is maintained as of the date of such sale or encumbrance in an amount not less than an amount equal to thirty (30) Days Cash on Hand, in which case up to twenty percent (20%) of the accounts receivable may be so sold or encumbered. Notwithstanding the terms and conditions of the preceding sentence, in the event that the Debt Service Coverage Ratio of the System for the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered is less than 1.25 to 1 or cash is maintained as of the date of such sale or encumbrance in an amount less than an amount equal to thirty (30) Days Cash on Hand, no accounts receivable may be sold or encumbered;

(i) Liens on any Property of a System Affiliate in effect on the effective date of the Master Indenture, as listed on Exhibit C to the Master Indenture, or existing at the time any Person becomes a System Affiliate; provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased, extended, renewed or modified to apply to any Property of such System Affiliate not subject to such Lien on such date unless such Lien as so increased, extended, renewed or modified is otherwise permitted under the Master Indenture;

(j) any Lien on Property acquired subject to an existing Lien as well as Liens on Property of a Person existing at the time such Person is merged into or consolidated with a System Affiliate, or at the time of a sale, lease or other disposition of the properties of a Person as an entirety or substantially as an entirety to a System Affiliate which becomes part of a Property that secures Indebtedness that is assumed by a System Affiliate as a result of any such merger, consolidation or acquisition; provided, that no such Liens may be increased, extended, renewed, or modified after such date to apply to any Property of a System Affiliate not subject to such Liens on such date unless such Liens as so increased, extended, renewed or modified is otherwise permitted under the Master Indenture;

(k) Liens which secure Non-Recourse Indebtedness provided that the Book Value of the Property subject to such Liens or the principal amount of the Indebtedness secured by such Liens are limited to twenty percent (20%) of System Revenues;

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(1) Liens arising out of Capital Leases provided that such Liens shall be subject to the twenty-five percent (25%) limitation set forth in subsection (m) of this definition;

(m) Liens on Property of a System Affiliate securing Indebtedness or Financial Products Agreements, in addition to those Liens permitted as defined elsewhere in this definition of Permitted Encumbrances, if the total aggregate Book Value (or at the option of the Obligated Group Agent, Current Value) of the Property subject to a Lien of the type described in this subsection (m) does not exceed twenty-five percent (25%) of the greatest of Long Term Indebtedness, unrestricted net assets or net Property, Plant and Equipment (calculated on the same basis as the value of Property subject to such Lien);

(n) Reserved;

(o) any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any System Affiliate to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with worker’s compensation, unemployment insurance, old age pensions or other social security, or to share in the privileges or benefits required for institutions participating in such arrangements;

(p) rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property, to (i) terminate such right, power, franchise, grant, license or permit, or (ii) purchase, condemn, appropriate or recapture, or designate a purchaser of such Property;

(q) any Liens on any Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any liens of mechanics, materialmen and laborers for work or services performed or materials furnished in connection with such Property (i) which are not due and payable or are not delinquent, (ii) the amount or validity of which is being contested in good faith and on which execution is stayed or (iii) the existence of which will not subject any material portion of the Property of the System to material loss or forfeiture;

(r) easements, rights-of-way, restrictions and other minor defects, encumbrances and irregularities in the title to any Property; and

(s) rights reserved to or vested in any municipality or public authority to control or regulate any Property or to use such Property in any manner.

“Permitted Investments” shall mean (i) with respect to any Obligation which secures a series of Related Bonds, the investments in which the Related Bond Trustee may invest funds under the Related Bond Indenture, (ii) with respect to any Obligations which do not secure a series of Related Bonds for which a Supplemental Master Indenture specifies certain permitted

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investments, the investments so specified and (iii) in all other cases such legal and prudent investments as are specified and directed to be invested by the Obligated Group Agent.

“Person” means any natural person, firm, joint venture, joint operating agency, association, partnership, limited liability partnership, business trust, limited liability company, corporation, public body, agency or political subdivision thereof or any other similar entity.

“Pledged Revenues” means (a) all receipts, revenues, income and other moneys acquired by or on behalf of the Corporation from its operations whether now existing or hereafter acquired, and all rights to receive the same (including accounts, instruments, chattel paper and general intangibles representing a right to payment constituting revenues of the Corporation), whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by the Corporation and all proceeds of the foregoing and (b) the non-operating revenues associated with the Corporation, including, without limitation, contributions, donations and pledges whether in the form of cash, securities or other personal property that are legally available to meet the Obligated Group’s obligations under the Master Indenture; provided, however, that (1) gifts, grants, bequests, donations and contributions made to the Corporation designated at the time of making thereof by the donor or maker as being for certain specific purposes, and the income derived therefrom, to the extent required by such designation, shall be excluded from (a) and (b) above and (2) all receipts, revenues, income and other moneys subject to Permitted Encumbrances, as defined in the Master Indenture and permitted therein, at present or in the future, other than the security interest in the Pledged Revenues, shall be excluded from (a) and (b) above.

“Primary Obligor” means the Person who is primarily obligated on an obligation which is guaranteed by another Person.

“Property” means any and all rights, titles and interests in and to any and all property, whether real or personal, tangible (including cash) or intangible, wherever situated and whether now owned or hereafter acquired.

“Property, Plant and Equipment” means all Property of each Member which is classified as property, plant and equipment under generally accepted accounting principles.

“Qualified Provider” means any financial institution or insurance company which is a party to a Financial Products Agreement if the unsecured long-term debt obligations of such financial institution or insurance company (or of the parent or a subsidiary of such financial institution or insurance company if such parent or subsidiary guarantees the performance of such financial institution or insurance company under such Financial Products Agreement), or obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance policy or surety bond issued by such financial institution or insurance company (or such guarantor parent or subsidiary), are rated in one of the three highest rating categories of a Rating Agency at the time of the execution and delivery of the Financial Products Agreement.

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“Rating Agency” means Moody’s, Fitch or Standard & Poor’s and their respective successors and assigns.

“Related Bonds” means (a) any revenue bonds or similar obligations issued by any state, commonwealth or territory of the United States or any municipal corporation or other political subdivision formed under the laws thereof or any constituted authority, agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, issued in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to or upon the order of such governmental issuer and (b) any revenue or general obligation bonds issued by the Corporation, any Member, any System Affiliate or any other Person in consideration, whether in whole or in part, of the execution, authentication and delivery of an Obligation or Obligations to the holder of such bonds or the Related Bond Trustee.

“Related Bond Indenture” means any indenture, bond resolution or similar instrument pursuant to which any series of Related Bonds is issued.

“Related Bond Trustee” means the trustee under any Related Bond Indenture and any successor trustee thereunder or, if no trustee is appointed under a Related Bond Indenture, the Related Issuer.

“Related Issuer” means the issuer of a series of Related Bonds.

“Related Loan Document” means any document or documents (including without limitation any loan agreement, lease, sublease or installment sales contract) pursuant to which any proceeds of any Related Bonds are loaned to, advanced to or made available to or for the benefit of any Member or System Affiliate (or pursuant to which any Property financed or refinanced with such proceeds is leased, sublet or sold to a Member or System Affiliate).

“Revenues” means, for any period, (a) in the case of any Person providing health care services, the sum of (i) net patient service revenues plus (ii) other operating revenues, plus (iii) non-operating revenues (other than income derived from the sale of assets not in the ordinary course of business or any gain from the extinguishment of debt or other extraordinary item or earnings which constitute Capitalized Interest or earnings on amounts which are irrevocably deposited in escrow to pay the principal of or interest on Indebtedness); and (b) in the case of any other Person, gross revenues less sale discounts and sale returns and allowances, as determined in accordance with generally accepted accounting principles; but excluding in any event in both clause (a) and clause (b): (i) any unrealized gain or loss resulting from changes in the value of investment securities, (ii) any gains on the sale or other disposition of fixed or capital assets not in the ordinary course, (iii) earnings resulting from any reappraisal, revaluation or write-up of fixed or capital assets or (iv) any revenues constituting deferred revenues related to entrance fees; provided, however, that if such calculation is being made with respect to the System, such calculation shall be made in such a manner so as to exclude any revenues attributable to transactions between any System Affiliate and any other System Affiliate or any Contract Participant (except as required by the Master Indenture).

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“Short-Term,” when used in connection with Indebtedness, means Indebtedness of a Person for money borrowed or credit extended having an original maturity less than or equal to one year and not renewable at the option of the debtor for, or subject to any binding commitment to refinance or otherwise provide for such Indebtedness having, a term greater than one year beyond the date of original issuance.

“Standard & Poor’s” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., its successors and assigns.

“Supplemental Master Indenture” means an indenture amending or supplementing the Master Indenture entered into pursuant to Article VII of the Master Indenture on or after the date thereof.

“System” means the affiliated group of Persons comprised of all the System Affiliates.

“System Affiliate” means each Member of the Obligated Group and each Affiliate of any Member of the Obligated Group.

“Tax-Exempt Organization” means a Person organized under the laws of the United States of America or any state thereof which is an organization described in Section 501(c)(3) of the Code, which is exempt from federal income taxation under Section 501(a) of the Code, and which is not a “private foundation” within the meaning of Section 509(a) of the Code, or corresponding provisions of federal income tax laws from time to time in effect.

“Variable Rate Indebtedness” means any Long-Term Indebtedness, the rate of interest on which is subject to change prior to maturity.

Series, Designation and Amount of Obligations

No Obligations may be issued under the provisions of the Master Indenture except in accordance with the Master Indenture and with the approval of the Obligated Group Agent as evidenced by its execution of the Supplemental Master Indenture authorizing the issuance of an Obligation. The total principal amount of Obligations, the number of Obligations and the series of Obligations that may be created under the Master Indenture is subject to the provisions of the Master Indenture and shall be as set forth in the Supplemental Master Indenture providing for the issuance thereof. Each series of Obligations shall be issued pursuant to a Supplemental Master Indenture. Each series of Obligations shall be designated so as to differentiate the Obligations of such series from the Obligations of any other series. Unless provided to the contrary in a Supplemental Master Indenture, Obligations shall be issued as fully registered Obligations.

Payment of Obligations

The principal of, premium, if any, and interest on the Obligations shall be payable in any currency of the United States of America which, at the respective dates of payment thereof, is

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legal tender for the payment of public and private debts, and such principal, premium, if any, and interest shall be payable at the principal corporate trust office of the Master Trustee or at the office of any alternate Paying Agent or Agents named in any such Obligations or in a Related Bond Indenture. Unless contrary provision is made in the Supplemental Master Indenture pursuant to which such Obligation is issued or the election referred to in the next sentence is made, payment of the interest on the Obligations shall be made to the person appearing on the registration books of the Obligated Group (kept in the principal corporate trust office of the Master Trustee as Obligation registrar) as the registered owner thereof and shall be paid by check or draft mailed to the registered owner at its address as it appears on such registration books or at such other address as is furnished to the Master Trustee in writing by such holder; provided, however, that any Supplemental Master Indenture creating any Obligation may provide that interest on such Obligation may be paid, upon the request of the holder of such Obligation, by wire transfer or by such other means as are then commercially reasonable and acceptable to the holder thereof and the Master Trustee. The foregoing notwithstanding, if a Member so elects, payments on such Obligation shall be made directly by such Member, by check or draft hand delivered to the holder thereof or its designee or shall be made by such Member by wire transfer to such holder, or by such other means as are then commercially reasonable and acceptable to the holder thereof, in any case delivered on or prior to the date on which such payment is due. Upon the reasonable written request of the Master Trustee, each Member shall provide information identifying the Obligation or Obligations with respect to which such payment, specifying the amount, was made, by series, designation, number and registered holder. Except with respect to Obligations directly paid to or upon the order of the holder thereof, the Members agree to deposit with the Master Trustee prior to each due date of the principal of, premium, if any, or interest on any of the Obligations a sum sufficient to pay such principal, premium, if any, or interest so becoming due. Any such moneys shall upon written request and direction of the Obligated Group Agent be invested in Permitted Investments. The foregoing notwithstanding, amounts deposited with the Master Trustee to provide for the payment of Obligations pledged to the payment of Related Bonds shall be invested in accordance with the provisions of the Related Bond Indenture and Related Loan Document. The Master Trustee shall not be liable or responsible for any loss resulting from any such investments made in accordance with the terms of the Master Indenture. Supplemental Master Indentures may create such security including debt service reserve funds and other funds as are necessary to provide for payment or to hold moneys deposited for payment or as security for a related series of Obligations.

Security for Obligations

All Outstanding Obligations issued under the Master Indenture are equally and ratably secured by the Master Indenture except to the extent specifically provided otherwise as permitted by the Master Indenture. Any one or more series of Obligations issued under the Master Indenture may, so long as any Liens created in connection therewith constitute Permitted Encumbrances, be secured by security (including without limitation letters or lines of credit, insurance or Liens on Property, including health care Facilities or Property of the Obligated Group or other System Affiliates, or security interests in a depreciation reserve, debt service or interest reserve or debt service or similar funds). Such security need not extend to any other

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Indebtedness (including any other Obligations or series of Obligations). Consequently, the Supplemental Master Indenture pursuant to which any one or more series of Obligations is issued may provide for such supplements or amendments to the provisions of the Master Indenture, as are necessary to provide for such security and to permit realization upon such security solely for the benefit of the Obligations entitled thereto.

Substitute Obligations Upon Withdrawal of a Member

In the event any Member ceases to be a Member of the Obligated Group in accordance with the Master Indenture and another Member issues an Obligation under the Master Indenture pursuant to a Supplemental Master Indenture evidencing or assuming the Obligated Group’s obligation in respect of Related Bonds, if so provided for in such Obligation originally issued by such withdrawing Member, such Obligation shall be surrendered to the Master Trustee in exchange for a substitute Obligation without notice to or consent of any Related Bondholder, provided that such substitute Obligation provides for payments of principal, interest, premium and other amounts identical to the surrendered Obligation and sufficient to provide all payments on the Related Bonds.

Appointment of Obligated Group Agent

Each Member, by becoming a Member of the Obligated Group, irrevocably appoints the Obligated Group Agent as its agent and true and lawful attorney in fact and grants to the Obligated Group Agent (a) full and exclusive power to execute Obligations and Supplemental Master Indentures and (b) full power to prepare, or authorize the preparation of, any and all documents, certificates or disclosure materials reasonably and ordinarily prepared in connection with the issuance of Obligations under the Master Indenture, or Related Bonds associated therewith, and to execute and deliver such items to the appropriate parties in connection therewith.

Payment of Principal, Premium, if any, and Interest; System Affiliates

(A) Each Member unconditionally and irrevocably (subject to the right of such Member to cease its status as a Member of the Obligated Group pursuant to the Master Indenture), as co- obligor and not guarantor, jointly and severally covenants that it will promptly pay the principal of, premium, if any, and interest on every Obligation issued under the Master Indenture and any other payments, including, if applicable, the purchase price of Related Bonds tendered or deemed tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document required by the terms of such Obligations, at the place, on the dates and in the manner provided in the Master Indenture and in said Obligations according to the true intent and meaning thereof. If any Member does not tender payment of any installment of principal, premium or interest on any Obligation when due and payable, the Master Trustee shall provide prompt written notice of such nonpayment to such Member and the Obligated Group Agent.

(B) Each Controlling Member shall cause each of its System Affiliates (subject to contractual and organizational limitations) to pay, loan or otherwise transfer to the Obligated

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Group Agent or other Member such amounts as are necessary to duly and punctually pay the principal of, premium, if any, and interest on all Outstanding Obligations and any other payments, including the purchase price of Related Bonds tendered for purchase pursuant to the terms of a Related Bond Indenture or Related Loan Document, required by the terms of such Obligations, on the dates, at the times and at the places and in the manner provided in such Obligations, the applicable Supplemental Master Indenture and the Master Indenture, when and as the same become payable, whether at maturity, upon call for redemption, by acceleration of maturity or otherwise.

(C) The Obligated Group Agent shall at all times maintain an accurate and complete list of all Persons that are Obligated Group Members, Contract Participants and System Affiliates. The Obligated Group Agent by an Officer’s Certificate delivered to the Master Trustee shall designate the Corporation or any other Member as the Controlling Member of any such additional System Affiliate. With respect to each such Person, and so long as such Person is a System Affiliate, the Obligated Group Agent, or any Member designated by the Obligated Group Agent as the Controlling Member, shall either (a) maintain, directly or indirectly, control of each System Affiliate, including the power to direct the management, policies, disposition of assets and actions of such System Affiliate to the extent required to cause such System Affiliate to comply with the terms and conditions of the Master Indenture, whether through the ownership of voting securities, by contract, partnership interests, membership, reserved powers, or the power to appoint members, trustees or directors or otherwise, to the extent required to enable the Members to comply with this Master Indenture, or (b) execute and have in effect such contracts or other agreements with a System Affiliate that the Obligated Group Agent or Controlling Member, in its sole discretion, deems sufficient for it to cause such System Affiliate to comply with the terms and conditions of this Master Indenture. Subject to the provisions of the next sentence, System Affiliates may cease to be such in accordance with the provisions of the Master Indenture. No Person shall cease to be a System Affiliate if any Outstanding Related Bonds have been issued for the benefit of such Person until there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the cessation by such Person of its status as a System Affiliate will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable thereon to which such Related Bond would otherwise be entitled.

(D) Each Controlling Member covenants that it will cause (subject to contractual and organizational limitations) each of its System Affiliates to comply with the terms and conditions of the Master Indenture which are applicable to such System Affiliate, and of the Related Loan Document, if any, to which such System Affiliate is a party.

Performance of Covenants

Each Member covenants that it will faithfully perform at all times any and all covenants, undertakings, stipulations and provisions contained in the Master Indenture and in each and every Obligation executed, authenticated and delivered under the Master Indenture and will perform all covenants and requirements imposed on the Corporation, the Obligated Group Agent or any Member under the terms of any Related Bond Indenture.

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Entrance into the Obligated Group

Any Person may become a Member of the Obligated Group if:

(a) Such Person is a corporation, association, partnership, limited liability partnership, business trust, limited liability company or any other similar entity;

(b) Such Person shall execute and deliver to the Master Trustee a Supplemental Master Indenture acceptable to the Master Trustee which shall be executed by the Master Trustee and the Obligated Group Agent on behalf of each then current Member of the Obligated Group, containing the agreement of such Person (i) to become a Member of the Obligated Group and thereby to become subject to compliance with all provisions of the Master Indenture and (ii) unconditionally and irrevocably (subject to the right of such Person to cease its status as a Member of the Obligated Group) to jointly and severally make payments upon each Obligation at the times and in the amounts provided in each such Obligation;

(c) The Obligated Group Agent shall have approved the admission of such Person into the Obligated Group;

(d) The Master Trustee shall have received (1) an Officer’s Certificate of the Obligated Group Agent which demonstrates that, immediately upon such Person becoming a Member of the Obligated Group, the Members would not, as a result of such transaction, be in default in the performance or observance of any covenant or condition to be performed or observed by them under the Master Indenture, (2) an opinion of Counsel to the effect that (x) the instrument described in paragraph (b) above has been duly authorized, executed and delivered and constitutes a legal, valid and binding agreement of such Person, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy, insolvency and other laws generally affecting enforcement of creditors’ rights and application of general principles of equity and other exceptions as set forth in the Master Indenture and (y) the addition of such Person to the Obligated Group will not adversely affect the status as a Tax Exempt Organization of any Member (including such Person) which otherwise has such status, and (3) if all amounts due or to become due on all Related Bonds have not been paid to the holders thereof and provision for such payment has not been made in such manner as to have resulted in the defeasance of all Related Bond Indentures, an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the consummation of such transaction will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Related Bond to which such Bond would otherwise be entitled;

(e) Exhibit A to the Master Indenture shall be amended or replaced to add such Person as a Member;

(f) The Master Trustee shall have received an Officer’s Certificate demonstrating that if such Person had been a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements

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of the System have been prepared, the Debt Service Coverage Ratio of the System would not have been less than 1.10 to 1; and

(g) The Master Trustee shall have received an Officer’s Certificate demonstrating that if such Person had been a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio of the System would be at least seventy-five (75%) of what the coverage would have been if such Person had not become a Member of the Obligated Group. This provision shall not apply in instances when the Debt Service Coverage Ratio of the System for such Fiscal Year is above 2.5 to 1 after giving effect to such Person becoming a Member of the Obligated Group.

Each successor, assignee, surviving, resulting or transferee corporation of a Member must agree to become, and satisfy the above-described conditions to becoming, a Member of the Obligated Group prior to any such succession, assignment or other change in such Member’s corporate status.

Cessation of Status as a Member of the Obligated Group

Each Member covenants that it will not take any action, corporate or otherwise, which would cause it or any successor thereto into which it is merged or consolidated to cease to be a Member of the Obligated Group under the terms of the Master Indenture unless:

(a) if the Member proposing to withdraw from the Obligated Group is a party to any Related Loan Documents with respect to Related Bonds which remain outstanding, another Member of the Obligated Group has issued an Obligation under the Master Indenture evidencing or assuming the obligation of the Obligated Group in respect of such Related Bonds;

(b) prior to cessation of such status, there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, the cessation by the Member of its status as a Member will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable on such Related Bond to which such Bond would otherwise be entitled;

(c) immediately after such cessation, no event of default exists under the Master Indenture and no event shall have occurred which with the passage of time or the giving of notice, or both, would become such an event of default;

(d) prior to such cessation there is delivered to the Master Trustee an opinion of Counsel to the effect that the cessation by such Member of its status as a Member will not adversely affect the status as a Tax-Exempt Organization of any Member which otherwise has such status;

(e) prior to the cessation of such status, the Obligated Group Agent consents in writing to the withdrawal of such Member;

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(f) Exhibit A to the Master Indenture shall be amended or replaced to delete such Person as a Member;

(g) prior to cessation, the Master Trustee shall have received an Officer’s Certificate demonstrating that if such Person had not been a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio of the System would not have been less than 1.10 to 1; and

(h) The Master Trustee shall have received an Officer’s Certificate demonstrating that if such Person had withdrawn as a Member of the Obligated Group as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio of the System would be at least seventy-five (75%) of what the coverage would have been if such Person had not withdrawn as a Member of the Obligated Group. This provision shall not apply in instances when the Debt Service Coverage Ratio of the System for such Fiscal Year is above 2.5 to 1 after giving effect to such Person withdrawing as a Member of the Obligated Group.

General Covenants; Right of Contest

Each Member covenants to, and each Controlling Member covenants to cause each of its System Affiliates (subject to contractual and organizational limitations) to:

(a) Except as otherwise expressly provided in the Master Indenture (i) preserve its corporate or other separate legal existence, (ii) preserve all its rights and licenses to the extent necessary or desirable in the operation of its business and affairs as then conducted and (iii) be qualified to do business and conduct its affairs in each jurisdiction where its ownership of Property or the conduct of its business or affairs requires such qualification, if failure to preserve such existence, rights, licenses or qualifications would have a material adverse effect on the operations or financial condition of the System taken as a whole; provided, however, that nothing contained in the Master Indenture shall be construed to obligate such Member or System Affiliate to retain, preserve or keep in effect the rights, licenses or qualifications no longer used or useful in the conduct of its business.

(b) In the case of the Corporation and any Person which is a Tax-Exempt Organization at the time it becomes a Member or System Affiliate, so long as the Master Indenture shall remain in force and effect and so long as all amounts due or to become due on all Related Bonds have not been fully paid to the holders thereof or provision for such payment has not been made, to take no action or suffer any action to be taken by others, including any action which would result in the alteration or loss of its status as a Tax-Exempt Organization, which could result in any such Related Bond being declared invalid or result in the interest on any Related Bond, which is otherwise exempt from federal or state income taxation, becoming subject to such taxation.

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(c) At its sole cost and expense, promptly comply with all present and future laws, ordinances, orders, decrees, decisions, rules, regulations and requirements of every duly constituted governmental authority, commission and court and the officers thereof which may be applicable to it or any of its affairs, business, operations and Property, any part thereof, any of the streets, alleys, passageways, sidewalks, curbs, gutters, vaults and vault spaces adjoining any of its Property or any part thereof, or to the use or manner of use, occupancy or condition of any of its Property or any part thereof, if the failure to so comply would have a materially adverse affect on the operations or financial affairs of the System, taken as a whole.

The foregoing notwithstanding, any Member or System Affiliate may (i) cease to be a not for profit corporation or (ii) take actions which could result in the alteration or loss of its status as a Tax-Exempt Organization if prior thereto there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that such actions would not adversely affect the validity of any Related Bond, the exemption from federal or state income taxation of interest payable on any Related Bond otherwise entitled to such exemption or adversely affect the enforceability in accordance with its terms of the Master Indenture against any Person.

No Member or other System Affiliate shall be required to remove any Lien required to be removed under the Master Indenture, pay or otherwise satisfy and discharge its obligations, Indebtedness (other than any Obligations), demands and claims against it or to comply with any Lien, law, ordinance, rule, order, decree, decision, regulation or requirement referred to in the Master Indenture, so long as such Member or other System Affiliate is contesting, in good faith and at its cost and expense, in its own name and behalf, the amount or validity thereof, in an appropriate manner or by appropriate proceedings which shall operate during the pendency thereof to prevent the collection of or other realization upon the obligation, Indebtedness, demand, claim or Lien so contested, and the sale, forfeiture, or loss of its Property or any part thereof, provided, that no such contest shall subject any Related Issuer, any Obligation holder or the Master Trustee to the risk of any liability. While any such matters are pending, such Member or other System Affiliate shall not be required to pay, remove or cause to be discharged the obligation, Indebtedness, demand, claim or Lien being contested unless such Member or other System Affiliate agrees to settle such contest. Each such contest shall be promptly prosecuted to final conclusion (subject to the right of such Member or other System Affiliate engaging in such a contest to settle such contest), and in any event the Member or other System Affiliate will save all Obligation holders and the Master Trustee harmless from and defend against all losses, judgments, decrees and costs (including attorneys’ fees and expenses in connection therewith) as a result of such contest and will, promptly after the final determination of such contest or settlement thereof, pay and discharge the amounts which shall be determined to be payable therein, together with all penalties, fines, interests, costs and expenses (including attorney’s fees) thereon or incurred in connection therewith.

Insurance

Each Member shall, and each Controlling Member covenants to cause each of its System Affiliates (subject to contractual and organizational limitations) to, maintain or cause to be

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maintained at its sole cost and expense, insurance (or self-insurance, as the case may be) with respect to its Property, the operation thereof and its business against such casualties, contingencies and risks (including but not limited to public liability and employee dishonesty) and in amounts not less than is customary in the case of corporations engaged in the same or similar activities and similarly situated and as is adequate to protect its Property and operations, provided however, that self-insurance may not be used to insure Property, Plant and Equipment other than in the form of commercially reasonable deductibles under any insurance secured. In addition, the insurance maintained by the System will be subject to review by a Consultant once every two years. An insurance company providing insurance will be required to have an “A” rating from Standard and Poor’s or Moody’s.

Debt Service Coverage Ratio

Each Member covenants and agrees to, and each Controlling Member covenants to cause (subject to contractual and organizational limitations) each of its System Affiliates to, charge such fees and rates and to exercise such skill and diligence as to provide income from its Property together with other available funds sufficient to pay promptly all payments of principal and interest on its Indebtedness, all expenses of operation, maintenance and repair of its Property and all other payments required to be made by it under the Master Indenture to the extent permitted by law. Each Member further covenants and agrees that it will, and each Controlling Member covenants that it will cause (subject to contractual and organizational limitations) each of its System Affiliates to, from time to time as often as necessary and to the extent permitted by law, revise its rates, fees and charges in such manner as may be necessary or proper to comply with the provisions of the Master Indenture.

At the end of each Fiscal Year or as soon as practicable thereafter, the Obligated Group Agent shall calculate the Income Available for Debt Service and the Debt Service Coverage Ratio of the System as of the end of such Fiscal Year. A copy of such calculations shall be delivered to the Persons to whom financial statements are required to be delivered under the Master Indenture, at the time of delivery of its financial report as required by the Master Indenture.

If, at the end of any Fiscal Year, the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Master Trustee shall require the Obligated Group Agent at its expense to retain a Consultant to make recommendations with respect to the rates, fees and charges of the System Affiliates and the System’s methods of operation and other factors affecting their financial condition in order to increase such Debt Service Coverage Ratio to at least 1.10 to 1 in the next succeeding Fiscal Year. A copy of the Consultant’s report and recommendations, if any, shall be filed with the Obligated Group Agent and the Master Trustee. Each Member shall follow and each Controlling Member shall cause (subject to contractual and organizational limitations) each of its System Affiliates to follow each recommendation of the Consultant applicable to it to the extent feasible (as determined in the reasonable judgment of the Governing Body of such Member) and permitted by law. This section shall not be construed to prohibit any Person from serving indigent patients to the extent required for such Person to continue its qualification as a Tax-Exempt Organization or from serving any other class or classes of patients

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without charge or at reduced rates so long as such service does not prevent the System from satisfying the other requirements of the Master Indenture.

The foregoing provisions notwithstanding, if, at the end of any Fiscal Year, the Debt Service Coverage Ratio of the System is less than 1.10 to 1, the Master Trustee shall not be obligated to require the Obligated Group Agent to retain a Consultant to make such recommendations if: (a) there is filed with the Master Trustee a written report addressed to it of a Consultant which contains an opinion of such Consultant to the effect that applicable laws or regulations have prevented the System from generating Income Available for Debt Service during such Fiscal Year in an amount sufficient to produce a Debt Service Coverage Ratio of the System of 1.10 to 1 or higher; (b) the report of such Consultant indicates that the fees and rates charged by the System Affiliates are such that, in the opinion of the Consultant, the System Affiliates have generated the maximum amount of Revenues reasonably practicable given such laws or regulations; and (c) the Debt Service Coverage Ratio of the System was at least 1.00 to 1 for such Fiscal Year. The Obligated Group Agent shall not be required to cause the Consultant’s report referred to in the preceding sentence to be prepared more frequently than once every two Fiscal Years if at the end of the first of such two Fiscal Years the Obligated Group Agent provides to the Master Trustee an Officer’s Certificate or an opinion of Counsel to the effect that the applicable laws and regulations underlying the Consultant’s report delivered in respect of the previous Fiscal Year have not changed in any material way.

In addition, if at any time during a Fiscal Year, any bankruptcy, dissolution, reorganization, arrangement, insolvency or liquidation proceedings, proceedings under Title 11 of the United States Code, as amended, or other proceedings for relief under any bankruptcy law or similar law for the relief of debtors are instituted by or against any System Affiliate other than a Member of the Obligated Group (other than bankruptcy proceedings instituted by any such System Affiliate against third parties), and if instituted against any System Affiliate other than a Member of the Obligated Group are allowed against such System Affiliate or are consented to or are not dismissed, stayed or otherwise nullified within 90 days after such institution, the Master Trustee shall require the Obligated Group Agent to deliver an Officer’s Certificate calculating the Debt Service Coverage Ratio of the System for the previously completed Fiscal Year excluding such System Affiliate in the calculations. As a result of such calculation, if the Debt Service Coverage Ratio is less than 1.10 to 1, the Master Trustee shall require the Obligated Group Agent at its expense to retain a Consultant as if the System had not achieved a Debt Service Coverage Ratio of at least 1.10 to 1 for such Fiscal Year unless not required, all pursuant to the provisions of the two preceding paragraphs.

Merger, Consolidation, Sale or Conveyance

(a) Each Member agrees that it will not merge into, or consolidate with, one or more corporations which are not Members, or allow one or more of such corporations to merge into it, or sell or convey all or substantially all of its Property to any Person who is not a Member, unless:

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(i) Any successor corporation to such Member (including without limitation any purchaser of all or substantially all the Property of such Member) is a corporation organized and existing under the laws of the United States of America or a state thereof and shall execute and deliver to the Master Trustee an appropriate instrument, satisfactory to the Master Trustee, containing the agreement of such successor corporation to assume, jointly and severally, the due and punctual payment of the principal of, premium, if any, and interest on all Obligations according to their tenor and the due and punctual performance and observance of all the covenants and conditions of the Master Indenture to be kept and performed by such Member; and prior to such merger or consolidation, or such sale or conveyance, the Master Trustee shall have received an Officer’s Certificate demonstrating that if the action had been taken as of the first day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, (a) the Debt Service Coverage Ratio of the System would not have been less than 1.10 to 1 and (b) that the Debt Service Coverage Ratio of the System would be at least seventy-five percent (75%) of what the coverage would have been absent such action. The limitation in clause (b) of the preceding sentence shall not apply in instances when the Debt Service Coverage Ratio of the System for such Fiscal Year is above 2.5 to 1 after giving effect to such action;

(ii) Immediately after such merger or consolidation, or such sale or conveyance, no Member would be in default in the performance or observance of any covenant or condition of any Related Loan Document or this Master Indenture; and

(iii) If all amounts due or to become due on all Related Bonds have not been fully paid to the holders thereof or fully provided for, there shall be delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that under then existing law the consummation of such merger, consolidation, sale or conveyance would not adversely affect the validity of such Related Bonds or the exemption otherwise available from federal or state income taxation of interest payable on such Related Bonds.

(b) In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation shall succeed to and be substituted for its predecessor, with the same effect as if it had been named in the Master Indenture as such Member and the Member party to such transaction, if it is not the survivor, shall thereupon be relieved of any further obligation or liabilities under the Master Indenture or upon the Obligations and such Member as the predecessor or non-surviving corporation may thereupon or at any time thereafter be dissolved, wound up or liquidated. Any successor corporation to such Member thereupon may cause to be signed and may issue in its own name Obligations under the Master Indenture and the predecessor corporation shall be released from its obligations under the Master Indenture and under any Obligations, if such predecessor corporation shall have conveyed all Property owned by it (or all such Property shall be deemed conveyed by operation of law) to such successor corporation. All Obligations so issued by such successor corporation under the Master Indenture shall in all respects have the same legal rank and benefit under the Master Indenture as Obligations theretofore or thereafter issued in accordance with the terms of the Master Indenture as though all of such Obligations had been

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issued under the Master Indenture by such prior Member without any such consolidation, merger, sale or conveyance having occurred.

(c) In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in Obligations thereafter to be issued as may be appropriate.

(d) The Master Trustee may rely upon an opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of the Master Indenture and that it is proper for the Master Trustee under the provisions of the Master Indenture to join in the execution of any instrument required to be executed and delivered by the Master Indenture.

(e) Except as may be expressly provided in any Supplemental Master Indenture, the ability of any System Affiliate to merge into, or consolidate with, one or more corporations, or allow one or more corporations to merge into it, or sell or convey all or substantially all of its Property to any Person is not limited by the provisions of the Master Indenture. Notwithstanding anything to the contrary in the Master Indenture, no System Affiliate shall engage in any merger or consolidation or disposition of substantially all of its assets if any Outstanding Related Bonds have been issued for the benefit of such System Affiliate until there is delivered to the Master Trustee an opinion of nationally recognized municipal bond counsel to the effect that, under then existing law, such action will not adversely affect the validity of any Related Bond or any exemption from federal or state income taxation of interest payable thereon to which such Related Bond would otherwise be entitled.

Financial Statements

The Obligated Group Agent and each Member covenant that they will, and will cause (subject to contractual and organizational limitations) each System Affiliate controlled by the Obligated Group Agent or such Member to, keep or cause to be kept proper books of records and accounts in which full, true and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the System Affiliates in accordance with generally accepted accounting principles consistently applied except as may be disclosed in the notes to the audited financial statements referred to in subparagraph (A) below, and will furnish to the Master Trustee:

(A) As soon as practicable after they are available, but in no event more than 120 days after the last day of each Fiscal Year, a financial report of the System for such Fiscal Year certified by a firm of nationally recognized independent certified public accountants selected by the Obligated Group Agent prepared on a combined or consolidated, or combining or consolidating, basis in accordance with generally accepted accounting principles covering the operations of the System for such Fiscal Year and containing an audited consolidated statement of financial position of the System as of the end of such Fiscal Year and an audited consolidated and an unaudited consolidating statement of changes in net assets and statement of cash flows of the System for such Fiscal Year and an audited consolidated and an unaudited consolidating

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statement of operations of the System for such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year. In the event that any System Affiliate’s financial report, statement of financial position and statement of changes in net assets and statement of cash flows are not included in the financial report of the System delivered in accordance with the previous sentence, such System Affiliate’s financial report otherwise meeting the requirements of the previous sentence shall be delivered as soon as practicable after they are available, but in no event more than 120 days after the last day of each Fiscal Year of such System Affiliate.

(B) In the event that Obligations are Outstanding which were issued for the benefit of any Contract Participant that represent more than ten percent (10%) of the Outstanding Obligations, the Obligated Group Agent shall cause audited financial statements of such Contract Participant to be delivered as soon as practicable after they are available, but in no event more than 120 days after the last day of such Contract Participant’s fiscal year.

(C) If the statements referred to in subsection (A) above do not include the results of operations of any Material System Affiliate, as soon as practicable, but in no event more than 120 days after the last day of each Fiscal Year for such Material System Affiliate, a financial statement for such Material System Affiliate for such Fiscal Year prepared by or at the direction of the chief financial officer of such Material System Affiliate on a combined or consolidated basis to include the results of operations of all Persons required to be consolidated or combined with such Material System Affiliate in accordance with generally accepted accounting principles and containing at least the results of operations of such Material System Affiliate for the Fiscal Year and a statement for financial position as of the end of such Fiscal Year, showing in each case in comparative form the financial figures for the preceding Fiscal Year for such Material System Affiliate.

(D) If financial statements have been delivered to the Master Trustee pursuant to the provisions of subsection (C) above, then, as soon as practicable, but in no event more than 120 days after the last day of each Fiscal Year of the Obligated Group Agent, the result of operations and statement of financial position of the Obligated Group prepared by or at the direction of the chief financial officer of the Obligated Group Agent based upon the financial statements described in subsections (A) and (C) above (such result of operations and statement of financial position being referred to as the “Obligated Group Financial Statements”), together with a certificate of the chief financial officer of the Corporation stating that the Obligated Group Financial Statements were prepared in accordance with generally accepted accounting principles (except for required consolidations) and that the Obligated Group Financial Statements reflect the results of the operations of only the Members of the Obligated Group and that all Members of the Obligated Group are included.

(E) At the time of delivery of the financial report referred to in subsection (A) above, an Officer’s Certificate of the Obligated Group Agent, stating that the Obligated Group Agent has made a review of the activities of each Member and other System Affiliate during the preceding Fiscal Year for the purpose of determining whether or not the Members and other System Affiliates have complied with all of the terms, provisions and conditions of the Master

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Indenture and that each Member and System Affiliate has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Master Indenture on its part to be performed and is not in default in the performance or observance of any of the terms, covenants, provisions or conditions of the Master Indenture, or if any such Person shall be in default such certificate shall specify all such defaults and the nature thereof.

(F) As soon as practicable after they are available, but in no event more than 60 days after the end of each quarter of each Fiscal Year excluding the last quarter of each Fiscal Year, unaudited combined or consolidated financial statements of the System in accordance with generally acceptable accounting principles.

Indebtedness

Additional Long-Term Indebtedness (other than Non-Recourse Indebtedness or Long- Term Indebtedness issued to refinance or refund any Outstanding Indebtedness of any System Affiliate whereby the Maximum Annual Debt Service Requirements on all Outstanding Long- Term Indebtedness of the System Affiliates will not be increased by more than ten percent (10%)) may not be incurred by any System Affiliate unless an Officer’s Certificate is provided to the Master Trustee evidencing the fact that the incurrence of such Indebtedness shall not cause the Debt to Capitalization Ratio to exceed 0.67. For purposes of this provision, “Debt to Capitalization Ratio” is defined to mean, as of any particular date, the quotient obtained by dividing (a) the total Outstanding principal amount of Long-Term Indebtedness of the System Affiliates as of such date by (b) the sum of:

(i) the total Outstanding principal amount of Long-Term Indebtedness of the System Affiliates; and

(ii) the sum of the unrestricted and temporarily restricted net assets and equity accounts (as the case may be) of the System Affiliates as of such date less the accumulated deficit of taxable System Affiliates as of such date, determined in accordance with generally accepted accounting principles.

In addition, additional Short-Term Indebtedness may not be incurred by any System Affiliate unless the aggregate amount of all Outstanding Short-Term Indebtedness including such additional Short-Term Indebtedness but excluding any current portion of Outstanding Long-Term Indebtedness is less than ten percent (10%) of the net operating revenues of the System provided that the aggregate amount of all Outstanding Short-Term Indebtedness must be reduced to at least five percent (5%) of net operating revenues of the System for twenty consecutive days within each Fiscal Year. Notwithstanding the above, $70,000,000 of existing Long-Term Indebtedness of a System Affiliate may be converted to Short-Term Indebtedness without complying with the above, provided however, that such Long-Term Indebtedness will continue to be treated as Outstanding Long-Term Indebtedness even after conversion to Short- Term Indebtedness.

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Parties to Guaranty Agreement

The Corporation shall, at all times, cause all Material System Affiliates to be a party to the Guaranty Agreement assuming the addition of such Material System Affiliate would comply with the applicable provisions of the Guaranty Agreement for the addition of parties; provided, however, that MedStar Family Choice, Inc. (“MFC”) will not be required to become a party to the Guaranty Agreement unless (i) it generates in excess of 5.0% of the System’s revenues after deducting its regulatory required amounts to meet its insurance liability obligations, administrative expenses and reserves and (ii) it secures approval of the State of Maryland and District of Columbia insurance commissioners, as well as, the insurance commissioner of any other jurisdiction in which it may operate in the future. Upon securing the consent of a majority of the holders of Obligations and Related Bonds, the Master Indenture will be amended to provide that no Material System Affiliate that constitutes a regulated insurance entity (including MFC) will ever be required to become a party to the Guaranty Agreement. The holders of the Bonds (and the Obligations securing the Bonds) will be deemed to have consented to this amendment by their purchase of the Bonds.

Sale, Lease or Other Disposition of Property

No System Affiliate shall sell, transfer or dispose of Property in any Fiscal Year except to another System Affiliate, other than;

(1) a sale or transfer of Property (other than cash or cash equivalents) for fair market value; or

(2) Property which has become worn out, obsolete or unnecessary for the operations of a System Affiliate; or

(3) Property which has been replaced or disposed of in the ordinary course of business; or

(4) sales, transfers and dispositions (other than cash or cash equivalents) pursuant to which the Debt Service Coverage Ratio of the System is greater or the same after giving effect to such sale, transfer or disposition calculated as if such action occurred on the first day of the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered; or

(5) Property constituting medical office buildings located on the Washington Hospital Center campus, Franklin Square Hospital campus and in Essex, Maryland; the Kober Cogen building and adjacent parcel known as Parking Lot A on the Georgetown University Hospital campus; Property leased to Children’s Hospital National Medical Center on the Washington Hospital Center campus as well as any Property located on the campus of Good Samaritan Hospital but not constituting the acute care facilities of Good Samaritan Hospital and, in connection with any of the foregoing, a grant or acceptance of any easements, covenants,

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restrictions, and other rights that affect the Property not so released and that are appurtenant to the portion of the Property that is being sold, transferred or disposed of; or

(6) Property constituting restricted gifts, grants and bequests that are not available to pay debt service on Indebtedness; or

(7) Property (other than cash or cash equivalents) with a Book Value of less than five percent (5%) of net Property, Plant and Equipment of the System; or

(8) Property constituting cash or cash equivalents (i) for fair market value or (ii) the cash or cash equivalents of the System would be at least seventy-five percent (75%) of the greater of (a) the cash or cash equivalents of the System as of the end of the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered and (b) the cash or cash equivalents of the System as of the date of the relevant action; and the cash or cash equivalents of the System would be not less than the greater of (a) a dollar amount equal to fifty-five (55) Days Cash on Hand, calculated as of the end of the most recent Fiscal Year and (b) a dollar amount equal to fifty-five (55) Days Cash on Hand, calculated as of the date of the relevant action; or

(9) in connection with a true “sale and leaseback” transaction; or

(10) sales, transfers and dispositions (other than cash or cash equivalents) resulting in (i) the Debt Service Coverage Ratio of the System exceeding ninety percent (90%) of what the coverage would have been absent such sale, transfer or disposition and (ii) the Debt Service Coverage Ratio of the System being greater than 1.75 to 1 after giving effect to such sale, transfer or disposition. Compliance with these provisions would be calculated as if such action occurred on the first day of the most recent Fiscal Year for which audited combined or consolidated financial statements of the System have been delivered.

Compliance with each of the above will be evidenced for each Fiscal Year by delivery of an Officer’s Certificate to the Master Trustee annually; provided, however, with regard to clauses (4) and (10) above, compliance will be evidenced by delivery of an Officer’s Certificate to the Master Trustee prior to such sales, transfers or dispositions of Property. The Master Trustee may solely rely on such Officer’s Certificate to evidence compliance with the above provisions of the Master Indenture.

Liens on Property

No Member shall create or incur or permit to be created or incurred or to exist any Lien on any Property of such Member, and no Controlling Member (subject to contractual and organizational limitations) shall permit to be created or incurred or to exist any Lien on any Property of any System Affiliate controlled by it except, in each instance, Permitted Encumbrances.

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Pledge of Revenues of Corporation

The Corporation, to the extent permitted by law, grants for the benefit of the holders of Outstanding Obligations a security interest in the Pledged Revenues in order to secure the Obligated Group’s obligations under the Master Indenture.

Right to Consent

Each Member shall have the right to agree in any Related Bond Indenture, Related Loan Document or Supplemental Master Indenture pursuant to which an Obligation is issued that, so long as any Related Bonds remain outstanding under such Related Bond Indenture or such Obligation remains outstanding, any or all provisions of the Master Indenture which provide for approval, consent, direction or appointment by the Master Trustee, provide that anything must be satisfactory or acceptable to the Master Trustee or not unacceptable to the Master Trustee, allow the Master Trustee to request anything or contain similar provisions granting discretion to the Master Trustee may also require or allow, as the case may be, the approval, consent, appointment, satisfaction, acceptance, request or like exercise of discretion by the Related Issuer, the Related Bond Trustee or the holders of some specified percentage of such Obligations as provided for in such Obligations, or any one thereof and that all items required to be delivered or addressed to the Master Trustee under the Master Indenture may also be delivered or addressed to the Related Issuer, such Obligation holders and the Related Bond Trustee, or any one thereof, unless waived thereby.

Events of Default

Each of the following events is pursuant to the Master Indenture declared an “event of default”:

(a) failure of the Obligated Group to pay any installment of interest or principal, or any premium, on any Obligation when the same shall become due and payable, whether at maturity, upon any date fixed for prepayment or by acceleration or otherwise and the continuance of such failure for ten days (or any shorter grace period required in the Supplemental Master Indenture pursuant to which such Obligation was issued); provided, however, that in no event shall any grace period continue for a period of time longer than is allowed under the Related Bonds Indenture to which the Related Bonds were issued; or

(b) failure of any Member to comply with, observe or perform any other covenants, conditions, agreements or provisions of the Master Indenture and to remedy such default within 60 days after written notice thereof to such Member and the Obligated Group Agent from the Master Trustee or the holders of at least 20% in aggregate principal amount of the outstanding Obligations; provided, that if such default cannot with due diligence and dispatch be wholly cured within 60 days but can be wholly cured, the failure of the Member to remedy such default within such 60-day period shall not constitute a default under the Master Indenture if the Member shall immediately upon receipt of such notice commence with due diligence and

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dispatch the curing of such default and, having so commenced the curing of such default, shall thereafter prosecute and complete the same with due diligence and dispatch; or

(c) any representation or warranty made by any Member in the Master Indenture or in any Supplemental Master Indenture or in any statement or certificate furnished to the Master Trustee or the purchaser of any Obligation or Related Bond in connection with the delivery of any Obligation or sale of any Related Bond or furnished by any Member pursuant the Master Indenture or any Supplemental Master Indenture proves untrue in any material respect as of the date of the issuance or making thereof and shall not be corrected or brought into compliance within 60 days after written notice thereof to the Obligated Group Agent by the Master Trustee or the holders of at least 20% in aggregate principal amount of the outstanding Obligations; or

(d) default in the payment of the principal of, premium, if any, or interest on any Indebtedness for borrowed money (other than Non-Recourse Indebtedness) of any Member, including without limitation any Indebtedness created by any Related Loan Document, as and when the same shall become due, or an event of default as defined in any mortgage, indenture, loan agreement or other instrument under or pursuant to which there was issued or incurred, or by which there is secured, any such Indebtedness (including any Obligation) of any Member, and which default in payment or event of default entitles the holder thereof (or any credit enhancer exercising the rights of such holder) to declare or, in the case of any Obligation, to request that the Master Trustee declare, such Indebtedness due and payable prior to the date on which it would otherwise become due and payable; provided, however, that if such Indebtedness is not evidenced by an Obligation or issued, incurred or secured by or under a Related Loan Document, a default in payment thereunder shall not constitute an “event of default” under the Master Indenture unless the unpaid principal amount of such Indebtedness, together with the unpaid principal amount of all other Indebtedness so in default, exceeds 1% of the Revenues of the System as shown on or derived from the then latest available audited consolidated financial statements of the System; or

(e) any judgment or similar process shall be entered or filed against any Member or against any Property of any Member and remains unvacated, unpaid, unbonded, unstayed or uncontested in good faith for a period of 60 days; provided, however, that the foregoing shall not constitute an event of default where (i) the judgment or similar process is payable from proceeds of insurance (including self-insurance or a captive insurance company), (ii) the judgment or similar process remains unvacated, unpaid, unbonded, unstayed or uncontested due to a good faith dispute as to the insurance coverage of the underlying claim to which the judgment or similar process pertains or (iii) the amount of such judgment or similar process, together with the amount of all other such judgments or similar processes so unvacated, unpaid, unbonded, unstayed or uncontested, does not exceed 1% of the Revenues of the System as shown on or derived from the then latest available audited consolidated financial statements of the System; or

(f) any Member admits insolvency or bankruptcy or its inability to pay its debts as they mature, or is generally not paying its debts as such debts become due, or makes an assignment for the benefit of creditors or applies for or consents to the appointment of a trustee, custodian or receiver for such Member, or for the major part of its Property; or

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(g) a trustee, custodian or receiver is appointed for any Member or for the major part of its Property and is not discharged within 90 days after such appointment; or

(h) bankruptcy, dissolution, reorganization, arrangement, insolvency or liquidation proceedings, proceedings under Title 11 of the United States Code, as amended, or other proceedings for relief under any bankruptcy law or similar law for the relief of debtors are instituted by or against any Member (other than bankruptcy proceedings instituted by any Member against third parties), and if instituted against any Member are allowed against such Member or are consented to or are not dismissed, stayed or otherwise nullified within 90 days after such institution; or

(i) the Debt Service Coverage Ratio of the System was less than 1 to 1 as of the end of two consecutive Fiscal Years and, as of the end of the second of such Fiscal Years, the Corporation had less than 55 Days Cash on Hand; or

(j) an event of default under the Guaranty Agreement delivered by certain System Affiliates to the Master Trustee.

Acceleration

If an event of default has occurred and is continuing, the Master Trustee may, and if requested by the holders of not less than 20% in aggregate principal amount of Outstanding Obligations shall, by notice in writing delivered to the Obligated Group Agent, declare the entire principal amount of all Obligations then outstanding under the Master Indenture and the interest accrued thereon immediately due and payable, and the entire principal and such interest shall thereupon become immediately due and payable, subject, however, to the provisions of the Master Indenture with respect to waivers of events of default. The foregoing notwithstanding, if the Supplemental Master Indenture creating an Obligation or Obligations includes a requirement that the consent of any credit enhancer, liquidity provider or any other Person be obtained prior to the acceleration of such Obligation or Obligations, the Master Trustee may not accelerate such Obligation or Obligations without the consent of such Person. In addition, the holder of any Accelerable Instrument under which Accelerable Instrument an event of default exists (which event of default permits the holder thereof to request that the Master Trustee declare such Indebtedness evidenced by an Obligation due and payable prior to the date on which it would otherwise become due and payable) may direct that the Master Trustee accelerate such Indebtedness.

Remedies; Rights of Obligation Holders

Upon the occurrence of any event of default under the Master Indenture, the Master Trustee may pursue any available remedy including a suit, action or proceeding at law or in equity to enforce the payment of the principal of, premium, if any, and interest on the Obligations outstanding under the Master Indenture and any other sums due under the Master Indenture and may collect such sums in the manner provided by law out of the Property of any Member wherever situated.

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If an event of default shall have occurred, and if it shall have been requested so to do by either the holders of 20% or more in aggregate principal amount of Obligations outstanding or the holder of an Accelerable Instrument upon whose request the Master Trustee has accelerated the Obligations (and upon the provision of indemnity satisfactory to the Master Trustee in its sole discretion), the Master Trustee shall be obligated to exercise such one or more of the rights and powers conferred by the Master Indenture as the Master Trustee shall deem most expedient in the interests of the holders of Obligations; provided, however, that the Master Trustee shall have the right to decline to comply with any such request if the Master Trustee shall be advised by Counsel (who may be its own Counsel) that the action so requested may not lawfully be taken or the Master Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of Obligations not parties to such request.

No remedy by the terms of the Master Indenture conferred upon or reserved to the Master Trustee (or to the holders of Obligations) is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given to the Master Trustee or to the holders of Obligations under the Master Indenture now or hereafter existing at law or in equity or by statute.

No delay or omission to exercise any right or power accruing upon any default or event of default shall impair any such right or power or shall be construed to be a waiver of any such default or event of default, or acquiescence therein; and every such right and power may be exercised from time to time and as often as may be deemed expedient.

No waiver of any default or event of default under the Master Indenture, whether by the Master Trustee or by the holders of Obligations, shall extend to or shall affect any subsequent default or event of default or shall impair any rights or remedies consequent thereon.

Direction of Proceedings by Holders

The holders of a majority in aggregate principal amount of the Obligations then outstanding which have become due and payable in accordance with their terms or have been declared due and payable pursuant to the Master Indenture and have not been paid in full in the case of remedies exercised to enforce such payment, or the holders of a majority in aggregate principal amount of the Obligations then outstanding in the case of any other remedy, shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Master Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Master Indenture or for the appointment of a receiver or any other proceedings under the Master Indenture; provided, that such direction shall not be otherwise than in accordance with the provisions of law and of the Master Indenture and that the Master Trustee shall have the right to decline to comply with any such request if the Master Trustee shall be advised by Counsel (who may be its own Counsel) that the action so directed may not lawfully be taken or the Master Trustee in good faith shall determine that such action would be unjustly prejudicial to the holders of the Obligations not parties to such direction. Pending such direction from the holders of a majority in aggregate principal amount of the Obligations outstanding, such direction may be given in the same

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manner and with the same effect by the holder of an Accelerable Instrument upon whose request the Master Trustee has accelerated the Obligations.

The foregoing notwithstanding, the holders of a majority in aggregate principal amount of the Obligations then outstanding which are entitled to the exclusive benefit of certain security in addition to that intended to secure all or other Obligations shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Master Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of the Master Indenture, the Supplemental Master Indenture or Indentures pursuant to which such Obligations were issued or so secured or any separate security document in order to realize on such security; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of the Master Indenture.

Application of Moneys

All moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of the Master Indenture (except moneys held for the payment of Obligations called for prepayment or redemption which have become due and payable and moneys which have been deposited with the Master Trustee in connection with the defeasance of any Obligation) shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys and of the fees of, expenses, liabilities and advances incurred or made by the Master Trustee, any Related Issuers and any Related Bond Trustees, be applied as follows:

(a) Unless the principal of all the Obligations shall have become or shall have been declared due and payable, all such moneys shall be applied:

First: To the payment to the persons entitled thereto of all installments of interest then due on the Obligations, in the order of the maturity of the installments of such interest, and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or privilege; and

Second: To the payment to the persons entitled thereto of the unpaid principal and premium, if any, on the Obligations which shall have become due (other than Obligations called for redemption or payment for payment of which moneys are held pursuant to the provisions of the Master Indenture), in the order of the scheduled dates of their payment, and, if the amount available shall not be sufficient to pay in full Obligations due on any particular date, then to the payment ratably, according to the amount of principal and premium due on such date, to the persons entitled thereto without any discrimination or privilege.

(b) If the principal of all the Obligations shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal, premium, if any, and interest then due and unpaid upon the Obligations without preference or

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priority of principal, premium or interest over the others, or of any installment of interest over any other installment of interest, or of any Obligation over any other Obligation, ratably, according to the amounts due respectively for principal, premium, if any, and interest to the persons entitled thereto without any discrimination or privilege; and

(c) If the principal of all the Obligations shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled then, subject to the provisions of paragraph (b) of this section in the event that the principal of all the Obligations shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of paragraph (a) of this section.

Whenever moneys are to be applied by the Master Trustee pursuant to the provisions of this section, such moneys shall be applied by it at such times, and from time to time, as the Master Trustee shall determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Master Trustee shall apply such moneys, it shall fix the date (which shall be an interest payment date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such date shall cease to accrue. The Master Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any unpaid Obligation until such Obligation shall be presented to the Master Trustee for appropriate endorsement or for cancellation if fully paid.

Whenever all Obligations and interest thereon have been paid under the provisions of this section and all expenses and charges of the Master Trustee have been paid, any balance remaining shall be paid to the person entitled to receive the same; if no other person shall be entitled thereto, then the balance shall be paid to the Obligated Group Agent on behalf of the Members.

Rights and Remedies of Obligation Holders

No holder of any Obligation shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of the Master Indenture or for the execution of any trust of the Master Indenture or for the appointment of a receiver or any other remedy under the Master Indenture, unless a default shall have become an event of default and (a) the holders of 20% or more in aggregate principal amount (i) of the Obligations which have become due and payable in accordance with their terms or have been declared due and payable under the Master Indenture and have not been paid in full in the case of powers exercised to enforce such payment or (ii) of the Obligations then outstanding in the case of any other exercise of power or (b) the holder of an Accelerable Instrument upon whose request the Master Trustee has accelerated the Obligations, shall have made written request to the Master Trustee and shall have offered it reasonable opportunity either to proceed to exercise the powers granted under the Master Indenture or to institute such action, suit or proceeding in its own name, and shall have offered indemnity to the Master Trustee for its fees and expenses in an amount satisfactory to the

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Master Trustee in its sole discretion, and unless the Master Trustee shall thereafter fail or refuse to exercise the powers granted under the Master Indenture, or to institute such action, suit or proceeding in its own name; and such notification, request and offer of indemnity are pursuant to the Master Indenture declared in every case at the option of the Master Trustee to be conditions precedent to the execution of the powers and trusts of the Master Indenture and to any action or cause of action for the enforcement of the Master Indenture, or for the appointment of a receiver or for any other remedy under the Master Indenture; it being understood and intended that no one or more holders of the Obligations shall have any right in any manner whatsoever to affect, disturb or prejudice the lien of the Master Indenture by its, his, her or their action or to enforce any right under the Master Indenture except in the manner provided in the Master Indenture, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner provided in the Master Indenture and for the equal benefit of the holders of all Obligations outstanding. Nothing in the Master Indenture contained shall, however, affect or impair the right of any holder to enforce the payment of the principal of, premium, if any, and interest on any Obligation at and after the maturity thereof, or the obligation of the Members to pay the principal, premium, if any, and interest on each of the Obligations issued under the Master Indenture to the respective holders thereof at the time and place, from the source and in the manner in said Obligations expressed.

Termination of Proceedings

In case the Master Trustee shall have proceeded to enforce any right under the Master Indenture by the appointment of a receiver, or otherwise, and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Master Trustee, then and in every case the Members and the Master Trustee shall, subject to any determination in such proceeding, be restored to their former positions and rights under the Master Indenture with respect to the Property pledged and assigned under the Master Indenture, and all rights, remedies and powers of the Master Trustee shall continue as if no such proceedings had been taken.

Waiver of Events of Default

If, at any time after the principal of all Obligations shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as provided in the Master Indenture and before the acceleration of any Related Bond, any Member shall pay or shall deposit with the Master Trustee a sum sufficient to pay all matured installments of interest upon all such Obligations and the principal and premium, if any, of all such Obligations that shall have become due otherwise than by acceleration (with interest on overdue installments of interest and on such principal and premium, if any, at the rate borne by such Obligations to the date of such payment or deposit, to the extent permitted by law) and the expenses of the Master Trustee, and any and all events of default under the Master Indenture, other than the nonpayment of principal of and accrued interest on such Obligations that shall have become due by acceleration, shall have been remedied, then and in every such case the holders of a majority in aggregate principal amount of all Obligations then outstanding and the holder of each Accelerable Instrument who requested the giving of notice of

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acceleration, by written notice to the Obligated Group Agent and to the Master Trustee, may waive all events of default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or affect any subsequent event of default, or shall impair any right consequent thereon.

Successor Master Trustee

Any corporation or association into which the Master Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which it is a party, ipso facto, shall be and become successor Master Trustee under the Master Indenture and vested with all of the title to the whole property or trust estate and all the trusts, powers, discretions, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of and of the parties to the Master Indenture, anything in the Master Indenture to the contrary notwithstanding.

Corporate Master Trustee Required; Eligibility

There shall at all times be a Master Trustee under the Master Indenture which shall be a bank or trust company organized under the laws of the United States of America or any state thereof, authorized to exercise corporate trust powers, subject to supervision or examination by federal or state authorities, and (except for the Master Trustee initially appointed under the Master Indenture and its successors) having a reported combined capital and surplus of at least $50,000,000. If at any time the Master Trustee shall cease to be eligible, it shall resign immediately in the manner provided in the Master Indenture. No resignation or removal of the Master Trustee and no appointment of a successor Master Trustee shall become effective until the successor Master Trustee has accepted its appointment.

Resignation by the Master Trustee

The Master Trustee and any successor Master Trustee may at any time resign from the trusts created under the Master Indenture by giving thirty days’ written notice to the Obligated Group Agent and by registered or certified mail to each registered owner of Obligations then outstanding and to each holder of Obligations as shown by the list of Obligation holders required by the Master Indenture to be kept at the office of the Master Trustee or its agent and to any Related Issuer of Related Bonds. Such resignation shall take effect at the end of such thirty days or when a successor Master Trustee has been appointed and has assumed the trusts created by the Master Indenture, whichever is later, or upon the earlier appointment of a successor Master Trustee by the Obligation holders or by the Obligated Group. Such notice to the Obligated Group Agent may be served personally or sent by registered or certified mail.

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Removal of the Master Trustee

The Master Trustee may be removed at any time, by an instrument or concurrent instruments in writing delivered to the Master Trustee and to the Obligated Group Agent, and signed by the owners of a majority in aggregate principal amount of Obligations then outstanding. So long as no event of default or event which with the passage of time or giving of notice or both would become such an event of default has occurred and is continuing under the Master Indenture, the Master Trustee may be removed with or without cause at any time by an instrument or concurrent instruments in writing signed by the Obligated Group Agent, delivered to the Master Trustee.

Appointment of Successor Master Trustee by the Obligation Holders; Temporary Master Trustee

In case the Master Trustee under the Master Indenture shall resign or be removed, or be dissolved, or shall be in the process of dissolution or liquidation, or otherwise becomes incapable of acting under the Master Indenture, or in case it shall be taken under the control of any public officer or officers, or of a receiver appointed by a court, a successor may be appointed by the owners of a majority in aggregate principal amount of Obligations then outstanding, by an instrument or concurrent instruments in writing signed by such owners, or by their attorneys in fact, duly authorized. The foregoing notwithstanding, so long as the Obligated Group is not in default under the Master Indenture, the Obligated Group shall have the right to approve any such successor trustee and to appoint any such successor trustee in lieu of the owners of a majority of the aggregate principal amount of the Obligations then Outstanding. Every such successor Master Trustee shall be a trust company or bank in good standing under the law of the jurisdiction in which it was created and by which it exists, having corporate trust powers and subject to examination by federal or state authorities, and having a reported capital and surplus of not less than $50,000,000.

Supplemental Master Indentures Not Requiring Consent of Obligation Holders

Except as provided in any Related Bond Indenture, subject to the limitations set forth in the Master Indenture, the Members and the Master Trustee may, without the consent of, or notice to, any of the Obligation holders, amend or supplement the Master Indenture, for any one or more of the following purposes:

(a) To cure any ambiguity or defective provision in or omission from the Master Indenture in such manner as is not inconsistent with and does not impair the security of the Master Indenture or adversely affect the holder of any Obligation;

(b) To grant to or confer upon the Master Trustee for the benefit of the Obligation holders any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Obligation holders and the Master Trustee, or either of them, to add to the covenants of the Members for the benefit of the Obligation holders or to surrender any right or power conferred under the Master Indenture upon any Member;

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(c) To assign and pledge under the Master Indenture any additional revenues, properties or collateral;

(d) To evidence the succession of another entity to the agreements of a Member or the Master Trustee, or the successor of any thereof under the Master Indenture;

(e) To permit the qualification of the Master Indenture under the Trust Indenture Act of 1939, as then amended, or under any similar federal statute hereafter in effect or to permit the qualification of any Obligations for sale under the securities laws of any state of the United States;

(f) To provide for the refunding or advance refunding of any Obligation;

(g) To provide for the issuance of Obligations;

(h) To reflect the addition to or withdrawal of a Member from the Obligated Group, including the necessary changes to Exhibit A to the Master Indenture as permitted by the Master Indenture;

(i) To provide for the issuance of Obligations with original issue discount, provided such issuance would not materially adversely affect the holders of Outstanding Obligations;

(j) To permit an Obligation to be secured by security which is not extended to all Obligation holders;

(k) To permit the issuance of Obligations which are not in the form of a promissory note;

(l) To modify or eliminate any of the terms of the Master Indenture; provided, however, that such Supplemental Master Indenture shall expressly provide that any such modifications or eliminations shall become effective only when there is no Obligation outstanding of any series created prior to the execution of such Supplemental Master Indenture the consent of a majority of the holders of which shall not have been obtained;

(m) To modify, eliminate or add to the provisions of the Master Indenture if the Master Trustee shall have received (i) written confirmation from each Rating Agency that such change will not result in a withdrawal or reduction of its credit rating assigned to any series of Obligations or Related Bonds, as the case may be, or a report, opinion or certification of a Consultant to the effect that such change is consistent with then current industry standards, (ii) an Officer’s Certificate of the Obligated Group Agent to the effect that, in the judgment of the Obligated Group Agent, such change is necessary to permit any Member of the Obligated Group to affiliate or merge with, on acceptable terms, one or more corporations that provide health care services and such modification is in the best interests of the holders of the Outstanding Obligations and (iii) an opinion of Counsel acceptable to the Master Trustee that such change or changes to the Master Indenture will not materially adversely affect the holders of any of the Obligations and does not materially adversely affect the holders of any Related Bonds; and

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(n) To make any other change which does not materially adversely affect the holders of any of the Obligations and does not materially adversely affect the holders of any Related Bonds, including without limitation any modification, amendment or supplement to the Master Indenture or any indenture supplemental hereto in such a manner as to establish or maintain exemption of interest on any Related Bonds under a Related Bond Indenture from federal income taxation under applicable provisions of the Code.

Any Supplemental Master Indenture providing for the issuance of Obligations shall set forth the date thereof, the date or dates upon which principal of, premium, if any, and interest on such Obligations shall be payable, the other terms and conditions of such Obligations, the form of such Obligations and the conditions precedent to the delivery of such Obligations which shall include, among other things:

(a) delivery to the Master Trustee of an opinion of Counsel acceptable to the Master Trustee to the effect that all requirements and conditions to the issuance of such Obligations, if any, set forth in the Master Indenture and in the Supplemental Master Indenture have been complied with and satisfied; and

(b) delivery to the Master Trustee of an opinion of Counsel acceptable to the Master Trustee to the effect that neither registration of such Obligations under the Securities Act of 1933, as amended, nor qualification of such Supplemental Master Indenture under the Trust Indenture Act of 1939, as amended, is required, or, if such registration or qualification is required, that the Obligated Group has complied with all applicable provisions of said acts.

Supplemental Master Indentures Requiring Consent of Obligation Holders

The holders of not less than a majority in aggregate principal amount of the Outstanding Obligations under the Master Indenture at the time of the execution of such Supplemental Master Indenture or, in case less than all of the several series of Obligations are affected thereby, the holders of not less than a majority in aggregate principal amount of the Outstanding Obligations of each series affected thereby at the time of the execution of such Supplemental Master Indenture, shall have the right, from time to time, anything contained in the Master Indenture to the contrary notwithstanding, to consent to and approve the execution by the Members and the Master Trustee of such Supplemental Master Indentures as shall be deemed necessary and desirable by the Members for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Master Indenture or in any Supplemental Master Indenture; provided, however, that nothing contained in the Master Indenture shall permit, or be construed as permitting, (a) an extension of the stated maturity or reduction in the principal amount of or reduction in the rate or extension of the time of paying of interest on or reduction of any premium payable on the redemption of, any Obligation, without the consent of the holder of such Obligation, (b) a reduction in the aforesaid aggregate principal amount of Obligations the holders of which are required to consent to any such Supplemental Master Indenture, without the consent of the holders of all the Obligations at the time outstanding which would be affected by the action to be taken, (c) the creation of any lien ranking prior to or on a parity with the lien of the Master Indenture with respect to the trust

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estate, if any, subject thereto or termination of the lien of the Master Indenture on any Property at any time subject thereto or deprivation of the holder of any Obligation of the security afforded by the lien of the Master Indenture except as otherwise provided in the Master Indenture, or (d) modification of the rights, duties or immunities of the Master Trustee, without the written consent of the Master Trustee.

If at any time the Obligated Group Agent shall request the Master Trustee to enter into any such Supplemental Master Indenture, the Master Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such Supplemental Master Indenture to be mailed by first class mail postage prepaid to each holder of an Obligation or, in case less than all of the series of Obligations are affected thereby, of an Obligation of the series affected thereby. Such notice shall briefly set forth the nature of the proposed Supplemental Master Indenture and shall state that copies thereof are on file at the principal corporate trust office of the Master Trustee identified in such notice for inspection by all Obligation holders. The Master Trustee shall not, however, be subject to any liability to any Obligation holder by reason of its failure to mail such notice, and any such failure shall not affect the validity of such Supplemental Master Indenture when consented to and approved as provided in the Master Indenture. If the holders of not less than a majority in aggregate principal amount of the Outstanding Obligations or the Outstanding Obligations of each series affected thereby, as the case may be, at the time of the execution of any such Supplemental Master Indenture shall have consented to and approved the execution thereof as provided in the Master Indenture, no holder of any Obligation shall have any right to object to any of the terms and provisions contained therein, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Master Trustee or the Members from executing the same or from taking any action pursuant to the provisions thereof. Upon the execution of any such Supplemental Master Indenture as permitted and provided in the Master Indenture, the Master Indenture shall be and be deemed to be modified and amended in accordance therewith.

Obligation and Document Substitution

(a) The Master Indenture may be amended or supplemented as provided in the Master Indenture.

(b) In addition, except as provided in any Related Bond Indenture, the Obligated Group and the Master Trustee, may, without the consent of any of the Holders of any Obligations or any Related Bonds, but only with the prior written consent of the credit enhancers of the Related Bonds of the affected series of Related Bonds, enter into one or more supplements, amendments, restatements, replacements or substitutions to the Master Indenture, to modify, amend, restate, supplement, replace, substitute, change or remove any covenant, agreement, term or provision of the Master Indenture, in whole or in part, including, but not limited to, an amendment, restatement or substitution of the Master Indenture, in whole to relate to all Related Bonds, or in part to relate to a portion of the Related Bonds, including but not limited to a series or subseries of the Related Bonds secured by payment obligations of the Persons on whose behalf the allocable portion of the proceeds of the Related Bonds were utilized, or an affiliate of such Persons, in order to effect (i) the affiliation of the Corporation, the

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Obligated Group, any Members of the Obligated Group or any System Affiliates with any of the foregoing or with another entity or entities in order to create a new or modified credit group or structure or in order to provide for the inclusion of the Corporation, the Obligated Group, any Members of the Obligated Group or any System Affiliates in another obligated group, combined group or other unified credit group or structure, (ii) the release or discharge of any collateral securing the Related Bonds, including, but not limited to, the release or discharge of (A) any or all Obligations, in whole or in part, issued pursuant to the Master Indenture to secure the Related Bonds and (B) the Corporation, the Obligated Group, any Members of the Obligated Group or any System Affiliates from any or all liability (whether direct or indirect) with respect to the Related Bonds or a portion thereof, any Related Loan Document, any Related Bond Indenture, the Obligations, or the Master Indenture or any portion of any thereof, in consideration for the issuance of a note or notes to secure the Related Bonds or portion of the Related Bonds that are to become an obligation of the new affiliated entities or the new obligated group, combined group or other unified credit group, which note or notes constitutes an obligation of the new affiliated entities or the members of the new obligated group, combined group or other unified credit group to make all payments required under such Obligation and any Related Loan Agreement, when due, and (iii) the replacement of all or a portion of the financial and operating covenants and related definitions set forth in the Master Indenture with those of the new affiliated entities or the new obligated group, combined group or other unified credit group, set forth in the new agreement or master indenture (such transaction is referred to collectively as the “Substitution Transaction”); provided, however, that the Master Indenture and any replacement or substitution thereof shall at all times contain certain covenants set forth in the Master Indenture.

(c) If all amounts due or to become due on the Related Bonds have not been fully paid to the Holder thereof, at or prior to the implementation of the Substitution Transaction there shall also be delivered to the Master Trustee, among other things,: (i) an opinion of nationally recognized bond counsel to the effect that under then existing law the implementation of the Substitution Transaction and the execution of the amendments, supplements, restatements, replacements or substitutions contemplated in the Master Indenture, in and of themselves, would not adversely affect the validity of the Related Bonds or the exclusion from federal income taxation of interest payable on the Related Bonds, (ii) an opinion of counsel to the new affiliated entities or the new obligated group, combined group or other unified credit group to the effect that (1) the note or notes of the new affiliated entities or the new obligated group, combined group or other unified credit group to be delivered to secure the Related Bonds constitute legal, valid and binding obligations of the new affiliated entities or the new obligated group, combined group or other unified credit group enforceable in accordance with their terms, except to the extent that the enforceability of such note or notes may be limited by any applicable bankruptcy, insolvency, liquidation, rehabilitation or other similar laws or enactment affecting the enforcement of creditors’ rights, and (2) the issuance of the note or notes will not cause the Related Bonds or such note or notes to become subject to the registration requirements pursuant to the Securities Act of 1933, as amended, (iii) an Officer’s Certificate demonstrating that if the new affiliated entity, obligated group, combined group or unified credit group as a result of the Substitution Transaction had been System Affiliates under the Master Indenture as of the first

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day of the most recently completed Fiscal Year for which combined or consolidated audited financial statements of the System have been prepared, the Debt Service Coverage Ratio would not have been less than 1.10 to 1; and (iv) if any Related Bonds are then rated by a Rating Agency, written confirmation from the Rating Agencies of the then existing rating on the Related Bonds.

(d) In addition, upon the implementation of the Substitution Transaction, the Corporation shall direct the Master Trustee to give written notice thereof, by first-class mail, to the Holders of the Outstanding Obligations.

(e) Notwithstanding the provisions described above within this subsection entitled “Obligation and Document Substitution”, the Master Indenture may be replaced or substituted in its entirety while the Bonds remain Outstanding only with the prior written consent of the Authority and the holders of a majority of the aggregate principal amount of Outstanding Bonds. Nothing herein shall limit any other rights of the Obligated Group and the Master Trustee in effect as set forth above.

Defeasance

If the Members shall pay or provide for the payment of the entire indebtedness on all Obligations (including, for the purposes of the Master Indenture, any Obligations owned by a Member) outstanding in any one or more of the following ways:

(a) by paying or causing to be paid the principal of (including redemption premium, if any) and interest on all Obligations outstanding, as and when the same become due and payable;

(b) by depositing with the Master Trustee, in trust, at or before maturity, moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations outstanding (including the payment of premium, if any, and interest payable on such Obligations to the maturity or redemption date thereof), provided that such moneys, if invested, shall be invested at the direction of the Obligated Group Agent in Escrow Obligations, in an amount, without consideration of any income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Obligations may be used at the direction of the Obligated Group Agent for any other purpose permitted by law;

(c) by delivering to the Master Trustee, for cancellation by it, all Obligations outstanding; or

(d) by depositing with the Master Trustee, in trust, before maturity, Escrow Obligations in such amount as the Master Trustee shall determine, based upon a verification report of independent certified public accountants, will, together with the income or increment to accrue thereon, without consideration of any reinvestment thereof, be fully sufficient to pay or

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redeem (when redeemable) and discharge the indebtedness on all Obligations outstanding at or before their respective maturity dates; and if the Obligated Group shall also pay or cause to be paid all other sums payable under the Master Indenture and any Related Bond Indenture or Indentures by the Obligated Group and, if any such Obligations are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given in accordance with the requirements of the Master Indenture or provisions satisfactory to the Master Trustee shall have been made for the giving of such notice, then and in that case (but subject to the provisions of the Master Indenture) the Master Indenture and the estate and rights granted under the Master Indenture shall cease, determine, and become null and void, and thereupon the Master Trustee shall, upon written request of the Obligated Group Agent, and upon receipt by the Master Trustee of an Officer’s Certificate from the Obligated Group Agent and an opinion of Counsel acceptable to the Master Trustee, each stating that in the opinion of the signers all conditions precedent to the satisfaction and discharge of the Master Indenture have been complied with, forthwith execute proper instruments acknowledging satisfaction of and discharging the Master Indenture and the lien of the Master Indenture. The satisfaction and discharge of the Master Indenture shall be without prejudice to the rights of the Master Trustee to charge and be reimbursed by the Obligated Group for any expenditures which it may thereafter incur in connection therewith.

Any moneys, funds, securities, or other property remaining on deposit under the Master Indenture (other than said Escrow Obligations or other moneys deposited in trust as above provided) shall, upon the full satisfaction of the Master Indenture, forthwith be transferred, paid over and distributed to the Obligated Group Agent.

The Obligated Group may at any time surrender to the Master Trustee for cancellation by it any Obligations previously authenticated and delivered which the Obligated Group may have acquired in any manner whatsoever, and such Obligations, upon such surrender and cancellation, shall be deemed to be paid and retired.

Provision for Payment of a Particular Series of Obligations or Portion Thereof

If the Obligated Group shall pay or provide for the payment of the entire indebtedness on all Obligations of a particular series or a portion of such a series (including any such Obligations owned by a Member) in one of the following ways:

(a) by paying or causing to be paid the principal of (including redemption premium, if any) and interest on all Obligations of such series or portion thereof outstanding, as and when the same shall become due and payable;

(b) by depositing with the Master Trustee, in trust, at or before maturity, moneys in an amount sufficient to pay or redeem (when redeemable) all Obligations of such series or portion thereof outstanding (including the payment of premium, if any, and interest payable on such Obligations to the maturity or redemption date), provided that such moneys, if invested, shall be invested at the direction of the Obligated Group Agent in Escrow Obligations in an

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amount, without consideration of any income or increment to accrue thereon, sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations of such series or portion thereof outstanding at or before their respective maturity dates; it being understood that the investment income on such Escrow Obligations may be used at the direction of the Obligated Group Agent for any other purpose permitted by law;

(c) by delivering to the Master Trustee, for cancellation by it, all Obligations of such series or portion thereof outstanding; or

(d) by depositing with the Master Trustee, in trust, Escrow Obligations in such amount as the Master Trustee shall determine, based upon a verification report of independent certified public accountants, will, together with the income or increment to accrue thereon without consideration of any reinvestment thereof, be fully sufficient to pay or redeem (when redeemable) and discharge the indebtedness on all Obligations of such series or portion thereof at or before their respective maturity dates; and if the Obligated Group shall also pay or cause to be paid all other sums payable under the Master Indenture by the Obligated Group with respect to such series of Obligations or portion thereof, and, if any such Obligations of such series or portion thereof are to be redeemed prior to the maturity of the Master Indenture, notice of such redemption shall have been given in accordance with the requirements of the Master Indenture or provisions satisfactory to the Master Trustee shall have been made for the giving of such notice, then in that case (but subject to the provisions of the Master Indenture) such Obligations shall cease to be entitled to any lien, benefit or security under the Master Indenture.

Satisfaction of Related Bonds

The provisions of other sections of the Master Indenture notwithstanding, any Obligation which secures a Related Bond shall be deemed paid and shall cease to be entitled to the lien, benefit and security under the Master Indenture in the circumstances described in subsection (b)(ii) of the definition of “Outstanding Obligations” contained in the Master Indenture.

SUMMARY OF CERTAIN PROVISIONS OF THE GUARANTY AGREEMENT

The following is a summary of certain provisions of the Guaranty Agreement. This summary should not be regarded as a full statement of the Guaranty Agreement or of the portions summarized. Reference is made to the Guaranty Agreement in its entirety for the complete statements of the provisions thereof, a copy of which is on file at the principal corporate trust office of the Master Trustee. Capitalized terms used herein and not defined shall have the meanings given to them in the forepart of this Official Statement or in the Master Indenture.

Guaranty

Under the provisions of the Guaranty Agreement, the Guarantors have absolutely and unconditionally guaranteed jointly and severally (a) the full and prompt payment of the principal

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and prepayment premium on the Obligations when and as the same shall become due, whether at the stated maturity thereof, by acceleration, call for prepayment or otherwise, (b) the full and prompt payment of any interest on any Obligations when and as the same shall become due, (c) any other payment required to be made by a Member of the Obligated Group with respect to an Obligation, including but not limited to payments pursuant to a Financial Products Agreement or a liquidity or credit agreement and (d) the full and complete performance by a Member of the Obligated Group of any other covenants, warranties, duties and obligations of a Member of the Obligated Group under the provisions of any Obligation and the Master Indenture.

A Guarantor may be released from the provisions of the Guaranty Agreement by amendment by complying with the provisions of the Master Indenture, as if such Guarantor were a member of the Obligated Group and such release constituted withdrawal of such Guarantor from the Obligated Group. A Guarantor may be added to the Guaranty Agreement by amendment by complying with the provisions of the Master Indenture, as if such Guarantor were to be admitted to the Obligated Group.

Covenants of Guarantors

Each Guarantor agrees that, so long as any of the Obligations are Outstanding and the Master Indenture has not been satisfied or discharged, it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets, and will not consolidate with or merge into another corporation or permit one or more corporations to consolidate with or merge into it; except as permitted by the disposition, consolidation and merger provisions of the Master Indenture, as if such Guarantor were a member of the Obligated Group provided that after giving effect thereto, no Event of Default shall exist under the Guaranty Agreement and no event shall exist which, with notice or lapse of time or both, would become such an Event of Default. This covenant does not apply to the merger or consolidation of one Guarantor into another Guarantor or into the Corporation nor does it apply to the transfer of all or substantially all of the assets of a Guarantor to another Guarantor or to the Corporation.

Each Guarantor also covenants to comply with each of the other covenants, warranties, and obligations set forth within the Master Indenture that relate to Systems Affiliates or each Member of the Obligated Group and such provisions are incorporated in the Guaranty Agreement by reference as if such provisions were stated in the Guaranty Agreement in their entirety.

Events of Default

An “Event of Default” under the Guaranty Agreement shall exist if any of the following occurs and is continuing:

(a) The Guarantors fail to perform or observe their obligations as described in the first paragraph under the heading “Guaranty” above;

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(b) Any Guarantor fails to comply with any other provision of the Guaranty Agreement, and such failure continues for more than sixty (60) days after written notice specifying such failure and requesting that it be remedied shall have been given to such Guarantor by the Master Trustee, unless the Master Trustee shall agree in writing to an extension of such time prior to its expiration; provided, however, that if the failure stated in the notice cannot be corrected within the applicable period, the Master Trustee will not unreasonably withhold its consent to an extension of such time if corrective action is instituted by such Guarantor within the applicable period and diligently pursued until the failure is corrected;

(c) Any material warranty, representation or other statement by or on behalf of any Guarantor contained in the Guaranty Agreement is false or misleading in any material respect on the date when made;

(d) A receiver, liquidator or trustee of any Guarantor or of any of its properties is appointed by court order and such order remains in effect for more than ninety (90) days; or such Guarantor is adjudicated bankrupt or insolvent; or any of its properties is sequestered by court order and such order remains in effect for more than ninety (90) days; or a petition is filed against such Guarantor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within ninety (90) days after such filing;

(e) Any Guarantor files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under such law;

(f) Any Guarantor makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of such Guarantor or of all or any part of its properties; and

(g) The occurrence of an Event of Default under the Deeds of Trust.

Remedies

If an Event of Default exists, the Master Trustee may proceed to enforce the provisions of the Guaranty Agreement and to exercise any other rights, powers and remedies available to the Master Trustee including those available at law or in equity or under the Deeds of Trust. The Master Trustee, in its sole discretion, shall have the right to proceed first and directly against the Guarantors under the Guaranty Agreement without proceeding against or exhausting any other remedies which it may have and without resorting to any other security held by the Master Trustee.

No remedy under the Guaranty Agreement conferred upon or reserved to the Master Trustee is intended to be exclusive of any other available remedy or remedies, but each and

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every such remedy shall be cumulative and shall be in addition to every other remedy given under the Guaranty Agreement or now or hereafter existing at law or in equity or by statute.

No delay or omission to exercise any right or power accruing upon the occurrence of any Event of Default under the Guaranty Agreement shall impair any such right or power or shall be construed to be a waiver thereof, but any such right or power may be exercised from time to time and as often as may be deemed expedient.

Termination of Guaranty Agreement

The obligations of the Guarantors under the Guaranty Agreement shall be satisfied in full and discharged upon the payment by the Guarantors to the Master Trustee of any amount due and owing on all Outstanding Obligations less all amounts theretofore deposited with the Master Trustee, whether under the Master Indenture or otherwise for the payment thereof resulting in the discharge and satisfaction of the Master Indenture.

SUMMARY OF CERTAIN PROVISIONS OF THE DEEDS OF TRUST

The following is a summary of certain provisions of the Deeds of Trust. This summary should not be regarded as a full statement of the Deeds of Trust or of the portions summarized. Reference is made to the Deeds of Trust in their entirety for the complete statements of the provisions thereof, copies of which are on file at the principal corporate trust office of the Master Trustee. Capitalized terms used herein and not defined shall have the meanings given to them in the forepart of this Official Statement. See “Security and Sources of Payment for the Bonds -- Deeds of Trust; Amendment Regarding Deeds of Trust” for a description of the amendment that will remove the requirement to maintain the Deeds of Trust.

Grant of Property

Under the terms of the Deeds of Trust, the System Hospitals each grant, bargain, sell and convey for the benefit of the Master Trustee as well as grant a security interest in, the following:

The Real Property, as hereinafter defined, to include:

(i) the parcels of land upon which the System Hospitals’ respective hospital facilities are located (collectively, the “Land”);

(ii) all right, title and interest of the System Hospitals, including any after- acquired right, title or reversion, in and to the streets and alleys adjoining the Land;

(iii) all and singular the rights, alleys, ways, tenements, hereditaments, easements, appurtenances, passages, waters, water rights, water courses, riparian rights, liberties, advantages, accessions and privileges now or hereafter appertaining to the Property (as hereinafter defined) or any part thereof, including, but not limited to, any homestead or other claim at law or in equity, the reversion or reversions, remainder or remainders thereof, and also

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all the estate, property, claim, right, title or interest now owned or hereafter acquired by the System Hospitals in or to the Property or any part thereof;

(iv) all improvements, structures and buildings now or hereafter erected or placed on the Land and all replacements thereof (collectively, the “Improvements”); and

(v) all tangible personal property of every kind and nature whatsoever, deemed to be, or permitted by law to be, fixtures and part of the Land and of the Improvements;

Unless specifically designated otherwise, the Land, the Improvements, and all other items and property described in the preceding paragraphs, together with all additions and improvements thereto, shall be referred to collectively as the “Real Property.”

The following categories of collateral:

(i) any and all judgments, awards of damages (including but not limited to consequential damages), payments, proceeds, settlements or other compensation made, including interest thereon, and the right to receive the same, as a result of, in connection with, or in lieu of (a) any taking of the Property or any part thereof under the power of eminent domain, either temporarily or permanently, (b) any change or alteration of the grade of any street, and (c) any other injury or damage to, or decrease in value of, the Property or any part thereof (all the foregoing being hereinafter sometimes referred to collectively as the “Condemnation Awards”, or singularly a “Condemnation Award”), to the extent of all System Hospitals’ Indebtedness (hereinafter defined) which may be secured by the Deeds of Trust at the date of receipt of any such Condemnation Award by the Master Trustee, and of the reasonable counsel fees, costs and disbursements, if any, incurred by the Master Trustee in connection with the collection of such Condemnation Award;

(ii) any and all payments, proceeds, settlements or other compensation made, including any interest thereon, and the right to receive the same, from any and all insurance policies covering the Property or any portion thereof; and

(iii) all the System Hospitals’ right, title and interest in and to (but not the System Hospitals’ obligations and burdens under) all architectural, engineering and similar plans, specifications, drawings, reports, surveys, plats, permits and the like, contracts for construction, operation and maintenance of, or provision of services to, the Property, and all sewer taps and allocations, agreements for utilities, bonds and the like, all relating to the Land and the Improvements (all such collateral being referenced herein as the “Miscellaneous Collateral”).

Except as prohibited by law, (a) all receipts, revenues, income and other moneys acquired by or on behalf of the System Hospitals from the operation of their respective hospital facilities whether now existing or hereafter acquired, and all rights to receive the same (including accounts, instruments, chattel paper and general intangibles representing a right to payment constituting revenues of their respective hospitals), whether now existing or hereafter coming into existence and whether now owned or held or hereafter acquired by their respective hospitals

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and all proceeds of the foregoing and (b) the non-operating revenues associated with their respective hospitals, including, without limitation, contributions, donations and pledges whether in the form of cash, securities or other personal property that are legally available to meet the System Hospitals’ obligations under the Guaranty Agreement; provided, however, that (1) gifts, grants, bequests, donations and contributions made to the System Hospitals designated at the time of making thereof by the donor or maker as being for certain specific purposes, and the income derived therefrom, to the extent required by such designation, shall be excluded from (a) and (b) above and (2) all receipts, revenues, income and other moneys subject to Permitted Encumbrances, in this context as defined in the Master Indenture and permitted therein, at present or in the future, other than the security interest in the Pledged Revenues, shall be excluded from (a) and (b) above (all of the foregoing being referenced herein as the “Pledged Revenues” and the Real Property, the Miscellaneous Collateral and the Pledged Revenues being collectively referenced herein as the “Property”).

The Deeds of Trust are intended to secure to the Master Trustee the prompt payment and performance by the System Hospitals of the Guaranty Agreement and the prompt performance of, observance of and compliance with, by the System Hospitals, all of the terms, covenants, conditions, stipulations, and agreements, express or implied, contained in the Deeds of Trust (all of the foregoing obligations of the System Hospitals being referred to herein as the “System Hospitals’ Indebtedness”).

Covenants and Agreements Relating to the Release of Property and Subordination of Liens

Without the prior written consent of the Master Trustee, except as permitted under the Deeds of Trust as described below and the sale, lease and disposition of property provisions contained in the Master Indenture (the “Release Conditions”), the System Hospitals will not encumber, transfer, sell, assign, lease, dispose of, or contract to transfer all or any part of the Property. The System Hospitals may, without the consent of the Master Trustee, transfer, sell, assign or convey the Property to the Corporation, any System Affiliate, or any entity directly or indirectly owned or the controlled by or directly or indirectly under common ownership or control with the System Hospitals, the Corporation or any System Affiliate; provided, however, unless the Release Conditions are met, any such conveyance of the Property shall be subject to the lien of the applicable Deed of Trust. Further, no consent of the Master Trustee is required for the encumbrance, transfer, sale or other conveyance of any interest in the System Hospitals.

The System Hospitals shall be entitled to the release of the Property or any portion thereof from the lien and security interest of the Deeds of Trust, and the Master Trustee shall release the Property or such portion thereof, if the Release Conditions are met or if the requirements of the Guaranty Agreement are met with respect to the release of any System Hospital. The Master Trustee shall rely solely upon a certificate of an officer of the Corporation as evidence that the Release Conditions have been met without the need for further documentation, inquiry or investigation. Upon receipt of such certificate of an officer of the Corporation, the Master Trustee immediately and without delay shall execute and deliver to the System Hospitals any and all releases requested by the System Hospitals and, in addition, the Master Trustee shall subordinate the lien and the effect of the Deeds of Trust to any easements,

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covenants, restrictions, and other rights that affect the Property not so released and that are appurtenant to the portion of the Property that is being released. As to the Property or portion thereof so released and as to any easements, covenants, restrictions and other rights that affect the Property not so released and that are appurtenant to the portion of the Property that is being released, the System Hospitals may thereafter take any action with respect thereto as if the same had never been subject to the lien and security interest of the Deeds of Trust. The Deeds of Trust shall also be subordinate and inferior to Permitted Encumbrances, as defined in the Master Indenture, which exist at this time or are created in the future.

Events of Default; Remedies

Events of Default. Any of the following events shall be an “Event of Default” under the Deeds of Trust:

(i) an Event of Default occurs under the Guaranty Agreement;

(ii) a System Hospital fails to fully and promptly perform, comply with or observe any term, covenant or agreement contained in the Deeds of Trust, and such failure remains unremedied for 60 days after written notice thereof shall have been given to the System Hospital by the Master Trustee, provided, however, if such failure be such that it can not be corrected within 60 days, it shall not be an Event of Default if a System Hospital is diligently taking appropriate corrective action to cure such failure; or

(iii) an Event of Default occurs under any of the Deeds of Trust.

Remedies. Upon the occurrence of an Event of Default, the Master Trustee may at any time thereafter exercise any of the following powers, privileges, discretions, rights and remedies, in addition to the powers, privileges, discretions, rights and remedies available to the Master Trustee under the Guaranty Agreement:

Foreclosure. The Master Trustee may take possession of and sell the Property, any substitutions or replacements thereto, or any part thereof subject to any lease which the Master Trustee elects to maintain. In connection therewith the System Hospitals authorize and empower the Master Trustee to take possession of and sell (or in case of any default of any purchaser to resell) the Property, or any part thereof, all in accordance with applicable law.

Receiver. As a matter of right and to the extent permitted by law, without notice to the System Hospitals, and without regard to the adequacy of the security, and upon application to a court of competent jurisdiction, the Master Trustee shall be entitled to the immediate appointment of a receiver for all or any part of the Property, and of the rents, income, profits, issues and proceeds, whether such receivership be incidental to a proposed sale of the Property or otherwise, and the System

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Hospitals consent to the appointment of such a receiver under the Deeds of Trust.

Uniform Commercial Code. The Master Trustee may proceed under the Uniform Commercial Code as to all or any part of the Miscellaneous Collateral or the Pledged Revenues and any other security granted under the Deeds of Trust and in conjunction therewith, to exercise all of the rights, remedies and powers of a secured party under the Uniform Commercial Code.

Each right, power and remedy of the Master Trustee as provided for in the Deeds of Trust or in the Guaranty Agreement shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in the Deeds of Trust or in the Guaranty Agreement, and the exercise or beginning of the exercise by the Master Trustee of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by the Master Trustee of any or all such other rights, powers or remedies.

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APPENDIX D

FORM OF CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (the “Disclosure Agreement”) is executed and delivered by MedStar Health, Inc., a Maryland non-stock corporation (the “Corporation”), on its own behalf and on behalf of the Obligated Group and the Guaranty System Affiliates (as defined below), and U.S. Bank National Association (the “Bond Trustee” and “Dissemination Agent”), in connection with the issuance of $[PAR] Maryland Health and Higher Educational Facilities Authority Revenue Bonds, MedStar Health Issue, Series 2017 (the “Bonds”). The Bonds are being issued pursuant to an indenture of trust (the “Bond Indenture”) between the Maryland Health and Higher Educational Facilities Authority (the “Issuer”) and the Bond Trustee. The proceeds of the Bonds are being loaned by the Issuer to the Corporation pursuant to a loan agreement (the “Loan Agreement”) between the Issuer and the Corporation. The obligations of the Corporation under the Loan Agreement are secured by payments made by the Obligated Group (the “Obligated Group”) on Obligation No. 48 (“Obligation No. 48”) issued by the Corporation under the Master Trust Indenture (the “Master Indenture”), dated as of December 1, 1998, as supplemented and amended, including by the Forty-Ninth Supplemental Master Trust Indenture, between the Corporation and U.S. Bank National Association, as successor master trustee. The payment and performance of the obligations of the Corporation under the Master Indenture is guaranteed by certain Material System Affiliates (as defined in the Master Indenture) as well as certain other System Affiliates (the Material System Affiliates together with the other System Affiliates party to the Guaranty Agreement, collectively referred to herein as the “Guaranty System Affiliates”) pursuant to a Guaranty Agreement between the Guaranty System Affiliates and the Master Trustee. The Corporation (on its own behalf and on behalf of the Obligated Group and the Guaranty System Affiliates), the Dissemination Agent and the Bond Trustee covenant and agree as follows:

SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Corporation, the Dissemination Agent and the Bond Trustee for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriters (as defined below) in complying with the Rule (defined below). The Corporation, the Dissemination Agent and the Bond Trustee acknowledge that the Issuer has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Agreement, and has no liability to any person, including any Holder or Beneficial Owner of the Bonds, with respect to the Rule.

SECTION 2. Definitions. In addition to the definitions set forth in the Bond Indenture, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by the Corporation pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

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“Beneficial Owner” shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries).

“Bond Trustee” shall mean U.S. Bank National Association, acting in its capacity as bond trustee for the Bonds, or any successor bond trustee.

“Corporation” shall mean the Corporation as defined in the introductory paragraph to this Disclosure Agreement and any entity that succeeds to the role of Obligated Group Agent under the Master Indenture.

“Dissemination Agent” shall mean U.S. Bank National Association, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Corporation and which has filed with the Bond Trustee a written acceptance of such designation.

“Holder” shall mean the person in whose name any Bond shall be registered.

“Listed Events” shall mean any of the events listed in Section 5 of this Disclosure Agreement.

“MSRB” shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at http://emma.msrb.org.

“Official Statement” means the official statement relating to the Bonds, dated [______], 2017.

“Participating Underwriter” shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with the offering of the Bonds.

“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“System” has the meaning set forth in the Master Indenture.

SECTION 3. Provision of Annual and Quarterly Reports.

(a) The Corporation shall, or shall cause the Dissemination Agent to, not later than January 1 of each year, commencing January 1, 2018 for the fiscal year ending June 30, 2017, provide to the MSRB an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of the System may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available

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by that date. If the Corporation’s fiscal year changes, it shall give notice of such change in a filing with the MSRB and the date above shall be deemed modified to a date six months following the changed fiscal year date. The Annual Report shall be submitted on a standard form in use by industry participants or other appropriate form and shall identify the Bonds by name and CUSIP number.

(b) Not later than 15 business days prior to the date specified in subsection (a) for providing the Annual Report to the MSRB, the Corporation shall provide the Annual Report to the Dissemination Agent. At such time, the Corporation shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by it hereunder. The Dissemination Agent may conclusively rely upon such certification of the Corporation and shall have no duty or obligation to review such Annual Report. If by such date the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Corporation to determine if the Corporation is in compliance with subsection (a).

(c) In addition to the Annual Report required to be filed pursuant to subsection (a), the Corporation shall, or shall cause the Dissemination Agent to, provide to the MSRB, not later than 75 days after the end of each quarter of the Corporation’s fiscal year (except for the fourth fiscal quarter), beginning with the fiscal quarter ending September 30, 2017, unaudited financial information for the System for such fiscal quarter, including a balance sheet, a cash flow statement and a consolidated statement of operations.

(d) If the Dissemination Agent does not receive the Annual Report from the Corporation or a written certification of the Corporation that it has filed the Annual Report with the MSRB by the date required in subsection (a), the Dissemination Agent shall, in a timely manner, send or cause to be sent to the MSRB a notice in substantially the form attached as Exhibit A.

(e) The Dissemination Agent shall file a report with the Corporation, the Issuer and the Bond Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided to the MSRB.

SECTION 4. Content of Annual Reports. The Corporation’s Annual Report shall contain or include by reference the following:

1. The audited consolidated financial statements for the System for the prior fiscal year, prepared in accordance with generally accepted accounting principles as promulgated from time to time by the Financial Accounting Standards Board. If the audited financial statements are not available by the time the Annual Report is required to be provided to the MSRB pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the Official Statement relating to the Bonds, and the audited financial statements shall be provided to the MSRB in the same manner as the Annual Report when they become available.

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2. Unless contained in the audited consolidated financial statements for the System provided in Section 4 (1) above, an update of the information of the type contained in Appendix A to the Official Statement relating to the Bonds:

a. A list of Members of the Obligated Group, the Material System Affiliates and any Guaranty System Affiliates.

b. A table showing the licensed acute beds and licensed post-acute beds by facility and location.

c. A summary of the System’s payor mix for the preceding fiscal year.

d. A summary table of historical utilization statistics for the preceding fiscal year of the type under the heading “Historical Utilization.”

e. A summary table showing the capitalization of the System for the preceding fiscal year.

f. A summary table showing the debt service coverage of the System for the preceding fiscal year.

g. Information for the most recent fiscal year similar to the information under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - Retirement Plans.”

h. Information for the most recent fiscal year similar to the information under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION - Liquidity and Capital Resources.”

Any or all of the items listed above may be set forth in one or a set of documents or may be included by specific reference to other documents, including official statements of debt issues with respect to which the Corporation is an “obligated person” (as defined by the Rule), which have been made available to the public on the MSRB’s website. The Corporation shall clearly identify each such other document so included by reference. The Dissemination Agent has no duty or obligation to verify the content or correctness of the Annual Report.

SECTION 5. Reporting of Significant Events.

The Corporation shall give, or cause to be given, notice to the MSRB of the occurrence of any of the following events with respect to the Bonds, in a timely manner not in excess of ten business days after the occurrence of the event:

1. Principal and interest payment delinquencies;

2. Non-payment related defaults; if material;

3. Unscheduled draws on debt service reserves reflecting financial difficulties;

4. Unscheduled draws on credit enhancements reflecting financial difficulties;

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5. Substitution of credit or liquidity providers, or their failure to perform;

6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701 TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;

7. Modifications to rights of Bond holders; if material

8. Bond calls; if material, and tender offers;

9. Defeasances;

10. Release, substitution, or sale of property securing repayment of the Bonds; if material;

11. Rating changes;

12. Bankruptcy, insolvency, receivership or similar event of the obligated person;

Note: for the purposes of the event identified in subparagraph (12), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person.

13. The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; if material; or

14. Appointment of a successor or additional trustee or the change of name of a trustee, if material.

SECTION 6. Format for Filings with MSRB. Any report or filing with the MSRB pursuant to this Disclosure Agreement must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB.

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SECTION 7. Termination of Reporting Obligation. The Corporation’s, the Dissemination Agent’s and the Bond Trustee’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If the Corporation’s obligations under the Loan Agreement are assumed in full by some other entity, such person shall be responsible for compliance with this Disclosure Agreement in the same manner as if it were the Corporation and the original Corporation shall have no further responsibility hereunder. If such termination or substitution occurs prior to the final maturity of the Bonds, the Corporation shall give notice of such termination or substitution in a filing with the MSRB.

SECTION 8. Dissemination Agent. The Corporation may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Corporation pursuant to this Disclosure Agreement. The Dissemination Agent may resign by providing 30 days written notice to the Corporation and the Bond Trustee. If at any time there is not any other designated Dissemination Agent, the Bond Trustee shall be the Dissemination Agent.

SECTION 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Corporation and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the Corporation which does not impose any greater duties, nor greater risk of liability or, on the Dissemination Agent) and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law or change in the identity, nature or status of the Corporation or any other obligated person with respect to the Bonds or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) The amendment or waiver either (i) is approved by the Holders of the Bonds in the same manner as provided in the Bond Indenture for amendments to the Bond Indenture with the consent of Holders, or (ii) does not, in the opinion of nationally recognized bond counsel selected by the Corporation, materially impair the interests of the Holders or Beneficial Owners of the Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Corporation shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Corporation. In addition, if the amendment

D-6 relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in a filing with the MSRB, and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

SECTION 10. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Corporation from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report, quarterly report or notice required to be filed pursuant to this Disclosure Agreement, in addition to that which is required by this Disclosure Agreement. If the Corporation chooses to include any information in any Annual Report, quarterly report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Agreement, the Corporation shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report, quarterly report or notice of occurrence of a Listed Event or any event required to be reported.

SECTION 11. Default. In the event of a failure of the Corporation or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Bond Trustee (at the written request of any Participating Underwriter or the Holders of at least twenty-five percent (25%) aggregate principal amount of Outstanding Bonds, shall but only to the extent funds in an amount satisfactory to the Bond Trustee have been provided to it or if it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges and fees of the Bond Trustee whatsoever, including, without limitation, fees and expenses of its attorneys), or any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Corporation or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Bond Indenture, and the sole remedy under this Disclosure Agreement in the event of any failure of the Corporation or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance.

SECTION 12. Duties, Immunities and Liabilities of Bond Trustee and Dissemination Agent. Article VI of the Bond Indenture is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Bond Indenture and the Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded the Bond Trustee thereunder. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Corporation agrees to indemnify and save the Dissemination Agent and its respective officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall have no duty or obligation to review any information provided to them hereunder and shall not be deemed to be acting in any fiduciary capacity for the Corporation, the Bondholders or any other party. The obligations of the Corporation under this

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Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. The fact that the Dissemination Agent or any affiliate thereof may have any fiduciary or banking relationship with the Corporation, apart from the relationship created by the Rule shall not be construed to mean that the Dissemination Agent has actual knowledge of any event or condition except as may be provided by written notice from the Corporation.

SECTION 13. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows:

To the Corporation: MedStar Health, Inc. 5565 Sterrett Place, 5th Floor Columbia, Maryland 21044 Attention: Chief Financial Officer Telephone: (410) 772-6630 Facsimile: (410) 772-6998

To the Bond Trustee and U.S. Bank National Association Dissemination Agent: Two James Center 1021 E. Cary St., Suite 1850 Richmond, VA 23219 Attention: U.S. Bank Global Corporate Trust Services Telephone: (804) 771-7927 Facsimile: (804) 771-7940

Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.

SECTION 14. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Issuer, the Corporation, the Dissemination Agent, the Participating Underwriters and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

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SECTION 15. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

Dated: [______], 2017.

MEDSTAR HEALTH, INC.

By: Authorized Representative

U.S. BANK NATIONAL ASSOCIATION, as Bond Trustee and Dissemination Agent

By: Authorized Officer

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EXHIBIT A

NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Maryland Health and Higher Educational Facilities Authority

Name of Bond Issue: Maryland Health and Higher Educational Facilities Authority Revenue Bonds, MedStar Health Issue, Series 2017

Name of Corporation: MedStar Health, Inc.

Date of Issuance: [______], 2017

NOTICE IS HEREBY GIVEN that MedStar Health, Inc. (the “Corporation”) has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated the above-mentioned date of issuance. [The Corporation anticipates that the Annual Report will be filed by ______.]

Dated: ______.

U.S. BANK NATIONAL ASSOCIATION, as Bond Trustee and Dissemination Agent

By:

cc: MedStar Health, Inc.

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APPENDIX E

PROPOSED FORM OF OPINION OF BOND COUNSEL

[Closing Date]

Maryland Health and Higher Educational Facilities Authority Baltimore, Maryland

Members of the Authority:

As Bond Counsel to Maryland Health and Higher Educational Facilities Authority (the “Authority”) in connection with the issuance by the Authority of its $______Revenue Bonds, MedStar Health Issue, Series 2017A (the “Bonds”), as special obligations of the Authority, we have examined:

(i) Sections 10-301 through 10-356, inclusive, of the Economic Development Article of the Annotated Code of Maryland (2008 Volume and 2016 Supplement) (the “Act”);

(ii) an Indenture of Trust dated as of June 1, 2017 (the “Indenture”), between the Authority and U.S. Bank National Association, as trustee;

(iii) a Loan Agreement dated as of June 1, 2017 (the “Loan Agreement”), between the Authority and MedStar Health, Inc. (the “Corporation”);

(iv) the form of Bond;

(v) relevant provisions of the Constitution and laws of the State of Maryland;

(vi) relevant provisions of the Internal Revenue Code of 1986, as amended (the “Code”); and

(vii) other proofs submitted to us relative to the issuance and sale of the Bonds.

The terms of the Bonds are contained in the Indenture and the Bonds.

In rendering this opinion, (i) we have relied on the Corporation’s Tax and Section 148 Certificate and Agreement dated this date made on behalf of the Corporation by officers thereof with respect to certain material facts within the knowledge of the Corporation and (ii) we have assumed the correctness of the opinion of Ballard Spahr LLP, special counsel to the Corporation, dated this date regarding, among other things, the tax-exempt status of the Corporation and certain of its affiliates, in each case without investigation.

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We have made no investigation of, and are rendering no opinion regarding, the title to, liens on or security interests in real or personal property.

Based upon the foregoing, it is our opinion that, under existing statutes, regulations and decisions:

(a) The Indenture and the Loan Agreement have been duly authorized, executed and delivered by the Authority and, assuming the due authorization, execution and delivery thereof by the other parties thereto, the Indenture and the Loan Agreement constitute the valid and binding obligations of the Authority.

(b) The Authority is duly authorized and entitled to issue the Bonds. Bonds executed and authenticated as provided in the Indenture have been duly and validly issued and constitute valid and binding special obligations of the Authority payable solely from Revenues (as defined in the Indenture) and other amounts pledged to such payment under the Indenture.

(c) The Indenture, the Loan Agreement and the Bonds are subject to bankruptcy, insolvency, moratorium, reorganization and other state and federal laws affecting the enforcement of creditors’ rights and to general principles of equity, and enforceability of the indemnification provisions of the Loan Agreement may be limited by applicable public policy.

(d) By the terms of the Act and the Indenture, the Bonds do not constitute a debt or liability of the State of Maryland, of any political subdivision thereof or of the Authority. None of the State of Maryland, any political subdivision thereof or the Authority shall be obligated to pay the Bonds or the interest thereon except from the Revenues and other amounts pledged to the payment of the Bonds under the Indenture. Neither the faith and credit nor the taxing power of the State of Maryland, of any political subdivision thereof or of the Authority is pledged to the payment of the principal of or the interest on the Bonds. The issuance of the Bonds does not directly or indirectly or contingently obligate, morally or otherwise, the State of Maryland, any political subdivision thereof or the Authority to levy or to pledge any form of taxation whatever therefor or to make any appropriation for their payment. The Authority has no taxing power.

(e) By the terms of the Act, the interest on the Bonds, their transfer and any income derived from the Bonds, including profits made in their sale or transfer, are forever exempt from all Maryland state and local taxes; no opinion is expressed as to estate or inheritance taxes or any other taxes not levied or assessed directly on the Bonds, their transfer or the income therefrom.

(f) Assuming compliance with the covenants referred to herein, interest on the Bonds is excludable from gross income for federal income tax purposes. It is noted that under the provisions of the Code, there are certain restrictions that must be met subsequent to the delivery of the Bonds in order for interest on the Bonds to remain excludable from gross income for federal income tax purposes, including restrictions that must be complied with

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throughout the term of the Bonds. These include the following: (i) a requirement that certain earnings received from the investment of the proceeds of the Bonds be rebated to the United States of America under certain circumstances (or that certain payments in lieu of rebate be made); (ii) other requirements applicable to the investment of the proceeds of the Bonds; and (iii) other requirements applicable to the use of the proceeds of the Bonds and the facilities financed or refinanced with proceeds of the Bonds. Failure to comply with one or more of these requirements could result in the inclusion of the interest payable on the Bonds in gross income for federal income tax purposes, effective from the date of their issuance. The Authority and the Corporation have made certain covenants regarding actions required to maintain the excludability from gross income for federal income tax purposes of interest on the Bonds. It is our opinion that, assuming compliance with such covenants, the interest on the Bonds will remain excludable from gross income for federal income tax purposes under the provisions of the Code.

(g) Interest on the Bonds is not includable in the alternative minimum taxable income of individuals, corporations or other taxpayers as an enumerated item of tax preference or other specific adjustment. However, for purposes of calculating the corporate alternative minimum tax, a corporation subject to such tax will be required to increase its alternative minimum taxable income by 75% of the amount by which its “adjusted current earnings” exceed its alternative minimum taxable income (computed without regard to this current earnings adjustment and the alternative tax net operating loss deduction). For such purposes, “adjusted current earnings” would include, among other items, interest income from the Bonds. In addition, interest income on the Bonds will be includable in the applicable taxable base for the purposes of determining the branch profits tax imposed by the Code on certain foreign corporations engaged in a trade or business in the United States of America.

We assume no obligation to supplement this opinion if any applicable laws or interpretations thereof change after the date hereof or if we become aware of any facts or circumstances that might change this opinion after the date hereof. This opinion is limited to the matters set forth above, and no other opinions should be inferred beyond the matters expressly stated.

Very truly yours,

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BOOK-ENTRY ONLY SYSTEM

The information in this section has been obtained from sources that the Authority, the Corporation and the Underwriters believe to be reliable, but none of the Authority, the Corporation or the Underwriters takes any responsibility for the accuracy thereof.

The Depository Trust Company

The Depository Trust Company, New York, New York (“DTC” or, together with any successor securities depository for the Bonds, the “Securities Depository”), will act as securities depository for the Bonds. The 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 certificate of the Bonds will be issued for each maturity of the Bonds in principal amount equal to the aggregate principal amount of the Bonds of such maturity and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. 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 (the “Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Direct and Indirect Participants are on file with the Securities and Exchange Commission (the “SEC”). More information about DTC can be found at www.dtcc.com.

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Ownership of Bonds

Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (the “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 Participants through which the Beneficial Owners entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of the Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds except in the event that use of the book-entry only system for the Bonds is discontinued under the circumstances described below under “Discontinuance of Book-Entry Only System.”

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults and proposed amendments to the security documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Bond Trustee and request that copies of the notices be provided directly to them.

So long as a nominee of DTC is the registered owner of the Bonds, references herein to the Bondholders or the holders or owners of the Bonds shall mean DTC and shall not mean the Beneficial Owners of the Bonds. The Authority and the Bond Trustee will recognize DTC or its nominee as the holder of all of the Bonds for all purposes, including the payment of the principal or Redemption Price of and interest on the Bonds, as well as the giving of notices and any consent or direction required or permitted to be given to or on behalf of the Bondholders under the Bond Indenture. Neither the Authority nor the Bond Trustee will have any responsibility or obligation to Direct or Indirect Participants or Beneficial Owners with respect to payments or notices to Direct or Indirect Participants or Beneficial Owners.

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Payments on and Redemption of Bonds

So long as the Bonds are held by DTC under a book-entry system, principal and interest payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding information from the Bond Trustee on the applicable payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participants and not of DTC, the Bond Trustee or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC is the responsibility of the Authority or the Bond 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.

So long as the Bonds are held by DTC under a book-entry only system, the Bond Trustee will send any notice of redemption with respect to the Bonds only to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. Any failure of DTC to advise any Direct Participant, or of any Direct Participant to notify any Indirect Participant or of any Participant to notify any Beneficial Owner, of any such notice and its content or effect will not affect the validity of the proceedings for the redemption of the Bonds or of any other action premised on such notice. If fewer than all of the Bonds of any one maturity are selected for redemption, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant to be redeemed, except as otherwise directed by the Authority.

None of the Authority, the Bond Trustee, the Underwriters or the Corporation can give any assurances that DTC or the Direct or Indirect Participants will distribute payments of the principal or Redemption Price of and interest on the Bonds paid to DTC or its nominee, as the registered owner of the Bonds, or any redemption or other notices, to the Beneficial Owners or that they will do so on a timely basis or that DTC will serve and act in the manner described in this Official Statement.

Discontinuance of Book-Entry Only System

DTC may discontinue its services as a securities depository for the Bonds at any time by giving reasonable notice to the Authority and the Bond Trustee, or the Authority may discontinue use of the system of book-entry transfers through DTC. Under such circumstances, in the event that a successor securities depository is not obtained, Bonds are required to be printed and delivered in fully certificated form to the Participants shown on the records of DTC provided to the Bond Trustee or, to the extent requested by any Participant, to the Beneficial Owners of the Bonds shown on the records of such Participant provided to the Bond Trustee.

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MARYLAND HEALTH AND HIGHER EDUCATIONAL FACILITIES AUTHORITY • Revenue Bonds, MedStar Health Issue, Series 2017A