This Preliminary Offering Memorandum Supplement and the information contained herein are subject to completion or amendment without notice. Under no circumstances shall this Preliminary Offering Memorandum Supplement constitute an offer to sell or a 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. BofA MERRILLLYN information in connection with the issuance of $220,000,000 May 11, 2016intheaggregateprincipalamountof$700,000,000(the“SeriesTaxableBonds”),hasbeen preparedtoprovide 25,2016(the“2016OfferingMemorandum”)relating to theAscensionTaxableBonds, Series 2016A initially issued on April †† † * May ___, 2017 Dated: May15,2017 C income for federal, state or local income taxpurposes. See “ optional redemptionpriortomaturityasdescribedherein. 2016 OfferingMemorandum,incorporatedbyreferenceherein.See“PurposeofthisMemorandumSupplement” herein. under the Bond Indenture described herein. Capitalized terms used but not defined herein shallhave themeaningsset forth inthe issued by Ascension, as Senior Credit Group Representative, under the Senior Master Indenture and from certain funds held made bytheSeniorObligatedGroupMembersonSeries2016TaxableObligation,asamended,describedherein, payable frompaymentsmadebyAscensionundertheBondIndenture,asamended,describedherein,tobe herein asthe“Bonds.”TheBondsaregeneralobligationsofAscensionHealthAllianced/b/a(“Ascension”),and 2016A AdditionalBonds”).TheSeries2016TaxableBondsandthearecollectivelyreferredto other documentsincorporatedhereinbyreferencetoobtaininformationessentialmakinganinformedinvestmentdecision. are advisedtoreadtheentireOfferingMemorandumSupplementinconjunctionwith2016 andthe commencing onNovember 15,2017. and interestwillbemadebyParticipantsinDTCtotheBeneficialOwnersofSeries2016AAdditionalBonds. Cede & Co. as longDTC is theSecuritiesDepository.Subsequentdisbursementsofprincipal,Make-Whole RedemptionPrice the Series2016AAdditionalBondswillbepayablebyBondTrusteefortoregisteredowners,which willbe 2016A AdditionalBondswillbemadeinbook-entryformonly.PrincipalandMake-WholeRedemptionPriceofinterest on Co.,asnomineeofTheDepositoryTrustCompany(“DTC”),NewYork,York.IndividualpurchasestheSeries of Cede & available fordeliverythroughthefacilitiesofDTCinNewYork, NewYork,onoraboutJune 1,2017. SanFrancisco, California.ItisexpectedthattheSeries2016AAdditionalBondsindefinitiveformwillbe Fulbright US LLP, Lyman,P.C.,Indianapolis,IndianaandfortheUnderwritersbytheircounsel,NortonRose by Hall,Render,Killian,Heath & approval ofcertainlegalmattersforAscension,theother Senior CreditGroupMembersandcertainotherAscensionaffiliates NEW ISSUE–BOOK-ENTRYONLY
ONSIDERATIONS” herein. reference only.Neither Ascensionnor the Underwriters assumeanyresponsibility for theaccuracyof suchnumbers. a databaseand does notserveinanywayasa substitutefortheCGSdatabase. CUSIPnumbersareprovided forconvenienceof managed byS&P GlobalMarketIntelligenceon behalfofTheAmericanBankers Association.Thisdatais not intendedtocreate A registeredtrademark ofTheAmericanBankers Association.CUSIPdataherein isprovidedbyCUSIPGlobal Services(“CGS”), For anexplanationoftheratings, see“RATINGS”herein. Preliminary, subjecttochange. This OfferingMemorandumSupplement(this“OfferingSupplement”)tothedated Interest onandgain,ifany,thesaleofSeries2016AAdditionalBondsarenotexcludablefromgross The Series2016AAdditionalBondsaresubjecttooptionalredemptionandmandatorypurchaseinlieu of This coverpagecontainsinformationforgeneralreferenceonly.Itisnotintendedasasummaryofthistransaction.Investors 15ineachyear, 15andNovember Interest ontheSeries2016AAdditionalBondswillbepayablesemiannuallyMay The Series2016AAdditionalBondswillbeissuedinthedenominationof$1,000oranyintegralmultiplethereof. The Series2016AAdditionalBondsareissuableasfullyregisteredbondsand,whenissued,willbeinthe name The Series2016AAdditionalBondsareofferedwhen,asand ifreceivedbytheUnderwriters,subjecttopriorsaleand $220,000,000 PRELIMINARY OFFERING MEMORANDUM SUPPLEMENT DATED MAY 17, 2017
* 3.945%BondsdueNovember 15,2046Price:_____%Yield _____% C H
MATURITY DATE,PRIN INTEREST RATE,PRI MORGAN STANLEY $220,000,000 Taxable Bonds A Series 2016A s c * ension of additional Ascension Taxable Bonds, Series 2016A (the “Series C C C E ANDYIELD IPAL AMOUNT, ERTAIN UNITED STATES FEDERAL IN * C USIP Due: November 15,2046 †† 04351LAB6 J.P. MORGAN C OME TAX Ratings † This Offering Memorandum Supplement does not constitute an offer to sell the Series 2016A Additional Bonds or the solicitation of an offer to buy, nor shall there be any sale of the Series 2016A Additional Bonds by any person in any state or other jurisdiction to any person to whom it is unlawful to make an offer, solicitation or sale in that state or jurisdiction. No dealer, salesman or any other person has been authorized to give any information or to make any representation other than those contained in this Offering Memorandum Supplement in connection with the offering of the Series 2016A Additional Bonds and, if given or made, that information or representation must not be relied upon. The information set forth in APPENDIX E to the 2016 Offering Memorandum and APPENDIX B hereto is based upon information furnished by DTC, Clearstream and Euroclear and is believed to be reliable, but neither Ascension nor the Underwriters make any representations or warranties whatsoever with respect to such information. All other information herein has been obtained by the Underwriters from Ascension and other sources deemed by the Underwriters to be reliable, but is not to be construed as a representation by the Underwriters. The information herein is subject to change without notice, and neither the delivery of this Offering Memorandum Supplement nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of DTC, Clearstream, Euroclear, Ascension or the other Senior Credit Group Members since the date hereof. The Underwriters have provided the following sentence for inclusion in this Offering Memorandum Supplement. The Underwriters have reviewed the information in this Offering Memorandum Supplement in accordance with, and as part of, their respective responsibilities to investors under federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of this information. The CUSIP number is included in this Offering Memorandum Supplement for the convenience of the Holders and potential Holders of the Series 2016A Additional Bonds. No assurance can be given that the CUSIP number for the Series 2016A Additional Bonds will remain the same after the date of issuance and delivery of the Series 2016A Additional Bonds. IN CONNECTION WITH THE OFFERING OF THE SERIES 2016A ADDITIONAL BONDS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2016A ADDITIONAL BONDS OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ______CAUTIONARY STATEMENTS REGARDING PROJECTIONS, ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS IN THIS OFFERING MEMORANDUM SUPPLEMENT ______Certain statements included or incorporated by reference in this Offering Memorandum Supplement constitute projections or estimates of future events, generally known as forward-looking statements. These statements are generally identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words. These forward-looking statements include, among others, certain information under the caption “BONDHOLDERS’ RISKS” in the forepart of this Offering Memorandum Supplement and under the captions “AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES,” “FINANCIAL AND OPERATING INFORMATION—Indebtedness and Certain Liabilities,” “—Regulatory Reviews, Audits and Investigations,” “— Liquidity, Investment Policies and Income,” “—Pension Plans,” “—Symphony” and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE CREDIT GROUP’S RECENT FINANCIAL PERFORMANCE” in APPENDIX A to this Offering Memorandum Supplement. The achievement of certain results or other expectations contained in these forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performances or achievements described to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Neither Ascension nor the other Senior Credit Group Members plan to issue any updates or revisions to those forward-looking statements if or when changes in their expectations, or events, conditions or circumstances on which these statements are based occur. The Series 2016A Additional Bonds and the related Obligation have not been registered with the Securities Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), and are being issued in reliance on an exemption contained in Section 3(a)(4) of the Securities Act. The Series 2016A Additional Bonds are not exempt from registration in every jurisdiction in the United States; some jurisdictions’ securities laws (the “blue sky laws”) may require a filing and a fee to secure the Series 2016A Additional Bonds’ exemption from registration. Neither the Bond Indenture nor the Master Indenture has been qualified under the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”), in reliance upon an exemption contained in the Trust Indenture Act. INFORMATION CONCERNING OFFERING RESTRICTIONS IN CERTAIN JURISDICTIONS OUTSIDE THE UNITED STATES
REFERENCES HEREIN TO THE “ISSUER” MEAN ASCENSION AND REFERENCES TO “BONDS” OR “SECURITIES” MEAN THE SERIES 2016A ADDITIONAL BONDS OFFERED HEREBY. NEITHER ASCENSION NOR THE UNDERWRITERS ASSUME ANY RESPONSIBILITY FOR THIS SECTION. MINIMUM UNIT SALES THE BONDS WILL TRADE AND SETTLE ON A UNIT BASIS (ONE UNIT EQUALING ONE BOND OF $1,000 PRINCIPAL AMOUNT). FOR ANY SALES MADE OUTSIDE THE UNITED STATES, THE MINIMUM PURCHASE AND TRADING AMOUNT IS 150 UNITS (BEING 150 BONDS IN AN AGGREGATE PRINCIPAL AMOUNT OF $150,000). NOTICE TO PROSPECTIVE INVESTORS IN THE EUROPEAN ECONOMIC AREA THIS OFFERING MEMORANDUM HAS BEEN PREPARED ON THE BASIS THAT ALL OFFERS OF THE SECURITIES TO ANY PERSON THAT IS LOCATED WITHIN A MEMBER STATE OF THE EUROPEAN ECONOMIC AREA (“EEA”) WILL BE MADE PURSUANT TO AN EXEMPTION UNDER ARTICLE 3 OF DIRECTIVE 2003/71/EC, AS AMENDED (INCLUDING BY DIRECTIVE 2010/73/EU) (THE “PROSPECTUS DIRECTIVE”), AS IMPLEMENTED IN MEMBER STATES OF THE EEA, FROM THE REQUIREMENT TO PRODUCE A PROSPECTUS FOR OFFERS OF THE SECURITIES. ACCORDINGLY, ANY PERSON MAKING OR INTENDING TO MAKE ANY OFFER TO ANY PERSON LOCATED WITHIN A MEMBER STATE OF THE EEA OF THE SECURITIES SHOULD ONLY DO SO IN CIRCUMSTANCES IN WHICH NO OBLIGATION ARISES FOR THE ISSUER OR ANY OF THE INITIAL PURCHASERS TO PRODUCE A PROSPECTUS FOR SUCH OFFER. NEITHER THE ISSUER NOR THE INITIAL PURCHASERS HAVE AUTHORIZED, NOR DO THEY AUTHORIZE, THE MAKING OF ANY OFFER OF SECURITIES THROUGH ANY FINANCIAL INTERMEDIARY, OTHER THAN OFFERS MADE BY THE INITIAL PURCHASERS, WHICH CONSTITUTE THE FINAL PLACEMENT OF THE SECURITIES CONTEMPLATED IN THIS OFFERING MEMORANDUM. IN RELATION TO EACH MEMBER STATE OF THE EEA THAT HAS IMPLEMENTED THE PROSPECTUS DIRECTIVE (EACH, A “RELEVANT MEMBER STATE”), WITH EFFECT FROM AND INCLUDING THE DATE ON WHICH THE PROSPECTUS DIRECTIVE IS IMPLEMENTED IN THAT RELEVANT MEMBER STATE, THE OFFER OF ANY SECURITIES WHICH IS THE SUBJECT OF THE OFFERING CONTEMPLATED BY THIS OFFERING MEMORANDUM IS NOT BEING MADE AND WILL NOT BE MADE TO THE PUBLIC IN THAT RELEVANT MEMBER STATE, OTHER THAN: (A) TO ANY LEGAL ENTITY WHICH IS A “QUALIFIED INVESTOR” AS SUCH TERM IS DEFINED IN THE PROSPECTUS DIRECTIVE; (B) TO FEWER THAN 150 NATURAL OR LEGAL PERSONS (OTHER THAN “QUALIFIED INVESTORS” AS SUCH TERM IS DEFINED IN THE PROSPECTUS DIRECTIVE), SUBJECT TO OBTAINING THE PRIOR CONSENT OF THE RELEVANT INITIAL PURCHASER OR THE ISSUER FOR ANY SUCH OFFER OR (C) IN ANY OTHER CIRCUMSTANCES FALLING WITHIN ARTICLE 3(2) OF THE PROSPECTUS DIRECTIVE; PROVIDED THAT NO SUCH OFFER OF THE SECURITIES SHALL REQUIRE THE ISSUER OR THE INITIAL PURCHASERS TO PUBLISH A PROSPECTUS PURSUANT TO ARTICLE 3 OF THE PROSPECTUS DIRECTIVE OR A SUPPLEMENT TO A PROSPECTUS PURSUANT TO ARTICLE 16 OF THE PROSPECTUS DIRECTIVE. FOR THE PURPOSES OF THIS PROVISION, THE EXPRESSION AN “OFFER OF SECURITIES TO THE PUBLIC” IN RELATION TO THE SECURITIES IN ANY RELEVANT MEMBER STATE MEANS THE COMMUNICATION IN ANY FORM AND BY ANY MEANS OF SUFFICIENT INFORMATION ON THE TERMS OF THE OFFER AND THE SECURITIES TO BE OFFERED SO AS TO ENABLE AN INVESTOR TO DECIDE TO PURCHASE THE SECURITIES, AS THE SAME MAY BE VARIED IN THAT RELEVANT MEMBER STATE BY ANY MEASURE IMPLEMENTING THE PROSPECTUS DIRECTIVE IN THAT RELEVANT MEMBER STATE AND THE EXPRESSION “PROSPECTUS DIRECTIVE” MEANS DIRECTIVE 2003/71/EC, AS AMENDED (INCLUDING BY DIRECTIVE 2010/73/EU) AS IMPLEMENTED IN EACH RELEVANT MEMBER STATE. NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED KINGDOM THIS OFFERING MEMORANDUM IS FOR DISTRIBUTION ONLY TO, AND IS DIRECTED SOLELY AT, PERSONS WHO (I) ARE OUTSIDE THE UNITED KINGDOM, (II) ARE INVESTMENT PROFESSIONALS, AS SUCH TERM IS DEFINED IN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005, AS AMENDED (THE “FINANCIAL PROMOTION ORDER”), (III) ARE PERSONS FALLING WITHIN ARTICLE 49(2)(A) TO (D) OF THE FINANCIAL PROMOTION ORDER, OR (IV) ARE PERSONS TO WHOM AN INVITATION OR INDUCEMENT TO ENGAGE IN INVESTMENT ACTIVITY (WITHIN THE MEANING OF SECTION 21 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000) IN CONNECTION WITH THE ISSUE OR SALE OF ANY BONDS MAY OTHERWISE BE LAWFULLY COMMUNICATED OR CAUSED TO BE COMMUNICATED (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “RELEVANT PERSONS”). THIS OFFERING MEMORANDUM IS DIRECTED ONLY AT RELEVANT PERSONS AND MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS OFFERING MEMORANDUM RELATES IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS. ANY PERSON WHO IS NOT A RELEVANT PERSON SHOULD NOT ACT OR RELY ON THIS OFFERING MEMORANDUM OR ANY OF ITS CONTENTS. NOTICE TO INVESTORS IN KOREA THE BONDS HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT OF KOREA AND THE DECREES AND REGULATIONS THEREUNDER (THE “FSCMA”), AND THE BONDS HAVE BEEN AND WILL BE OFFERED IN KOREA AS A PRIVATE PLACEMENT UNDER THE FSCMA. NONE OF THE BONDS MAY BE OFFERED, SOLD OR DELIVERED DIRECTLY OR INDIRECTLY, OR OFFERED OR SOLD TO ANY PERSON FOR RE-OFFERING OR RESALE, DIRECTLY OR INDIRECTLY, IN KOREA OR TO ANY RESIDENT OF KOREA EXCEPT PURSUANT TO THE APPLICABLE LAWS AND REGULATIONS OF KOREA, INCLUDING THE FSCMA AND THE FOREIGN EXCHANGE TRANSACTION LAW OF KOREA AND THE DECREES AND REGULATIONS THEREUNDER (THE “FETL”). FURTHERMORE, THE PURCHASER OF THE BONDS SHALL COMPLY WITH ALL APPLICABLE REGULATORY REQUIREMENTS (INCLUDING BUT NOT LIMITED TO REQUIREMENTS UNDER THE FETL) IN CONNECTION WITH THE PURCHASE OF THE BONDS. NOTICE TO PROSPECTIVE INVESTORS IN TAIWAN THE OFFER OF THE BONDS HAS NOT BEEN AND WILL NOT BE REGISTERED WITH THE FINANCIAL SUPERVISORY COMMISSION OF TAIWAN PURSUANT TO RELEVANT SECURITIES LAWS AND REGULATIONS, AND THE BONDS MAY NOT BE OFFERED, ISSUED OR SOLD IN TAIWAN THROUGH A PUBLIC OFFERING OR IN CIRCUMSTANCES WHICH CONSTITUTE AN OFFER WITHIN THE MEANING OF THE SECURITIES AND EXCHANGE ACT OF TAIWAN THAT REQUIRES THE REGISTRATION OR FILING WITH OR APPROVAL OF THE FINANCIAL SUPERVISORY COMMISSION OF TAIWAN. NOTICE TO RESIDENTS OF HONG KONG WARNING. THE CONTENTS OF THIS OFFERING MEMORANDUM HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE OFFER OF THE BONDS. IF YOU ARE IN ANY DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE. THIS DOCUMENT HAS NOT BEEN, AND WILL NOT BE, REGISTERED AS A PROSPECTUS IN HONG KONG NOR HAS IT BEEN APPROVED BY THE SECURITIES AND FUTURES COMMISSION OF HONG KONG PURSUANT TO THE SECURITIES AND FUTURES ORDINANCE (CHAPTER 571 OF THE LAWS OF HONG KONG) (“SFO”). ACCORDINGLY, THE BONDS MAY NOT BE OFFERED OR SOLD IN HONG KONG BY MEANS OF THIS DOCUMENT OR ANY OTHER DOCUMENT, AND THIS DOCUMENT MUST NOT BE ISSUED, CIRCULATED OR DISTRIBUTED IN HONG KONG, OTHER THAN TO ‘PROFESSIONAL INVESTORS’ AS DEFINED IN THE SFO AND ANY RULES MADE THEREUNDER. IN ADDITION, NO PERSON MAY ISSUE OR HAVE IN ITS POSSESSION FOR THE PURPOSES OF ISSUE, WHETHER IN HONG KONG OR ELSEWHERE, ANY ADVERTISEMENT, INVITATION OR DOCUMENT RELATING TO THE BONDS, WHICH IS DIRECTED AT, OR THE CONTENTS OF WHICH ARE LIKELY TO BE ACCESSED OR READ BY, THE PUBLIC OF HONG KONG (EXCEPT IF PERMITTED TO DO SO UNDER THE SECURITIES LAWS OF HONG KONG) OTHER THAN WITH RESPECT TO BONDS WHICH ARE OR ARE INTENDED TO BE DISPOSED OF ONLY (A) TO PERSONS OUTSIDE HONG KONG, (B) TO ‘PROFESSIONAL INVESTORS’ AS DEFINED IN THE SFO AND ANY RULES MADE THEREUNDER. NOTICE TO PROSPECTIVE INVESTORS IN SWITZERLAND THIS OFFERING MEMORANDUM IS NOT INTENDED TO CONSTITUTE AN OFFER OR A SOLICITATION TO PURCHASE OR INVEST IN THE BONDS. THE BONDS MAY NOT BE PUBLICLY OFFERED, SOLD OR ADVERTISED, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM SWITZERLAND AND WILL NOT BE LISTED ON THE SIX SWISS EXCHANGE OR ON ANY OTHER EXCHANGE OR REGULATED TRADING FACILITY IN SWITZERLAND. NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER OFFERING OR MARKETING MATERIAL RELATING TO THE BONDS CONSTITUTES A PROSPECTUS AS SUCH TERM IS UNDERSTOOD PURSUANT TO ART. 652A OR ART. 1156 OF THE SWISS CODE OF OBLIGATIONS OR A LISTING PROSPECTUS WITHIN THE MEANING OF THE LISTING RULES OF THE SIX SWISS EXCHANGE OR ANY OTHER REGULATED TRADING FACILITY IN SWITZERLAND, AND NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER OFFERING OR MARKETING MATERIAL RELATING TO THE BONDS MAY BE PUBLICLY DISTRIBUTED OR OTHERWISE MADE PUBLICLY AVAILABLE IN SWITZERLAND. NEITHER THIS OFFERING MEMORANDUM NOR ANY OTHER OFFERING OR MARKETING MATERIAL RELATING TO THE OFFERING, NOR THE ISSUER, NOR THE BONDS HAVE BEEN OR WILL BE FILED WITH OR APPROVED BY ANY SWISS REGULATORY AUTHORITY. THE BONDS ARE NOT SUBJECT TO SUPERVISION BY ANY SWISS REGULATORY AUTHORITY, E.G., THE SWISS FINANCIAL MARKET SUPERVISORY AUTHORITY FINMA, AND INVESTORS IN THE BONDS WILL NOT BENEFIT FROM PROTECTION OR SUPERVISION BY SUCH AUTHORITY. SELLING RESTRICTIONS FOR OFFER OF SECURITIES IN SINGAPORE THIS OFFERING MEMORANDUM HAS NOT BEEN AND WILL NOT BE REGISTERED AS A PROSPECTUS WITH THE MONETARY AUTHORITY OF SINGAPORE. ACCORDINGLY, THIS OFFERING MEMORANDUM AND ANY OTHER DOCUMENT OR MATERIAL IN CONNECTION WITH THE OFFER OR SALE, OR INVITATION FOR SUBSCRIPTION OR PURCHASE, OF THE BONDS MAY NOT BE CIRCULATED OR DISTRIBUTED, NOR MAY THE BONDS BE OFFERED OR SOLD, OR BE MADE THE SUBJECT OF AN INVITATION FOR SUBSCRIPTION OR PURCHASE, WHETHER DIRECTLY OR INDIRECTLY, TO PERSONS IN SINGAPORE OTHER THAN (I) TO AN INSTITUTIONAL INVESTOR UNDER SECTION 274 OF THE SECURITIES AND FUTURES ACT, CHAPTER 289 OF SINGAPORE (THE “SFA”), (II) TO A RELEVANT PERSON PURSUANT TO SECTION 275(1), OR ANY PERSON PURSUANT TO SECTION 275(1A), AND IN ACCORDANCE WITH THE CONDITIONS SPECIFIED IN SECTION 275, OF THE SFA, OR (III) OTHERWISE PURSUANT TO, AND IN ACCORDANCE WITH THE CONDITIONS OF, ANY OTHER APPLICABLE PROVISION OF THE SFA. WHERE THE BONDS ARE SUBSCRIBED OR PURCHASED UNDER SECTION 275 OF THE SFA BY A RELEVANT PERSON WHICH IS: (A) A CORPORATION (WHICH IS NOT AN ACCREDITED INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA)) THE SOLE BUSINESS OF WHICH IS TO HOLD INVESTMENTS AND THE ENTIRE SHARE CAPITAL OF WHICH IS OWNED BY ONE OR MORE INDIVIDUALS, EACH OF WHOM IS AN ACCREDITED INVESTOR; OR (B) A TRUST (WHERE THE TRUSTEE IS NOT AN ACCREDITED INVESTOR) WHOSE SOLE PURPOSE IS TO HOLD INVESTMENTS AND EACH BENEFICIARY OF THE TRUST IS AN INDIVIDUAL WHO IS AN ACCREDITED INVESTOR, SECURITIES (AS DEFINED IN SECTION 239(1) OF THE SFA) OF THAT CORPORATION OR THE BENEFICIARIES’ RIGHTS AND INTEREST (HOWSOEVER DESCRIBED) IN THAT TRUST SHALL NOT BE TRANSFERRED WITHIN SIX MONTHS AFTER THAT CORPORATION OR THAT TRUST HAS ACQUIRED SUCH BONDS PURSUANT TO AN OFFER MADE UNDER SECTION 275 OF THE SFA, EXCEPT: (1) TO AN INSTITUTIONAL INVESTOR (AS DEFINED IN SECTION 4A OF THE SFA) OR TO A RELEVANT PERSON (AS DEFINED IN SECTION 275(2) OF THE SFA), OR TO ANY PERSON ARISING FROM AN OFFER REFERRED TO IN SECTION 275(1A) OR SECTION 276(4)(I)(B) OF THE SFA; (2) WHERE NO CONSIDERATION IS OR WILL BE GIVEN FOR THE TRANSFER; (3) WHERE THE TRANSFER IS BY OPERATION OF LAW; (4) AS SPECIFIED IN SECTION 276(7) OF THE SFA; OR (5) AS SPECIFIED IN REGULATION 32 OF THE SECURITIES AND FUTURES (OFFERS OF INVESTMENTS) (SHARES AND DEBENTURES) REGULATIONS 2005 OF SINGAPORE. [THIS PAGE INTENTIONALLY LEFT BLANK] TABLE OF CONTENTS Page INTRODUCTION ...... 1 Purpose of this Offering Memorandum Supplement ...... 1 Ascension ...... 1 The Series 2016A Additional Bonds ...... 1 Plan of Finance ...... 1 Security for the Bonds ...... 2 THE SERIES 2016A ADDITIONAL BONDS ...... 2 Redemption ...... 2 Additional Bonds ...... 2 BOOK-ENTRY ONLY SYSTEM ...... 3 General ...... 3 Global Clearance Procedures ...... 3 SECURITY FOR THE BONDS ...... 4 General ...... 4 The Senior Master Indenture ...... 4 Possible Replacement of the Series 2016 Taxable Senior Obligation ...... 7 Amendments of Bond Indenture, Senior Master Indenture, Supplement No. 114 and Series 2016 Taxable Senior Obligation ...... 7 PLAN OF FINANCE ...... 7 ESTIMATED SOURCES AND USES OF FUNDS ...... 8 CONTINUING DISCLOSURE ...... 8 BONDHOLDERS’ RISKS ...... 9 General ...... 9 Market Risk ...... 10 Impact of Market Turmoil ...... 10 Debt Limit Increase ...... 10 Federal Budget Cuts ...... 11 Health Care Reform ...... 11 Nonprofit Health Care Environment ...... 14 Security and Enforceability ...... 16 Patient Service Revenues ...... 18 State Laws ...... 25 Dependence Upon Third-Party Payors ...... 25 Regulatory Environment ...... 25 Information Technology ...... 32 Certain Business Transactions ...... 33 Tax Matters ...... 38 Other Risks ...... 41 ABSENCE OF MATERIAL LITIGATION ...... 43 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS ...... 43 U.S. Holders ...... 44 Non-U.S. Holders ...... 46 Foreign Account Tax Compliance Act (“FATCA”)—U.S. Holders and Non-U.S. Holders ...... 47 Effect of Defeasance ...... 47 ERISA CONSIDERATIONS ...... 47 APPROVAL OF LEGALITY ...... 49
i RATINGS ...... 49 UNDERWRITING ...... 49 FINANCIAL ADVISOR ...... 50 MISCELLANEOUS ...... 50 DOCUMENTS INCORPORATED BY REFERENCE ...... 50 OTHER MATTERS ...... 51
APPENDIX A – INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP ...... A-1 APPENDIX B – GLOBAL CLEARANCE PROCEDURES ...... B-1
ii SUMMARY OF THE OFFERING
Issuer Ascension Senior Credit Group Members For a list of Senior Credit Group Members, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—LIST OF MEMBERS OF THE ASCENSION CREDIT GROUP AS OF THE DATE HEREOF” herein. Securities Offered $220,000,000* 3.945% Ascension Taxable Bonds, Series 2016A, due November 15, 2046 (the “Series 2016A Additional Bonds”) Interest Payment Dates May 15 and November 15 of each year, commencing November 15, 2017 Dated Date May 15, 2017 Settlement Date June 1, 2017 Redemption The Series 2016A Additional Bonds are subject to optional redemption in whole or in part by Ascension prior to maturity, on any Business Day, at the Make-Whole Redemption Price together with accrued interest thereon to the date fixed for redemption, as further described herein. See “THE SERIES 2016A ADDITIONAL BONDS—Redemption” herein. Authorized Denominations $1,000 and any integral multiple thereof Form and Depository The Series 2016A Additional Bonds will be delivered solely in registered form under a global book-entry system through the facilities of DTC. See “BOOK-ENTRY ONLY SYSTEM.” Use of Proceeds Ascension will use proceeds of the Series 2016A Additional Bonds as described in “PLAN OF FINANCE” herein. Ratings Fitch: AA+ S&P: AA+ Moody’s: Aa2
* Preliminary, subject to change.
iii [THIS PAGE INTENTIONALLY LEFT BLANK] OFFERING MEMORANDUM SUPPLEMENT
$220,000,000* Ascension Taxable Bonds Series 2016A
INTRODUCTION
Purpose of this Offering Memorandum Supplement
The purpose of this Offering Memorandum Supplement, including the cover page and the Appendices hereto (this “Offering Memorandum Supplement”), to the Offering Memorandum dated April 25, 2016 (the “2016 Offering Memorandum”) relating to the Ascension Taxable Bonds, Series 2016A initially issued on May 11, 2016 in the aggregate principal amount of $700,000,000 (the “Series 2016 Taxable Bonds”), is to set forth information in connection with the offering of $220,000,000* of additional Ascension Taxable Bonds, Series 2016A (the “Series 2016A Additional Bonds”) to be issued by Ascension Health Alliance d/b/a Ascension (“Ascension”), a Missouri nonprofit corporation. The Series 2016 Taxable Bonds and the Series 2016A Additional Bonds are collectively referred to herein as the “Bonds.”
Reference is made to the 2016 Offering Memorandum, which is on file with the Municipal Securities Rulemaking Board (the “MSRB”) on its Electronic Municipal Market Access (“EMMA”) system and incorporated herein by reference, for a summary description of the Bonds, including a description of the security for the Bonds. Other than by this Offering Memorandum Supplement, the 2016 Offering Memorandum has not been amended and supplemented since its date.
All references to the “Series 2016 Taxable Bonds” in the 2016 Offering Memorandum are replaced by this Offering Memorandum Supplement with the “Bonds.” All other capitalized terms used in this Offering Memorandum Supplement and not otherwise defined herein or in APPENDIX C to the 2016 Offering Memorandum have the same meaning as in the Senior Master Indenture (as defined herein) or the Bond Indenture (as defined herein). See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—DEFINITIONS OF CERTAIN TERMS” to the 2016 Offering Memorandum.
Ascension
Ascension is the parent organization of the largest nonprofit Catholic health care system in the United States. As of June 30, 2016, the Ascension system consisted primarily of 111 general acute care hospitals controlled directly or indirectly by Ascension that own and operate health care facilities with approximately 24,251 available beds throughout the United States. For more information regarding Ascension and the Senior Credit Group, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP.”
The Series 2016A Additional Bonds
The Series 2016A Additional Bonds will be issued pursuant to a Bond Indenture, dated as of May 1, 2016, relating to the Bonds, as supplemented and amended by a First Supplemental Bond Indenture, dated as of June 1, 2017 (as supplemented and amended, the “Bond Indenture”), each between Ascension and Wells Fargo Bank, National Association, as bond trustee (the “Bond Trustee”).
Plan of Finance
The proceeds of the sale of the Series 2016A Additional Bonds are expected to be used to refund all of the outstanding Oklahoma Development Finance Authority St. John Health System Revenue and Refunding Bonds,
* Preliminary, subject to change.
1 Series 2007 (the “Prior Bonds”) and pay certain costs relating to the issuance of the Series 2016A Additional Bonds. A portion of the proceeds of the Series 2016A Additional Bonds is also expected to be used for other proper corporate purposes consistent with Ascension’s charitable purposes. See “PLAN OF FINANCE” and “ESTIMATED SOURCES AND USES OF FUNDS” herein for additional information.
Security for the Bonds
In connection with the issuance of the Series 2016A Additional Bonds, Ascension, as Senior Credit Group Representative (the “Senior Credit Group Representative”), under a Master Trust Indenture, dated as of November 1, 1999, as amended and supplemented, including by a Supplemental Master Indenture, dated as of May 1, 2016, as amended and supplemented by a First Amendment to Supplemental Master Indenture, dated as of June 1, 2017 (as so amended and supplemented, “Supplement No. 114”), between Ascension and the hereinafter- defined Senior Master Trustee (the “Senior Master Indenture”), among Ascension, the other corporations that are Senior Obligated Group Members thereunder from time to time and U.S. Bank National Association, as master trustee (the “Senior Master Trustee”), will issue an amended senior obligation (as amended, the “Series 2016 Taxable Senior Obligation”) under the Senior Master Indenture to secure the Bonds. Each Obligation issued under the Senior Master Indenture, including the Series 2016 Taxable Senior Obligation, constitutes a “Senior Obligation.” As described below, Ascension and the other Senior Credit Group Members are also members of the Subordinate Credit Group (as defined herein) that was established under a separate subordinate master trust indenture, under which obligations are issued that are subordinate to the Senior Obligations issued under the Senior Master Indenture. The Series 2016 Taxable Senior Obligation is a joint and several obligation of Ascension and the other Senior Obligated Group Members.
THE SERIES 2016A ADDITIONAL BONDS
The Series 2016A Additional Bonds will bear interest at the rate set forth on the cover page of this Offering Memorandum Supplement. Payment of the interest on any Series 2016A Additional Bond shall be made on May 15 and November 15 of each year, commencing November 15, 2017 (each, an “Interest Payment Date”) to the Holder thereof as of the Record Date (which will be the first day of the month during which each Interest Payment Date falls, whether or not a Business Day) for each Interest Payment Date (except with respect to interest in default, for which a special record date and special interest payment date shall be established). See “THE SERIES 2016 TAXABLE BONDS” and APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—BOND INDENTURE” in the 2016 Offering Memorandum for a description of certain terms of the Bonds.
Redemption
Optional Redemption. The Series 2016A Additional Bonds are subject to optional redemption prior to maturity at the same times and at the same Make-Whole Redemption Price as the Bonds as described in the 2016 Offering Memorandum. See “THE SERIES 2016 TAXABLE BONDS—Redemption—Optional Redemption of the Series 2016 Taxable Bonds” in the 2016 Offering Memorandum.
Purchase in Lieu of Redemption. The Series 2016A Additional Bonds are subject to purchase in lieu of redemption under certain circumstances described in the 2016 Offering Memorandum. See “THE SERIES 2016 TAXABLE BONDS—Redemption—Purchase in Lieu of Redemption” in the 2016 Offering Memorandum.
Additional Bonds
The Bond Indenture provides that Ascension may issue Additional Bonds thereunder, subject to the terms and conditions set forth in the Bond Indenture. All such Additional Bonds shall mature on the maturity date for the Series 2016 Taxable Bonds and shall bear interest at the rate per annum for the Series 2016 Taxable Bonds, and shall be subject to redemption at the same times and at the same Make-Whole Redemption Price as the Series 2016 Taxable Bonds. Additional Bonds may be consolidated with the Series 2016 Taxable Bonds and the Series 2016A Additional Bonds upon compliance with certain requirements of the Bond Indenture. Each Additional Bond to be so consolidated shall constitute part of the Series 2016 Taxable Bonds and the Series 2016A Additional Bonds. See
2 APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—BOND INDENTURE—Additional Bonds” in the 2016 Offering Memorandum.
BOOK-ENTRY ONLY SYSTEM
General
The Series 2016A Additional Bonds will be issued in book-entry form. DTC will act as securities depository for the Series 2016A Additional Bonds. The Series 2016A Additional Bonds will be issued as fully registered securities registered in the name of Cede & Co., as nominee of DTC, or such other name as may be requested by an authorized representative of DTC. One fully registered Series 2016A Additional Bond certificate will be issued for the Series 2016A Additional Bonds set forth on the cover page of this Offering Memorandum Supplement, in the aggregate principal amount of the Series 2016A Additional Bonds, and will be deposited with DTC. For additional information regarding DTC and its book-entry only system, see “BOOK-ENTRY ONLY SYSTEM” in, and APPENDIX E to, the 2016 Offering Memorandum.
Global Clearance Procedures
See APPENDIX B hereto, entitled “GLOBAL CLEARANCE PROCEDURES,” for a description of global clearance procedures with respect to the Series 2016A Additional Bonds.
ASCENSION AND THE BOND TRUSTEE CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM CUSTOMERS, EUROCLEAR OR EUROCLEAR PARTICIPANTS WILL DISTRIBUTE TO THE BENEFICIAL OWNERS OF THE SERIES 2016A ADDITIONAL BONDS (1) PAYMENTS OF PRINCIPAL OF OR INTEREST OR REDEMPTION PREMIUM ON THE SERIES 2016A ADDITIONAL BONDS; (2) CONFIRMATIONS OF THEIR OWNERSHIP INTERESTS IN THE SERIES 2016A ADDITIONAL BONDS; OR (3) OTHER NOTICES SENT TO DTC OR CEDE & CO., ITS PARTNERSHIP NOMINEE, AS THE REGISTERED OWNER OF THE SERIES 2016A ADDITIONAL BONDS, OR THAT THEY WILL DO SO ON A TIMELY BASIS, OR THAT DTC DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS, CLEARSTREAM, CLEARSTREAM CUSTOMERS, EUROCLEAR OR EUROCLEAR PARTICIPANTS WILL SERVE AND ACT IN THE MANNER DESCRIBED IN THIS OFFERING MEMORANDUM.
ASCENSION AND THE BOND TRUSTEE WILL NOT HAVE ANY RESPONSIBILITY OR OBLIGATIONS TO DTC, THE DIRECT PARTICIPANTS, THE INDIRECT PARTICIPANTS OF DTC CLEARSTREAM, CLEARSTREAM CUSTOMERS, EUROCLEAR, EUROCLEAR PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM CUSTOMERS, EUROCLEAR OR EUROCLEAR PARTICIPANTS; (2) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM CUSTOMERS, EUROCLEAR OR EUROCLEAR PARTICIPANTS OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OF OR INTEREST OR REDEMPTION PRICE ON THE SERIES 2016A ADDITIONAL BONDS; (3) THE DELIVERY BY DTC OR ANY DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS OF DTC, CLEARSTREAM, CLEARSTREAM CUSTOMERS, EUROCLEAR OR EUROCLEAR PARTICIPANTS OF ANY NOTICE TO ANY BENEFICIAL OWNER THAT IS REQUIRED OR PERMITTED TO BE GIVEN TO OWNERS UNDER THE TERMS OF THE CERTIFICATE; OR (4) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE REGISTERED HOLDER OF THE SERIES 2016A ADDITIONAL BONDS.
THE INFORMATION CONTAINED HEREIN, IN APPENDIX B, CLEARSTREAM AND EUROCLEAR AND THEIR BOOK-ENTRY SYSTEMS HAS BEEN OBTAINED FROM DTC, CLEARSTREAM AND EUROCLEAR, RESPECTIVELY, AND ASCENSION MAKES NO REPRESENTATION AS TO THE COMPLETENESS OR THE ACCURACY OF SUCH INFORMATION OR AS TO THE ABSENCE OF MATERIAL ADVERSE CHANGES IN SUCH INFORMATION SUBSEQUENT TO THE DATE HEREOF.
3 SECURITY FOR THE BONDS
General
The Bonds are general obligations of Ascension, payable from payments made by Ascension under the Bond Indenture and from payments made by the Senior Obligated Group Members on the Series 2016 Taxable Senior Obligation, and are secured by a pledge of amounts held in the funds and accounts by the Bond Trustee under the Bond Indenture.
Ascension and certain, but not all, of the other Senior Obligated Group Members (as provided in the Senior Master Indenture) have granted a security interest to the Senior Master Trustee in their respective “Pledged Revenues” to secure all Senior Obligations outstanding under the Senior Master Indenture, including the Series 2016 Taxable Senior Obligation, and to secure the performance by Ascension and the other members of the Senior Obligated Group of their obligations under the Senior Master Indenture. The Pledged Revenues consist of certain operating revenues of the Senior Obligated Group Members that granted such security interests. See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—DEFINITIONS OF CERTAIN TERMS” in the 2016 Offering Memorandum for a definition of “Pledged Revenues”.
No reserve fund has been established under the Bond Indenture. The Property of Ascension and the other Senior Credit Group Members, other than Pledged Revenues, is not pledged as security for the Series 2016A Additional Bonds or for the payment of the Series 2016 Taxable Senior Obligation.
The Senior Master Indenture
Ascension and the Senior Credit Group. Ascension is a Missouri nonprofit corporation formed on September 13, 2011 and is the sole corporate member of Ascension Health. Through Ascension Health, Ascension is the indirect sole corporate member of certain non-profit corporations that own and operate acute care hospitals and other health care facilities and service providers with approximately 24,251 available beds as of June 30, 2016. For more information regarding Ascension and the Senior Credit Group, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP.”
The Senior Credit Group created under the Senior Master Indenture is composed of the Senior Obligated Group Members, the Senior Designated Affiliates and the Senior Limited Designated Affiliates. As of the date hereof, the Senior Credit Group consists of 127 nonprofit organizations, as more fully described in APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES” and “—LIST OF MEMBERS OF THE ASCENSION CREDIT GROUP AS OF THE DATE HEREOF.”
All Senior Obligated Group Members are jointly and severally liable for the payment of amounts due on the Senior Obligations, including the Series 2016 Taxable Senior Obligation. Neither the Senior Designated Affiliates nor the Senior Limited Designated Affiliates are obligated to make payments on the Senior Obligations.
The Senior Master Indenture permits the Senior Credit Group Representative to designate a Person as a Senior Designated Affiliate and a Senior Obligated Group Member as the “Controlling Member” of that Senior Designated Affiliate for purposes of the Senior Master Indenture. A Controlling Member may, but is not required to, maintain corporate control over the Senior Designated Affiliate. If the Controlling Member does not maintain sufficient corporate control over the Senior Designated Affiliate, the Controlling Member must have in effect contracts or other agreements which the Senior Credit Group Representative and the Controlling Member, in the judgment of their respective Governing Bodies, deem sufficient for the Controlling Member to cause the Senior Designated Affiliate to comply with the terms of the Senior Master Indenture.
The Senior Designated Affiliates are not obligated to make any payments on any Senior Obligation. Each Controlling Member has agreed in the Senior Master Indenture to cause each Senior Designated Affiliate to pay, loan or otherwise transfer to the Senior Credit Group Representative amounts necessary to enable the Senior
4 Obligated Group Members to comply with the provisions of the Senior Master Indenture, including the provisions for payments on Senior Obligations.
The Senior Master Indenture further provides that Senior Designated Affiliates may be designated by the Senior Credit Group Representative as “Senior Limited Designated Affiliates.” A Senior Limited Designated Affiliate’s liability to transfer moneys or other assets to the Senior Credit Group Representative shall be limited to a specified amount set forth in an Officer’s Certificate delivered to the Senior Master Trustee upon the designation of the Senior Designated Affiliate as a Senior Limited Designated Affiliate. Ascension is the Controlling Member for each of the Senior Limited Designated Affiliates identified in APPENDIX A. As of the date hereof, the aggregate obligations of the existing Senior Limited Designated Affiliates to transfer such moneys or other assets was limited to approximately $49 million. See APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—LIST OF MEMBERS OF THE ASCENSION CREDIT GROUP AS OF THE DATE HEREOF.”
Certain information concerning Ascension and the Ascension Senior Credit Group is contained in APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP.”
Senior Obligations. Under the Senior Master Indenture, the Senior Credit Group Representative is authorized to issue, for itself and on behalf of the other Senior Obligated Group Members, Senior Obligations to evidence or secure Indebtedness and other obligations. The Series 2016 Taxable Senior Obligation is a Senior Obligation issued under the Senior Master Indenture. The Series 2016 Taxable Senior Obligation will be secured on a parity with other Senior Obligations issued and outstanding under the Senior Master Indenture.
The aggregate principal amount of Senior Obligations that were outstanding as of March 31, 2017 was approximately $5.8 billion. After the date of issuance of the Series 2016A Additional Bonds, and the application of the proceeds thereof as described herein under the caption “PLAN OF FINANCE,” the aggregate principal amount of such Senior Obligations, including the Series 2016 Taxable Senior Obligation is expected to be approximately $6 billion*.
Subordinate Credit Group. Ascension and the other Senior Credit Group Members are also members of the Subordinate Credit Group that was established by the Subordinate Master Indenture. The Subordinate Master Indenture requires that the members of the Subordinate Credit Group be identical to the members of the Senior Credit Group.
Subordinate Obligations. The aggregate principal amount of the Subordinate Obligations that were outstanding as of March 31, 2017 was approximately $426 million.
The security interests in Pledged Revenues granted to the Senior Master Trustee are not intended to, and do not secure, the obligations of the Subordinate Credit Group on the Subordinate Obligations, or the obligations of any Subordinate Obligated Group Member under the Subordinate Master Indenture.
Financial Performance Tests. The Senior Master Indenture requires the Senior Credit Group to maintain an Annual Required Debt Service Coverage Ratio of at least 1.10:1.0, and limits the ability of Ascension and the other Senior Credit Group Members to encumber Property, except for Permitted Liens. See “Covenants Against Liens on Property; Permitted Senior Indebtedness” below. In determining whether the Senior Credit Group has complied with the debt service coverage test in the Senior Master Indenture, the income and assets of all Senior Credit Group Members are included, even though only the Senior Obligated Group Members are obligated on the Senior Obligations.
Changes of the Senior Credit Group Members. Entities may be added to and withdrawn from the Senior Credit Group from time to time. The Senior Master Indenture imposes minimal conditions on the right of any Senior Obligated Group Member or other Senior Credit Group Member to enter or withdraw from the Senior
* Preliminary, subject to change.
5 Obligated Group and the Senior Credit Group, respectively, at any time, or to change the status of a Senior Obligated Group Member to that of a Senior Designated Affiliate or a Senior Limited Designated Affiliate.
Additional Senior Obligations. Ascension anticipates that it may issue taxable bonds or incur other indebtedness and various issuers will issue revenue bonds in the future for the benefit of Senior Credit Group Members or other Persons whose obligation thereon may be guaranteed by the Senior Obligated Group. Ascension anticipates that it will issue additional Senior Obligations to evidence and secure the obligations of the Senior Obligated Group to repay the taxable bonds issued by it and such other indebtedness and the loans to be made to Ascension, other Senior Credit Group Members or to such other Persons from the proceeds of the sale of future revenue bonds or for other corporate purposes. The Series 2016 Taxable Senior Obligation will be secured on a parity with Outstanding Senior Obligations and any additional Senior Obligations.
No Restriction on Incurrence of Additional Indebtedness. The Senior Master Indenture does not contain any limitations on the issuance of additional Senior Obligations or Subordinate Obligations or the incurrence of additional Indebtedness, including the amount and terms of additional Indebtedness. Additionally, the Senior Master Indenture permits Ascension and the other Senior Credit Group Members to provide security for additional Indebtedness, which need not be extended to any other Indebtedness, including Indebtedness secured by the Series 2016 Taxable Senior Obligation.
Covenants Against Liens on Property; Permitted Senior Indebtedness. Pursuant to the Senior Master Indenture, each of Ascension and the other Senior Obligated Group Members agrees that it will not, and each Controlling Member covenants that it will not permit any of its Senior Designated Affiliates to, create, assume or suffer to exist any Lien upon the Property of the Senior Credit Group to secure Indebtedness, except for Permitted Liens. “Permitted Liens” include, among other things, (i) Liens on Property existing as of the effective date of the Senior Master Indenture and, with respect to new Senior Obligated Group Members or Senior Designated Affiliates, on the date an entity becomes a Senior Credit Group Member, (ii) Liens securing all Senior Obligations equally and ratably, and (iii) any other Liens on Property securing Indebtedness provided that the aggregate Value of Property subject to Liens that are not otherwise Permitted Liens shall not exceed 10% of the total net assets of the Senior Credit Group (as shown on the financial statements of the Senior Credit Group for the most recent fiscal year for which financial statements are available immediately preceding the date that the Lien is created). See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—DEFINITIONS OF CERTAIN TERMS” in the 2016 Offering Memorandum for a definition of “Permitted Liens.”
No Restriction on Transfer of Assets. The Senior Master Indenture does not contain any limitations on the sale, lease, transfer or disposition of a Senior Credit Group Member’s assets, other than certain limited covenants regarding the disposition of substantially all of a Senior Obligated Group Member’s assets.
No Requirement of Reserved Powers or Contractual Rights. Each Controlling Member has covenanted in the Senior Master Indenture to cause each Senior Designated Affiliate (other than Senior Limited Designated Affiliates, whose obligations to make such transfers are limited to specified amounts) which it controls to pay, loan or otherwise transfer to the Senior Credit Group Representative amounts necessary to enable the Senior Obligated Group Members to comply with the provisions of the Senior Master Indenture, including the provisions for payments on Senior Obligations. This agreement is subject to legal limitations which may render a Controlling Member unable to cause a Senior Designated Affiliate to make such payments or transfer such amounts. The Senior Master Indenture does not contain any specific requirements for the type of powers a Controlling Member must have over Senior Designated Affiliates or the type of contractual rights or form of contract a Controlling Member must have with Senior Designated Affiliates. Accordingly, no assurance can be given that a Controlling Member will be able to exercise these powers over the Senior Designated Affiliates. See “BONDHOLDERS’ RISKS—Security and Enforceability—Enforceability of Senior Obligations Under the Senior Master Indenture” herein.
For a more detailed discussion of covenants of the Senior Obligated Group and the Senior Credit Group under the Senior Master Indenture, see APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—SENIOR MASTER INDENTURE—Covenants of Each Senior Obligated Group Member” in the 2016 Offering Memorandum. For a further summary of certain other provisions of the Senior Master Indenture, see APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—SENIOR MASTER INDENTURE” in the 2016 Offering Memorandum.
6 Possible Replacement of the Series 2016 Taxable Senior Obligation
At the option of the Senior Credit Group Representative, the Series 2016 Taxable Senior Obligation may be replaced with an obligation or obligations issued by a separate group of corporations under a separate master trust indenture, provided that (i) the applicable provisions of the Bond Indenture are satisfied, including the provisions concerning the replacement of the Series 2016 Taxable Senior Obligation and (ii) the Bond Trustee shall receive written confirmation from each rating agency then rating the Bonds that the replacement of the Series 2016 Taxable Senior Obligation will not by itself result in a reduction in the then-current ratings on the Bonds. See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—BOND INDENTURE” in the 2016 Offering Memorandum for a summary of the applicable provisions of the Bond Indenture.
Amendments of Bond Indenture, Senior Master Indenture, Supplement No. 114 and Series 2016 Taxable Senior Obligation
Each of the Bond Indenture and the Senior Master Indenture provides for the modification or amendment of the Bond Indenture and the Senior Master Indenture, respectively, from time to time, in certain circumstances without the consent of the Holders of the Bonds issued and Outstanding under the Bond Indenture or the holders of Senior Obligations (including the Series 2016 Taxable Senior Obligation), respectively, and in other circumstances with the consent of the Holders of a majority of the principal amount of the Bonds or the consent of the holders of a majority in aggregate principal amount of outstanding Senior Obligations, respectively. Such amendments could be substantial and result in the modification, waiver or removal of certain existing covenants or restrictions contained in the Bond Indenture or the Senior Master Indenture. Such amendments could adversely affect the security of the Bondholders. See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—SENIOR MASTER INDENTURE—Supplements and Amendments” and “—BOND INDENTURE—Modification or Amendment of Bond Indenture” in the 2016 Offering Memorandum.
Concurrently with the issuance of the Series 2016A Additional Bonds and concurrently with the issuance of any other Additional Bonds, Supplement No. 114 and the Series 2016 Taxable Senior Obligation shall be amended to increase the principal amount of the Series 2016 Taxable Senior Obligation to an amount equal to the Outstanding par amount of the Bonds and the Additional Bonds, and the Bond Trustee is directed to surrender the existing Series 2016 Taxable Senior Obligation in exchange for an amended Series 2016 Taxable Senior Obligation. No consent is required from the Holders or Beneficial Owners of the Bonds or the Bond Trustee to effect such amendments to Supplement No. 114 and the Series 2016 Taxable Senior Obligation.
PLAN OF FINANCE
The proceeds of the sale of the Series 2016A Additional Bonds are expected to be used to refund, together with certain other funds, all of the Prior Bonds and pay certain costs relating to the issuance of the Series 2016A Additional Bonds. The Prior Bonds are expected to be redeemed on the Date of Issuance of the Series 2016A Additional Bonds. A portion of the proceeds of the Series 2016A Additional Bonds is also expected to be used for other proper corporate purposes consistent with Ascension’s charitable purposes.
7 ESTIMATED SOURCES AND USES OF FUNDS
The following table sets forth the estimated sources and uses of funds related to the Series 2016A Additional Bonds (with all amounts rounded to the nearest whole dollar).
Series 2016A Additional Bonds Sources Principal amount $ Original Issue Premium/Discount Equity contribution Funds on Deposit with Prior Trustee Total Sources $
Uses Refinancing of Prior Bonds Other Corporate Purposes Costs of Issuance(1) Total Uses $
(1) Includes certain fees and expenses of legal counsel, accountants, the Bond Trustee, the Senior Master Trustee, financial advisor, the rating agencies, the Underwriters and the cost of printing offering documents.
CONTINUING DISCLOSURE
The Senior Credit Group Representative, on behalf of itself and the other Senior Obligated Group Members, has covenanted for the benefit of Holders and Beneficial Owners of the Bonds to provide, in an Annual Report, certain financial information and operating data relating to the Senior Credit Group no later than 180 days following the end of the Senior Credit Group Representative’s fiscal year, commencing with the report for the fiscal year ending June 30, 2016, and to provide notices of the occurrence of certain enumerated events. The Senior Credit Group Representative has also covenanted to provide, in a Quarterly Report, quarterly unaudited financial information for each of the first three quarters of each fiscal year relating to the Senior Credit Group no later than 60 days following the end of each of the first three quarters of the Senior Credit Group Representative’s fiscal year. The specific nature of the information contained in the Annual Report and the notices of enumerated events is described in APPENDIX D – “FORM OF CONTINUING DISCLOSURE AGREEMENT” in the 2016 Offering Memorandum.
Financial information may also be obtained from Ascension online at the following web address: http://ascension.org/about/community-and-investor-relations. No assurances can be given that Ascension will continue to make such information available on its website.
Since the Bonds are taxable securities issued directly by Ascension, the Electronic Municipal Market Access (“EMMA”) website of the Municipal Securities Rulemaking Board (the “MSRB”) is not directly available for the filing of annual or quarterly reports or listed event notices relating to the Bonds. Ascension will, however, file such reports and notices on EMMA so long as it has tax-exempt bonds outstanding, using the CUSIP numbers for such tax-exempt bonds. If no such tax-exempt bonds are outstanding, Ascension will make such reports and notices available through any other nationally recognized disclosure site or through Ascension’s website.
Ascension and Ascension Health have previously entered into continuing disclosure agreements for the benefit of certain outstanding bonds. With the exception of filings relating to defeasances and bond calls, a notice of a rating increase, a notice of a rating decrease, the late filing of a notice with respect to a merger, the filing of notices
8 for both the entry into a definitive agreement for the sale of the assets of three Senior Obligated Group Members, and the cancellation of such agreement, Ascension and Ascension Health believe they have complied in all material respects with their obligations under such continuing disclosure agreements during the past five years.
The continuing disclosure agreements for four series of outstanding bonds provided that Ascension Health would provide unaudited financial statements within 60 days of the end of each quarter of the fiscal year. Ascension and Ascension Health’s practice, including for the past five years and consistent with the remainder of their continuing disclosure agreements, has been to provide unaudited financial statements within 60 days of the end of the first three quarters of the fiscal year, and audited financial statements when available, generally within 90 days after the end of the fiscal year. These continuing disclosure agreements have been amended to remove the requirement for the provision of unaudited financial statements for the fourth quarter of each fiscal year. Prior to the amendment, management of Ascension and Ascension Health believed it was not practical or material to provide unaudited financial statements for the fourth quarter of each fiscal year in such close proximity to the release of full- year audited financial statements.
Ascension voluntarily disclosed to the Securities and Exchange Commission (the “SEC”) certain failures to satisfy its continuing disclosure obligations. Ascension entered into a settlement with the SEC related to Ascension’s failure to disclose certain failures to file notices of defeasance in an official statement delivered in 2012. Under the terms of the settlement, Ascension consented to the entry of a Cease and Desist Order by the SEC. The SEC issued that Order on August 24, 2016. Under the terms of the settlement and the Order, Ascension must cease and desist from committing or causing any violations and future violations of Section 17(a)(2) of the Securities Act of 1933, as amended, which prohibits any untrue statement of material fact or an omission of material fact in connection with the offer or sale of securities. Further, under the terms of the settlement and the Order, Ascension must, among other things, (1) establish appropriate written policies and procedures and periodic training regarding continuing disclosure obligations to effect compliance with federal securities laws, (2) comply with existing continuing disclosure undertakings, including updating past delinquent filings, (3) disclose in a clear and conspicuous fashion the terms of the settlement in any final official statement for an offering by Ascension within five years of the settlement, (4) certify to the SEC in writing compliance with the undertakings in the settlement, and (5) cooperate in any subsequent investigation by the SEC regarding the false statement identified in the settlement. The settlement and Order do not include any fines or monetary penalties. The settlement and Order provide that Ascension does not admit or deny the findings in the settlement or Order (except those related to the jurisdiction of the SEC).
BONDHOLDERS’ RISKS
General
The Bonds are general obligations of Ascension, payable solely from the money and investments in funds held under the Bond Indenture to be funded from payments to be received from Ascension by the Bond Trustee and from payments to be made on the Series 2016 Taxable Senior Obligation by Ascension and any other Senior Obligated Group Members. No representation or assurance can be made that revenues will be realized by Ascension or the other Senior Credit Group Members in amounts sufficient to pay maturing principal and interest due on the Series 2016 Taxable Senior Obligation and the Bonds, including the payment of the Make-Whole Redemption Price of the Bonds. Future economic and other conditions, some of which are described below, may adversely affect revenues and expenses and, consequently, payment of amounts due, or the timing of such payments, on or with respect to the Bonds.
The practical realization of any rights upon any default under the Bond Indenture and the Senior Master Indenture will depend upon the exercise of various remedies specified in these instruments, as restricted by federal and state laws. The federal bankruptcy laws may have an adverse effect on the ability of the Bond Trustee and the Holders of the Bonds to enforce their claim to liens granted by the Bond Indenture.
The Senior Master Indenture contains few limitations or conditions upon transactions involving Senior Credit Group Members. A governmental agency may determine that a transaction may have violated applicable laws and may proceed to enjoin the transaction or impose civil or criminal penalties, notwithstanding the fact that
9 the transaction may have been permitted by the Senior Master Indenture. Violations of these laws may have a material adverse effect on the operations and financial condition of the Senior Credit Group.
Certain of the factors that could affect the Bonds and the future financial condition of the Senior Credit Group are described below. This discussion of risk factors is not, and is not intended to be, exhaustive.
Market Risk
As of March 31, 2017, the Senior Credit Group had outstanding approximately $584.6 million of bonds bearing interest at weekly interest rates which could be put upon seven days’ notice, and $1.8 billion of bonds bearing fixed rates of interest for fixed interim periods subject to mandatory tender for purchase at the end of their respective long-term interest rate periods. None of these variable rate bonds are supported by dedicated letters of credit or other dedicated liquidity facilities. Ascension is required to pay the tender price of tendered and unremarketed bonds. In such an event, management would utilize other sources to provide the liquidity necessary to pay such purchase price. Potential sources include liquidating investments (which could be accompanied by draws on lines of credit to restore fund balances) and issuing commercial paper. In addition, the interest rates on such bonds from time to time has fluctuated significantly and may increase Ascension’s cost of capital. See APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP— FINANCIAL AND OPERATING INFORMATION—Liquidity, Investment Policies and Income.”
Impact of Market Turmoil
Disruption of the credit and financial markets has resulted in volatility in the securities markets, significant losses in investment portfolios, increased business failures and consumer and business bankruptcies. In response to this disruption of the credit and financial markets, federal legislation was enacted, including the Recovery Act (as defined below) and the Dodd-Frank Act (as defined below).
The health care sector has been adversely affected as a direct consequence of the disruption of the credit and financial markets. Patient service revenues and inpatient volumes have not increased as historic trends would otherwise indicate. Unemployment rates are relatively higher than national rates in certain market areas in which Senior Credit Group Members own and operate health care facilities. The last recession also increased stresses on the budgets of states in which Senior Credit Group Members are located, which could potentially result in reductions in Medicaid payment rates or increases in Medicaid eligibility standards, and delays of payment of amounts due under Medicaid and other state or local payment programs. For a discussion of the effects of these factors on Ascension and the Senior Credit Group, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE CREDIT GROUP’S RECENT FINANCIAL PERFORMANCE.”
Debt Limit Increase
Through legislation, the federal government has 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. 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.
Ascension management 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 Senior Credit Group, 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.
10 Federal Budget Cuts
The Budget Control Act of 2011 (the “BCA”) mandated significant reductions and spending caps on the federal budget for fiscal years 2012-2021. The BCA 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. Because the Super Committee failed to act, the BCA mandated that a 2% reduction in Medicare spending, among other reductions, would be triggered to take effect on January 2, 2013.
The American Taxpayer Relief Act of 2012 (“ATRA”) postponed this scheduled reduction until March 1, 2013. On March 11, 2013, CMS implemented the 2% reductions for all Medicare Parts A and B claims with dates- of-service or dates-of-discharge on or after April 1, 2013, and for all payments made to Medicare Advantage Organizations (“MAOs”), Part D plans and other programs (including Managed Care Organizations) with enrollment periods beginning on or after April 1, 2013. Additionally, ATRA affects hospital Medicare reimbursement in that it requires the Medicare program to recoup funds from hospitals based on changes made from 2010-2012 to documentation and coding that have increased Medicare inpatient prospective payment system (“IPPS”) payments but that do not represent real increases in the intensity of services provided to patients. In the final IPPS regulations for federal fiscal year 2014, CMS stated that it intends to phase in this recoupment over time, starting with a 0.8% reduction in the Medicare standardized amount for 2014. The fiscal year 2015 IPPS final rule reduced standardized amounts by a second 0.8% installment, for a cumulative reduction of 1.6% for fiscal year 2015. The fiscal year 2016 IPPS final rule reduced standardized amounts by an additional 0.8%, for a cumulative reduction of 2.4%. The fiscal year 2017 IPPS final rule, which implements the final year of reductions pursuant to ATRA, reduced standardized amounts by an additional 1.5%, for a cumulative reduction of 3.9%.
While the 2013 budget agreement offered limited relief from sequestration cuts for certain defense and non- defense spending for fiscal years 2014 and 2015, it did not extend relief to sequestration reductions impacting Medicare, but rather extended the 2% reduction to Medicare providers and insurers at least through March 31, 2024, subject to additional Congressional action. Certain commercial Medicare Advantage plans are passing this reduction on to health care providers. On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 (the “BBA”) into law, increasing the budget caps imposed by the BCA for fiscal years 2016 and 2017 and authorizing $80 billion in increased spending over the two years. The BBA also extended the 2% reduction to Medicare providers and insurers for another year, to at least March 31, 2025, and suspended the limit on the federal government’s debt until March 2017. Special accounting measures are being taken which are expected to keep the federal debt below the debt ceiling until around fall of 2017. On May 5, 2017, President Trump signed an appropriations bill providing for federal funding through the end of September 2017.
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 each of the Senior Credit Group Members. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. If and to the extent Medicare and/or Medicaid spending is reduced under either scenario, this may have a material adverse effect upon the financial condition of the Senior Credit Group Members. Ultimately, these reductions or alternatives could have a disproportionate impact on hospital providers and could have an adverse effect on the financial condition of the Senior Credit Group Members, which could be material.
Health Care Reform
The Patient Protection and Affordable Care Act (“ACA”) was enacted in March 2010. This legislation addresses almost all aspects of hospital and provider operations and health care delivery, has changed and is changing how health care services are covered, delivered, and reimbursed. These changes will result in new payment models with the risk of lower hospital reimbursement from Medicare, utilization changes, increased government enforcement and the necessity for health care providers to assess, and potentially alter, their business strategy and practices, among other consequences. While many providers may receive reduced payments for care, millions of previously uninsured Americans may have coverage. State “health insurance exchanges” could fundamentally alter the health insurance market and negatively impact hospital providers enabling insurers to aggressively negotiate rates. Federal deficit reduction efforts will likely curb federal Medicare and Medicaid spending further to the detriment of hospitals, physicians and other health care providers. In June 2012, the
11 Supreme Court upheld most provisions of the ACA, while limiting the power of the federal government to penalize states for refusing to expand Medicaid. In June 2015, the Supreme Court held that individuals eligible for tax credits to subsidize their purchase of health insurance in healthcare marketplaces created by the ACA may receive those tax credits whether they purchase their policies in state or federal exchanges. In November 2015, the BBA repealed a provision of the ACA which would require employers that offer one or more health benefits plans and have more than 200 full time employees to automatically enroll new full-time employees in a health plan.
Several of the federal statutes and regulations described herein may be substantially modified or repealed in whole or in part. President Trump promised to modify or repeal the ACA during his campaign in 2016. In May of 2017 the U.S. House of Representatives voted to adopt the American Health Care Act (the “AHCA”), which would replace portions of the ACA, including eliminating the individual and large employer mandate to obtain or provide health insurance coverage, respectively, imposing a per capita cap on federal funding of Medicaid programs, or permitting the transition of federal funding to block grants, and permitting states to seek waivers of certain federal essential health benefit and pre-existing condition requirements. The legislation will proceed to the U.S. Senate for consideration. There can be no assurances that any legislation signed into law would not have material adverse effects on the Senior Credit Group.
As a result of the ACA, substantial changes have occurred and are anticipated in the United States health care system. The ACA affects the delivery of health care services, the financing of health care costs, reimbursement of health care providers and the legal obligations of health insurers, providers, employers and consumers. While some provisions of the ACA have been implemented, others are slated to take effect at specified times in the coming years, and, therefore, the full consequences of the ACA on the health care industry have not been fully realized. The ramifications of the ACA may also become apparent only following implementation or through later regulatory and judicial interpretations. Portions of the ACA have already been limited and nullified as a result of legislative amendments and judicial interpretations and future actions may further change its impact. Such interpretations are expected to cause third-party payors and health care suppliers and vendors to impose new and additional contractual terms and conditions, which may have an adverse effect on health care providers. In addition, the uncertainties regarding the implementation of the ACA create unpredictability for the strategic and business planning efforts of health care providers, which in itself constitutes a risk.
The changes in the health care industry brought about by the ACA and other reform efforts such as the AHCA may have both positive and negative effects, directly and indirectly, on the nation’s hospitals and other health care providers, including the Senior Credit Group Members. For example, the projected increase in the numbers of individuals with health care insurance occurring as a consequence of Medicaid expansion, creation of health insurance exchanges, subsidies for insurance purchase and the penalty on certain individuals who do not purchase insurance could result in lower levels of bad debt and increased utilization or profitable shifts in utilization patterns for hospitals. A negative impact to the hospital industry overall will likely result from scheduled cumulative reductions in Medicare payments; such reductions are substantial. The ACA’s cost-cutting provisions to the Medicare program include reduction in Medicare market basket updates to hospital reimbursement rates under the IPPS, as well as additional reductions to or elimination of Medicare reimbursement for certain patient readmissions and hospital-acquired conditions. Industry experts also expect that government cost reduction actions may be followed by private insurers and payors. Because approximately 36% of the net patient service revenues of the Senior Credit Group for its fiscal year ended June 30, 2016 are from Medicare spending, the reductions may have a material impact, and could offset any positive effects of the ACA.
Health care providers could be further subjected to decreased reimbursement as a result of implementation of recommendations of the Independent Payment Advisory Board (“IPAB”). The ACA directs the IPAB to make recommendations to reduce Medicare cost growth if such growth exceeds legislated targets. The IPAB’s recommended reductions will be automatically implemented unless Congress adopts alternative legislation that meets equivalent savings targets. While hospitals are largely exempted from the recommendations from the IPAB, the impact on providers may filter up to hospitals, and industry experts also expect that government cost reduction actions may be followed by private insurers and payors. The IPAB was to begin submitting its annual recommendations no later than January 15, 2014. However, neither President Obama nor President Trump has appointed the members of the IPAB. The Medicare Trustees 2016 report predicted that the IPAB will likely be triggered in fiscal year 2017. Appropriations bills passed in both 2016 and 2017 removed any funding for the IPAB.
12 Beginning in 2014, the ACA created “health insurance exchanges” in which health insurance can be purchased by individuals and certain groups, expanded the availability of subsidies and tax credits for premium payments by some consumers and employers, and required that certain terms and conditions be included by commercial insurers in contracts with providers. Since 2014, Americans who remain uninsured may face financial penalties.
In addition, the ACA imposed many new obligations on states related to health insurance. It is unclear how the increased federal oversight of state health care may affect future state oversight or affect the Senior Credit Group Members. The health insurance exchanges may have positive impact for hospitals by increasing the availability of health insurance to individuals who were previously uninsured. Conversely, employers or individuals may shift their purchase of health insurance to new plans offered through the exchanges, which may or may not reimburse providers at rates equivalent to rates the providers currently receive. The exchanges could alter the health insurance markets in ways that cannot be predicted, and exchanges might, directly or indirectly, take on a rate-setting function that could negatively impact providers. Because the exchanges are still evolving, the effects of these changes upon the financial condition of any third party payor that offers health insurance, rates paid by third-party payors to providers and, thus, the revenues of the Senior Credit Group Members, and upon the operations, results of operations and financial condition of the Senior Credit Group, taken as a whole, cannot be predicted.
High deductible insurance plans have become more common in recent years, and the ACA has also increased the prevalence of high deductible insurance plans as the health care exchanges include a variety of plans, many of which offer lower monthly premiums in return for higher deductibles. High deductible plans may contribute to lower inpatient volumes as patients may forgo or choose less expensive medical treatment to avoid having to pay the costs 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 their high deductible.
The ACA has and will likely continue to affect some health care organizations differently from others, depending, in part, on how each organization adapts to the ACA’s emphasis on directing more federal health care dollars to integrated provider organizations and providers with demonstrable achievements in quality care. The ACA created a value-based purchasing system for hospitals under the Medicare program, which was designed to provide incentive payments to hospitals contingent on satisfaction of specified performance measures related to common and high-cost medical conditions, such as cardiac, surgical and pneumonia care. The ACA also funds various programs to evaluate and encourage new provider delivery models and payment structures, including “accountable care organizations” and bundled provider payments.
On January 26, 2015, the Department of Health and Human Services (“DHHS”) 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 Accountable Care Organizations or bundled payment arrangements, by the end of 2016, increasing to 50% by 2018. In addition, DHHS proposed that by the end of 2016, 85% of all Medicare fee-for service payments have a component based on quality or efficiency of care, such as value-based purchasing or readmission reductions, increasing to 95% by 2018. As of the date of such announcement, approximately 20% of Medicare’s fee-for-service payments were made through alternative delivery models, and 80% of fee for service payments had a component based upon quality or efficiency of care, up from almost none in 2011.
As a part of this value-based payment initiative, in October of 2016, DHHS published regulations pursuant to the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) which significantly affect the method of reimbursement for healthcare providers billing under the Medicare Physician Fee Schedule. MACRA created a new quality reporting system called the Merit-Based Incentive Payment System (“MIPS”) that is based on concepts from the Physician Quality Reporting System, the Value Based Modifier and the eligible professional Medicare Electronic Health Record Incentive programs and consolidates elements of each into a single quality reporting program. The Medicare Electronic Health Record Incentive Program for eligible hospitals remains separate from MIPS. Starting in 2019, most physicians and mid-level providers will be subject to a reimbursement adjustment based on their MIPS performance. The potential MIPS adjustment starts at +/-4% in 2019 and extends to +/-9% in 2022. Qualifying providers who opt to participate in Advanced Alternative Payment Models (“AAPMs”) can be excluded from MIPS by satisfying threshold requirements for AAPM participation. Qualifying providers who choose to participate in an AAPM and satisfy certain requirements will receive a five percent lump sum incentive
13 payment for years 2019-2024, as well as higher payment adjustments to the Medicare Physician Fee Schedule than MIPS participants for years 2026 and beyond. Generally, the first performance year to report quality metrics pursuant to MACRA is 2017 with payment adjustments for the 2017 performance year being implemented in 2019.
The outcomes of these projects and programs, including the likelihood of being revised or expanded or their effect on health care organizations’ revenues or financial performance cannot be predicted.
The ACA amended existing criminal, civil and administrative anti-fraud statutes and increased funding for enforcement and efforts to recoup prior federal health care payments to providers. Under the ACA, a broad range of providers, suppliers and physicians are required to adopt a compliance and ethics program. While the government has already increased its enforcement efforts, failure to implement certain core compliance program features provides new opportunities for regulatory and enforcement scrutiny, as well as potential liability if an organization fails to prevent or identify improper federal health care program claims and payments. See also “—Regulatory Environment” below.
Management of Ascension has analyzed the ACA, the AHCA and other proposed reforms and will continue to do so in order to assess the effects of the legislation and evolving regulations on current and projected operations, financial performance and financial condition. However, management of Ascension cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of new legislation or attempts to repeal or amend existing legislation. There can be no assurances that any potential changes to the laws and regulations governing health care would not have significant negative financial impact to the Senior Credit Group.
Nonprofit Health Care Environment
Nearly all of the Senior Credit Group Members are nonprofit corporations, exempt from federal income taxation as organizations described in Section 501(c)(3) of the Code. As nonprofit tax-exempt organizations, the Senior Credit Group Members are subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for religious and charitable purposes. At the same time, the Senior Credit Group Members conduct large-scale complex business transactions and are often major employers in their geographic areas. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a complex, multi-state health care organization.
The operations and practices of nonprofit, tax-exempt hospitals are routinely challenged or criticized for inconsistency or inadequate compliance with the regulatory requirements for, and societal expectations of, nonprofit tax-exempt organizations. These challenges, in some cases, are broader than concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, and instead in many cases are examinations of core business practices of the health care organizations. A common theme of these challenges is that nonprofit hospitals may not confer community benefits that equal the benefit received from tax-exempt status. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the “IRS”), labor unions, Congress, state legislatures, and patients, and in a variety of forums, including hearings, audits and litigation. The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on Ascension and the Senior Credit Group. These challenges or examinations include the following, among others:
Congressional Hearings. Senate and House committees have conducted several nationwide investigations of hospital billing and collection practices and prices charged to uninsured patients and have considered reforms to the nonprofit sector, including proposed reform in the area of tax-exempt health care organizations, as part of health care reform generally. See “IRS Examination of Compensation Practices,” “Community Benefit Initiatives” and “Challenges to Real Property Tax Exemptions” below.
IRS Bond Examinations. IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds in the charitable organization sector with specific review of private use. Schedule K to the revised Form 990 return addresses what the IRS believes is significant
14 noncompliance with recordkeeping and record retention requirements. Schedule K also requires tax- exempt organizations to report on the investment and use of tax-exempt bond proceeds to address IRS concerns regarding compliance with arbitrage rebate requirements and the private use and research use of tax-exempt bond-financed facilities.
IRS Examination of Compensation Practices. For more than a decade, the IRS has been concerned about executive compensation practices of tax-exempt hospitals. The IRS measures compliance by tax-exempt organizations with requirements that they not pay excessive compensation and benefits to their officers and other insiders. In February 2009, the IRS issued its Hospital Compliance Project Final Report (the “IRS Final Report”) that examined tax-exempt organizations’ practices and procedures with regard to compensation and benefits paid to their officers and other defined “insiders.” The IRS Final Report indicates 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 tax-exempt organizations.
Community Benefit Initiatives. The IRS has also undertaken a community benefit initiative directed at hospitals. The IRS Final Report determined that the reporting of community benefit by nonprofit hospitals varied widely, both as to types of programs and expenditures classified as community benefit and the measurement of community benefits. As a result, the IRS issued the revised Form 990 that includes Schedule H, effective for tax years beginning after March 23, 2010, which is designed to provide uniformity regarding types of programs and expenditures reported as community benefit by nonprofit hospitals. As the IRS collects and reviews information from hospitals about the level and types of community benefit provided, the IRS may issue a more stringent interpretation of community benefit. Findings from Schedule H reports may also revive proposals in Congressional committees which, from time to time, have been made to codify the requirements for hospitals’ tax-exempt status, including requirements to provide minimum levels of charity care. Additionally, the ACA contains new requirements for nonprofit hospitals in order to maintain their tax-exempt status, which includes a requirement to conduct a community health needs assessment, among other requirements. See “—Tax Matters” below.
Class Actions. Nonprofit hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for nonprofit hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices and breaches of privacy, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on hospitals and health systems in the future.
Challenges to Real Property Tax Exemptions. Recently, the real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins. Several of these disputes have been determined in favor of the taxing authorities or have resulted in settlements. While Ascension is not aware of any current challenge to the tax exemption afforded to any material real property of the Senior Credit Group Members, there can be no assurance that these types of challenges will not occur in the future.
Indigent Care. Tax-exempt health care providers often treat large numbers of indigent patients who are unable to pay in full for their medical care. These hospitals and health care providers may be susceptible to economic and political changes that could increase the number of indigents or their responsibility for caring for this population. General economic conditions affect the number of employed individuals who have health coverage and the ability of patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage exclusions under local, county, state and federal health care programs (including Medicare and Medicaid) may increase the frequency and severity of indigent treatment by such hospitals and other providers. It also is possible that future legislation could require that
15 tax-exempt hospitals and other providers maintain minimum levels of indigent care as a condition to federal income tax exemption or exemption from certain state or local taxes.
The foregoing are some examples of the challenges and examinations facing nonprofit health care organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations, and may indicate an increasingly more difficult operating environment for nonprofit health care organizations, including the Senior Credit Group. The challenges and examinations, and any resulting legislation, regulations, judgments, or penalties, could have a material adverse effect on the Senior Credit Group.
Security and Enforceability
Enforceability of Senior Obligations Under the Senior Master Indenture. In determining whether various covenants and tests contained in the Senior Master Indenture are met, the accounts of the Senior Credit Group Members will be combined, notwithstanding that Senior Designated Affiliates are not obligated on the Senior Obligations and that uncertainties exist as to the enforceability of certain obligations of the Senior Credit Group Members contained in the Senior Master Indenture which bear on the availability of the revenues of the Senior Credit Group Members for payment of amounts due on the Senior Obligations, including the Series 2016 Taxable Senior Obligation issued as security for the Bonds.
The joint and several obligation described herein of each Senior Obligated Group Member to make payments of debt service on a Senior Obligation, the proceeds of which Senior Obligation were not loaned or otherwise made available to that Senior Obligated Group Member, or the obligation of a Senior Designated Affiliate to transfer funds to the Senior Credit Group Representative for purposes of making payments on Senior Obligations, may not be enforceable to the extent that the payments (i) will be made on a Senior Obligation issued for a purpose that is not consistent with the charitable purposes of the entity from which the payment or transfer is requested or is subject to the application of charitable trust principles or state laws, regulations, policies or procedures 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 the property for payments; (iii) would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by the entity from which payment or transfer 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 the property of any Senior Obligated Group Member or Senior Designated Affiliate may be applied or transferred as described above cannot be determined and could be substantial.
A Senior Credit Group Member, including a Senior Obligated Group Member, may not be required to make payments on a Senior Obligation or transfers for the purpose of making payment on a Senior Obligation issued by or for the benefit of another Senior Credit Group Member to the extent that any payment or transfer would render the paying or transferring Senior Credit Group Member insolvent or would conflict with, not be permitted by or would be subject to recovery for the benefit of other creditors of the Senior Credit Group Member under applicable fraudulent conveyance, bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights. There is no clear precedent in the law as to whether payments by any Senior Obligated Group Member on a Senior Obligation or transfers by Senior Designated Affiliates of funds for the purpose of making payments on a Senior Obligation issued by or for the benefit of another Senior Credit Group Member or other person may be avoided by a trustee in bankruptcy in the event of a bankruptcy of the Senior Obligated Group Member or Senior Designated Affiliate or by third party creditors in an action brought pursuant to fraudulent conveyances statutes of the states in which the Senior Obligated Group Member or Senior Designated Affiliate is incorporated or doing business. Under the United States Bankruptcy Code, a trustee in bankruptcy and, under fraudulent conveyances statutes of the states in which the Senior Credit Group Members are incorporated or doing business, a creditor of a guarantor may avoid any obligation incurred by a guarantor, if, among other bases therefor, (i) the guarantor has not received fair consideration or reasonably equivalent value in exchange for the guaranty, and (ii) the guaranty renders the guarantor insolvent, as defined in the United States Bankruptcy Code or fraudulent conveyances statutes of the applicable states, or the guarantor is undercapitalized.
Application by courts of the tests of “insolvency,” “reasonably equivalent value” and “fair consideration” has resulted in a conflicting body of case law. It is possible that, in an action to force any Senior Obligated Group Member to pay debt service on a Senior Obligation issued by or for the benefit of another entity, a court might not
16 enforce the obligation in the event it is determined that the paying entity is analogous to a guarantor and that fair consideration or reasonably equivalent value for the guaranty was not received and that the incurrence of the obligation has rendered and will render the paying entity insolvent or the paying entity is or will thereby become undercapitalized.
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 the corporation has insufficient assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry out its purposes. Such court action may arise on the court’s own motion or pursuant to a petition of the Attorney General of a particular state or other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses.
Enforceability of Security Interest in Pledged Revenues. The enforceability, priority and perfection of the security interest in the Pledged Revenues created under the Senior Master Indenture may be limited by a number of factors, including, without limitation: (i) provisions prohibiting the direct payment of amounts due to health care providers from the Medicaid and Medicare programs to persons other than such providers; (ii) the absence of an express provision permitting assignment of receivables due under the contracts between the Senior Obligated Group Members and third-party payors, and present or future legal prohibitions against assignment; (iii) certain judicial decisions which cast doubt on the right of the Senior Master Trustee, in the event of the bankruptcy of a Senior Obligated Group Member, to collect and retain accounts receivable from Medicare, Medicaid and other governmental programs; (iv) commingling of proceeds of Pledged Revenues with other moneys of the Senior Obligated Group Members not so pledged under the Senior Master Indenture; (v) statutory liens; (vi) rights arising in favor of the United States of America or any agency thereof; (vii) constructive trusts or equitable or other rights impressed or conferred thereon by a federal or state court in the exercise of its equitable jurisdiction; (viii) federal and state laws governing fraudulent transfers discussed above; (ix) federal bankruptcy laws that may affect the enforceability of the Senior Master Indenture or the security interest in the Pledged Revenues; (x) rights of third parties in Pledged Revenues converted to cash and not in the possession of the Senior Master Trustee; and (xi) claims that might arise if appropriate financing or continuation statements or amendments of financing statements are not filed in accordance with the Uniform Commercial Code, as from time to time in effect.
Amendments to Senior Master Indenture and Bond Indenture. Certain amendments to the Senior Master Indenture may be made with the consent of the holders of not less than a majority of the principal amount of outstanding Senior Obligations. These amendments may adversely affect the security of the Holders of the Bonds, and a majority may be composed wholly or partially of the holders of Senior Obligations other than the Series 2016 Taxable Senior Obligation. Certain amendments to the Bond Indenture may be made with the consent of the Holders of not less than a majority of the outstanding principal amount of the Bonds outstanding under the Bond Indenture. Such amendments may adversely affect the security of the Holders of the Bonds.
Availability of Remedies. The remedies available to the Bond Trustee, the Senior Master Trustee and the Holders of the Bonds upon an event of default under the Bond Indenture, the Senior Master Indenture and the Series 2016 Taxable Senior Obligation are in many respects dependent upon judicial actions which are often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, including, specifically, the United States Bankruptcy Code, the remedies provided in the Bond Indenture, the Senior Master Indenture and the Series 2016 Taxable Senior Obligation may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by general principles of equity and by bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors’ generally and laws relating to fraudulent conveyances.
Bankruptcy. In the event of bankruptcy of a Senior Obligated Group Member, the rights and remedies of the Holders of the Bonds are subject to various provisions of the United States Bankruptcy Code. If a Senior Obligated Group Member were to commence a proceeding in bankruptcy, payments made by that Senior Obligated Group Member during the 90-day (or, in some circumstances, one-year) period immediately preceding the commencement may be avoided as preferential transfers to the extent payments allow the recipients thereof to receive more than they would have received in the event of the Senior Obligated Group Member’s liquidation and
17 the other requirements set forth in Section 547(b) of the United States Bankruptcy Code have been met. Security interests and other liens granted to or perfected by the Bond Trustee or the Senior Master Trustee during the preference period may also be avoided as preferential transfers to the extent the security interest or other lien secures obligations that arose prior to the date of the grant or perfection. Such a bankruptcy filing would result in the imposition of an automatic stay of the commencement or continuation of any judicial or other proceeding against the Senior Obligated Group Member 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 Senior Master Trustee. If the bankruptcy court so ordered, the property of the Senior Obligated Group Member could be used for the reorganization of the Senior Obligated Group Member despite any security interest of the Bond Trustee therein. The rights of the Bond Trustee and the Senior Master Trustee to enforce their respective interests and other liens could be delayed or altered during the pendency of the reorganization.
Such Senior Obligated Group Member could file a plan for the adjustment of its debts in any bankruptcy 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, would bind 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 that it shall either have been accepted by each class of claims impaired thereunder or, if the plan is not so accepted, the court shall have determined that the plan is fair and equitable with respect to each class of nonaccepting creditors impaired thereunder and does not discriminate unfairly. A 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.
In addition, the bankruptcy of a health plan or physician group that is a party to a significant managed care arrangement with one or more of the Senior Credit Group Members could have material adverse effects on the Senior Credit Group Member or Senior Credit Group Members.
In the event of bankruptcy or insolvency of a Senior Obligated Group Member, there is no assurance that certain covenants, including tax covenants, contained in the Bond Indenture or Senior Master Indenture and certain other documents would survive. Accordingly, a debtor or bankruptcy trustee could take action that would adversely affect the Bonds.
The bankruptcy of a Senior Designated Affiliate would not trigger an event of default under the Senior Master Indenture or the Bond Indenture, but the bankruptcy of a Senior Designated Affiliate could have a material adverse effect on the Senior Credit Group. If a Senior Designated Affiliate were to file for bankruptcy and had no contractual obligation to make payments to the Senior Credit Group Representative, none of Ascension, the Controlling Member of the Senior Designated Affiliate or the Senior Master Trustee would be able to file a claim in a bankruptcy proceeding involving the Senior Designated Affiliate for the payment of any amounts due on the Senior Obligations. In addition, in the event a Senior Designated Affiliate’s Controlling Member were to become a debtor in a bankruptcy case, Ascension or the other Controlling Member, as debtor-in-possession, or a trustee in bankruptcy, may not be able to cause the Senior Designated Affiliate to transfer funds to the Senior Credit Group Representative or the trustee in bankruptcy.
Patient Service Revenues
Net patient revenues realized by the Senior Credit Group are derived from a variety of sources and will vary among the individual facilities owned and operated by the Senior Credit Group Members and also among the various market areas and regions in which the facilities are located. Certain facilities and regions may realize substantially more revenues from private payment programs, such as managed care organizations, than do others.
A substantial portion of the net patient service revenues of the Senior Credit Group is derived from third- party payors which pay for the services provided to patients covered by third parties for services. These third-party payors include the federal Medicare program, state Medicaid programs and private health plans and insurers, including health maintenance organizations and preferred provider organizations. Many of those programs make payments to Members of the Senior Credit Group in amounts that may not reflect the direct and indirect costs of the Members of providing services to patients.
18 The financial performance of the Senior Credit Group has been and could be in the future adversely affected by the financial position or the insolvency or bankruptcy of or other delay in receipt of payments from third-party payors that provide coverage for services to their patients.
Medicare and Medicaid Programs. 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 eligible elderly persons, disabled persons and persons with end-stage renal disease. Medicare Part A covers inpatient hospital services, skilled nursing care and some home health care, and Medicare Part B covers hospital outpatient 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.
For the fiscal year ended June 30, 2016, Medicare payments represented approximately 36% of the Senior Credit Group’s net patient service revenue less provision for bad debt expense. For the fiscal year ended June 30, 2015, Medicare payments represented approximately 37% of the Senior Credit Group’s net patient service revenue less provision for bad debt expense.
Medicare. Medicare is the federal health insurance system under which physicians, hospitals and other health care providers or suppliers are paid for services provided to eligible elderly persons, disabled persons and persons with end-stage renal disease. The Senior Credit Group depends significantly on Medicare as a source of revenue. Because of this dependence, changes in the Medicare program may have a material adverse effect on the Senior Credit Group.
Medicare is administered by the Centers for Medicare and Medicaid Services (“CMS”) of the federal Department of Health and Human Services (“DHHS”), which delegates to the states the process for certifying hospitals to which CMS will make payment. In order to achieve and maintain Medicare certification, certain health care providers, including hospitals must meet CMS’s “Conditions of Participation” on an ongoing basis, as determined by their state and/or ongoing compliance with the standards of a chosen accreditation program, such as The Joint Commission or the Healthcare Facilities Accreditation Program. The requirements for Medicare certification are subject to change, and, therefore, it may be necessary for hospitals to effect changes from time to time in their facilities, equipment, personnel, billing, policies and services.
As the population ages, more people will become eligible for the Medicare program. Current projections indicate that demographic changes and continuation of current cost trends will exert significant and negative forces on the overall federal budget. The ACA institutes multiple mechanisms for reducing the costs of the Medicare program, including the following:
Value-Based Purchasing Program. Beginning in federal fiscal year 2013, Medicare inpatient payments to hospitals will be determined, in part, based on a program under which value-based incentive payments are made in a fiscal year to hospitals that meet certain performance standards during that fiscal year. The program is funded through the reduction of hospital inpatient care payments by 1%, progressing to 2% by federal fiscal year 2017. This reduction may be offset by incentive payments that commenced in federal fiscal year 2013 for hospitals that meet or exceed certain quality standards.
Market Basket Reductions. Generally, Medicare payment rates to hospitals are adjusted annually based on a “market basket” of estimated cost increases. In recent years, market basket adjustments for inpatient hospital care have averaged approximately 2-4% annually. The ACA required automatic 0.25% reductions in the “market basket” for federal fiscal years 2010 and 2011, and calls for reductions in the annual “market basket” update amount ranging from 0.10% to 0.75 % each year through federal fiscal year 2019.
Market Productivity Adjustments. Beginning in federal fiscal year 2012 and thereafter, the ACA provides for “market basket” adjustments based on overall national economic productivity statistics calculated by the Bureau of Labor Statistics. This adjustment is currently anticipated to result in an approximately 1% additional reduction to the “annual market basket” update.
19 Hospital Acquired Conditions. Medicare inpatient payments to hospitals that are in the top quartile nationally for frequency of certain “hospital-acquired conditions” identified by CMS are reduced by 1% of what would otherwise be payable to each hospital for the applicable federal fiscal year.
Readmission Rate Penalty. Medicare inpatient payments to those hospitals with excess readmissions compared to the national average for specified conditions are reduced based on the dollar value of that hospital’s percentage of excess preventable Medicare readmissions within 30 days of discharge, for certain medical conditions. The current maximum penalty is 3%. CMS expanded the patient conditions for which this penalty is assessed beginning in federal fiscal year 2017.
DSH Payments. Beginning in federal fiscal year 2014, hospitals receiving supplemental Medicare DSH payments (i.e., those hospitals that care for a disproportionate share of low-income Medicare beneficiaries) had their Medicare DSH payments reduced by 75%, although a portion of this reduction potentially could be offset in whole or in part by new payments to each hospital based on the volume of uninsured and uncompensated care. Separately, Medicaid DSH allotments from the federal government to the states are scheduled to be reduced in the aggregate amount of $44 billion during federal fiscal years 2018 through 2025. These ACA-initiated Medicaid DSH allotment reductions have been delayed three times and modified five times by subsequent federal statutes. See also “Disproportionate Share Payments” below.
From October 1, 2010 through September 30, 2019, payments under the Medicare Advantage programs will be reduced, which may result in increased premiums or out-of-pocket costs to Medicare beneficiaries enrolled in Medicare Advantage plans. Those beneficiaries may terminate their participation in those plans and opt for the traditional Medicare fee-for-service program. The reduction in payments to Medicare Advantage programs may also lead to decreased payments to providers by managed care companies operating Medicare Advantage programs, depending on the contractual arrangement between the Medicare Advantage program and the provider. All or any of these outcomes could have a disproportionately negative effect upon those providers with relatively high dependence upon Medicare Advantage program revenues.
Components of the 2008 federal stimulus package, the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”), provided for Medicare and Medicaid incentive payments that began in 2011 to hospital providers meeting designated deadlines for the installation and use of electronic health information systems. For those hospital providers failing to meet a 2016 deadline, Medicare payments will be significantly reduced.
For information concerning the Medicare payments received by the Senior Credit Group for the fiscal years ended June 30, 2015 and 2016, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—FINANCIAL AND OPERATING INFORMATION—Sources of Revenue.” For information concerning the impact of the ACA on future Medicare payments to the Senior Credit Group, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP— MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE CREDIT GROUP’S RECENT FINANCIAL PERFORMANCE—Health Care Reform.”
Hospital Inpatient Reimbursement. Hospitals are generally paid for inpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as diagnosis related groups (“DRGs”). The actual cost of care, including capital costs, may be more or less than the DRG rate. DRG rates are subject to adjustment by CMS, including reductions mandated by the ACA and the BCA and are subject to federal budget considerations. There is no guarantee that DRG rates, as they change from time to time, will cover actual costs of providing services to Medicare patients. For information regarding the impact of the ACA on payments to hospitals for inpatient services, see “Medicare” above.
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
20 admitted and instead be billed as outpatient. On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014, which further delayed enforcement of the “Two-Midnight” rule until March 31, 2015. The Medicare Access and CHIP Reauthorization Act of 2015 directed CMS to continue to refrain from conducting post-payment patient status reviews through recovery audit contractors on claims with dates of admission through 2015, absent evidence of systematic gaming, fraud, abuse, or delays in the provision of care. In a fiscal year 2016 final rule, CMS maintained the benchmark established by the original Two-Midnight rule, but permitted greater flexibility for determining when an admission that does not satisfy that benchmark should nonetheless be payable on a case-by-case basis. CMS continued its use of Beneficiary and Family Centered Core Quality Improvement Organizations (“BFCC-QIOs”), rather than recovery audit contractors or Medicare administration contractors, to conduct the initial medical reviews of providers who submit claims for short stay inpatient admissions beginning October 1, 2015. On May 4, 2016 CMS temporarily paused the BFCC-QIOs performance of initial patient status reviews under the revised Two-Midnight rule, which reviews resumed effective September 12, 2016. The “Two-Midnight” rule has had and will likely continue to have an adverse financial impact for hospitals.
Hospital Outpatient Reimbursement. Hospitals are generally paid for outpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as ambulatory payment classifications (“APC”). The actual cost of care, including capital costs, may be more or less than the reimbursements. There is no guarantee that APC rates, as they change from time to time, will cover actual costs of providing services to Medicare patients.
Other Medicare Service Payments. Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, general outpatient services and home health services are based on regulatory formulas or pre-determined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients.
Reimbursement of Hospital Capital Costs. Hospital capital costs apportioned to Medicare patient use (including depreciation and interest) are paid by Medicare on the basis of a standard federal rate (based upon average national costs of capital), subject to limited adjustments specific to the hospital. There can be no assurance that future capital-related payments will be sufficient to cover the actual capital-related costs of the Senior Credit Group Members’ facilities applicable to Medicare patient stays or will provide flexibility for hospitals to meet changing capital needs.
Medical Education Payments. Medicare currently pays for a portion of the costs of medical education at hospitals that have teaching programs. These payments are vulnerable to reduction or elimination. The direct and indirect medical education reimbursement programs have repeatedly emerged as targets in the legislative efforts to reduce the federal budget deficit.
Medicare Bad Debt Reimbursement. Under Medicare, the costs attributable to the deductible and coinsurance amounts which remain unpaid by the Medicare beneficiary can be added to the Medicare share of allowable costs as cost reports are filed. Hospitals generally receive interim pass-through payments during the cost report year which were determined by the Medicare Administrative Contractor (“MAC”) from the prior cost report filing. Bad debts must meet the following criteria to be allowable:
• the debt must be related to covered services and derived from deductible and coinsurance amounts; • the provider must be able to establish that reasonable collection efforts were made; • the debt was actually uncollectible when claimed as worthless; and • sound business judgment established that there was no likelihood of recovery at any time in the future.
The amounts uncollectible from specific beneficiaries are to be charged off as bad debts in the accounting period in which the accounts are deemed to be uncollectible. In some cases, an amount previously written off as a bad debt and allocated to the program may be recovered in a subsequent accounting period. In these cases, the recoveries must be used to reduce the cost of beneficiary services for the period in which the collection is made. In determining reasonable costs for hospitals, the amount of bad debts otherwise treated as allowable costs is reduced
21 by 35%. Amounts incurred by a hospital as reimbursement for bad debts are subject to audit and recoupment by the MAC. Bad debt reimbursement has been a focus of MAC audit/recoupment efforts in the past.
Medicaid. Medicaid is a program of medical assistance, funded jointly by the federal government and the states, for certain low-income and needy individuals and their dependents. Under Medicaid, the federal government provides limited funding to states that have medical assistance programs that meet federal standards. Each state determines the type, amount, duration and scope of services, sets the payment rates for services, and administers its own programs. Attempts to balance or reduce the federal and state budgets will likely negatively impact spending for Medicaid and other state health care program spending.
The ACA requires Medicaid to be expanded to all individuals under the age of 65 with income less than 138% of the federal poverty limit, effective in 2014. To fund this expansion, the ACA provides that the federal government will fund 100% of the costs of this expansion from fiscal years 2014 – 2016, decreasing to 90% of the costs of this expansion in fiscal year 2020 and thereafter. In June 2012, the Supreme Court held that the federal government cannot withhold existing federal funds for states that refuse to expand Medicaid as required by the ACA. As of January 1, 2017, 31 states and the District of Columbia had adopted the Medicaid expansion in some form, with the remainder declining to participate in the expansion, or remaining undecided. Some states in which Ascension operates have expanded Medicaid and others have not.
Federal and state governments continue to consider changes to Medicaid funding, particularly in light of the budget challenges facing many states. Certain additional proposals being examined may ultimately result in reduced federal Medicaid funding to the states, which could adversely impact amounts received by the Senior Credit Group Members.
While management of Ascension cannot predict the effect of these changes to the Medicaid program on operations, results from operations or financial condition of the Senior Credit Group, historically Medicaid has reimbursed at rates below the cost of care. Therefore, increases in the overall proportion of Medicaid patients poses a financial risk to the Senior Credit Group. It is uncertain to what extent this risk may be mitigated if the increased Medicaid utilization replaces previously uncompensated care. Certain outcomes, such as a state refusing to expand Medicaid coverage, which brings more patients to most hospital providers, while Medicaid payment cuts are implemented, could put providers at greater financial risk. At the same time, a state’s refusal to expand the Medicaid program could put providers at greater financial risk because that state is unable to access federal funding associated with expansion, and current Medicaid rates are subject to reduction.
For the fiscal year ended June 30, 2016, Medicaid payments represented approximately 13% of the Senior Credit Group’s net patient service revenue less provision for bad debt expense. For the fiscal year ended June 30, 2015, Medicaid payments represented approximately 11% of the Senior Credit Group’s net patient service revenue less provision for bad debt expense.
Medicare and Medicaid Audits. Hospitals that participate in the Medicare and Medicaid programs are subject from time to time to audits and other investigations relating to various aspects of their operations and billing practices, as well as to retroactive audit adjustments to reimbursements claimed under these programs. Medicare and Medicaid regulations also provide for withholding reimbursement payments in certain circumstances. New billing rules and reporting requirements for which there is no clear guidance from CMS or state Medicaid agencies could result in claims submissions being considered inaccurate. The penalties for violations may include an obligation to refund money to the Medicare or Medicaid program, payment of criminal or civil fines and, for serious or repeated violations, exclusion from participation in federal health programs.
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. These entities, Medicare zone program integrity contractors (“ZPICs”), formerly known as program safeguard contractors, are contracted by CMS 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 as well as to refer cases to the Office of Inspector
22 General. ZPICs have the ability to compile claims data from multiple sources in order to analyze the complete claims histories of beneficiaries for inconsistencies.
Medicare and Medicaid audits may result in reduced reimbursement or repayment obligations related to past alleged overpayments and may also delay Medicare and Medicaid payments to providers pending resolution of the appeals process. The ACA explicitly gives DHHS the authority to suspend Medicare and Medicaid payments to a provider or supplier during a pending investigation of fraud. The ACA also amended certain provisions of the FCA (as defined herein) to include retention of overpayments as a false claim. It also 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 Senior Credit Group Members cannot be predicted.
CMS has implemented a Recovery Audit Contractor (“RAC”) program on a nationwide basis pursuant to which 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 ACA expands the RAC program’s scope to include managed Medicare plans and Medicaid claims. CMS also employs Medicaid Integrity Contractors (“MICs”) 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.
Disproportionate Share Payments. The federal Medicare and Medicaid programs each provide additional payment for hospitals that serve a disproportionate share of certain low-income patients. Certain facilities of the Senior Credit Group Members qualify as disproportionate share hospitals and are expected to qualify from time to time in future years, but there can be no assurance that such facilities will qualify for disproportionate share status in the future. As discussed above, the ACA substantially reduced Medicare and Medicaid payments to disproportionate share hospitals (with some of the reductions delayed by subsequent federal law). There can be no assurance that payments to disproportionate share hospitals will not be further decreased or eliminated in the future or that any of the Senior Credit Group’s facilities will continue to qualify for disproportionate share status. See “Medicare” above. For information concerning the impact of the ACA on future DSH payments to the Senior Credit Group, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP— MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE CREDIT GROUP’S RECENT FINANCIAL PERFORMANCE—Health Care Reform.”
State Children’s Health Insurance Program. The State Children’s Health Insurance Program (“SCHIP”) is a federally funded insurance program for families which 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 periodically 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.
The ACA temporarily increased reimbursement for primary care visits for Medicaid enrolled individuals, which the federal government will fully fund through federal fiscal year 2017.
Private Health Plans and Managed Care. Most private health insurance coverage is provided by various types of “managed care” plans, including health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”) that generally use discounts and other economic incentives to reduce or limit the utilization of or payment for health care services. Medicare and Medicaid also purchase health care using managed care options. Payments to health care organizations from managed care plans typically are lower than those received from traditional indemnity or commercial insurers.
In many markets, managed care plans have replaced indemnity insurance as the primary source of non- governmental payment for health care services, and health care organizations must be capable of attracting and maintaining managed care business, often on a regional basis. Regional coverage and aggressive pricing may be required. However, it is also essential that contracting health care organizations be able to provide the contracted services without significant operating losses, which may require multiple forms of cost containment.
23 Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or on a fixed rate per day of care, or a fixed rate per hospital stay, which, in each case, usually is discounted from the usual and customary charges for the care provided. As a result, the discounts offered to HMOs and PPOs could, in some cases, result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections, and changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider’s ability to manage this component of revenue and cost.
Some HMOs employ a “capitation” payment method under which health care organizations are paid a predetermined periodic rate for each enrollee in the HMO who is “assigned” or otherwise directed to receive care from a particular organization. The health care organization may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet the health care organization’s actual costs of care, or if utilization by such enrollees materially exceeds projections, the financial condition of the health care organization could erode rapidly and significantly. In addition to this standard managed care risk sharing approach, private health insurance companies are increasingly adopting various additional risk sharing/cost containing measures, sometimes similar to those introduced by government payors. Providers may expect health care cost containment and its associated risk sharing to continue to increase in the coming years amongst all payors.
Often, HMO contracts are enforceable for a stated term, regardless of losses by the health care organization and may require health care organizations to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the health care organization. As with other large health care systems, the Senior Credit Group Members from time to time have disputes with HMOs, PPOs and other managed care payors concerning payment and contract interpretation issues. Such disputes may result in mediation, arbitration or litigation. Management of Ascension expects that most types of such issues ultimately will be resolved, sometimes through renegotiation or termination of the contract. For a discussion of certain recently filed litigation affecting Ascension and certain Senior Credit Group Members, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—FINANCIAL AND OPERATING INFORMATION—Litigation.”
Defined broadly, for the fiscal year ended June 30, 2016, commercial care and other managed care payments (excluding Medicare and Medicaid contracts) constituted approximately 50% of the Senior Credit Group’s net patient service revenue less provision for bad debt expense. For the fiscal year ended June 30, 2015, commercial care and other managed care payments (excluding Medicare and Medicaid contracts) represented approximately 50% of the Senior Credit Group’s net patient service revenue less provision for bad debt expense.
With implementation of the ACA, substantial numbers of employers may elect to discontinue employer- funded medical care for employees eligible for federal assistance in securing private insurance, and the employees could then chose health insurance under the health insurance exchanges. Individuals choosing their own coverage may become highly price sensitive, which could increase the number of enrollees in HMO plans and increase the use of capitation, making price negotiations with HMO and other insurance plans more difficult.
Failure to maintain contracts could have the effect of reducing a health care organization’s market share and net patient service revenues. Conversely, participation may result in lower net income if participating organizations are unable to adequately contain their costs. In part to reduce costs, health plans are increasingly implementing, and offering to purchasing employers, tiered provider networks, which involve classification of a plan’s network providers into different tiers based on care quality and cost. With tiered benefit designs, plan enrollees are generally encouraged, through incentives or reductions in copayments or deductibles, to seek care from providers in the top tier. Classification of a provider in a non-preferred or lower tier by a significant payor may result in a material loss of volume. The new demands of dominant health plans and other shifts in the managed care industry may also reduce patient volume and revenue. Thus, managed care poses one of the most significant business risks (and opportunities) that health care organizations face.
State and Local Budgets. Certain states in which Credit Group members operate recently have incurred severe financial challenges, including erosion of general fund tax revenues, falling real estate values, slowing economic growth, and higher unemployment, each of which may continue to worsen or resist improvement over the coming years. In some states, these factors have resulted in a shortfall between revenue and spending demands.
24 The financial challenges facing these states may negatively affect hospitals in a number of ways, including elimination or reduction of health care safety net programs (causing a greater number of indigent, uninsured or underinsured patients) and reductions in Medicaid reimbursement rates. The financial challenges may also result in a greater number of indigent, uninsured or underinsured patients who are unable to pay for their care or access primary care facilities, a greater number of individuals who qualify for Medicaid and reductions in Medicaid reimbursement rates.
Off-Campus Provider-Based Departments. Effective January 1, 2016, the calendar year 2015 Outpatient Prospective Payment System Final Rule requires hospitals to use new modifiers for services provided to Medicare beneficiaries at off-campus provider-based 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 provider- based hospital departments. A potential result of this information could be a future reduction in reimbursement for certain services provided at certain types of off-campus provider-based departments. In any event, failure to use the modifiers correctly could jeopardize the provider-based status of associated off-campus locations. In addition, the BBA created “site neutral” reimbursement for services to Medicare beneficiaries at certain off-campus provider based locations beginning January 1, 2017. Services subject to the change will not be reimbursed under Medicare’s hospital outpatient prospective payment system (“OPPS”), but rather will be reimbursed under alternative payment systems (for example, at ambulatory surgery center rates). The exclusion applies to off-campus hospital departments that did not bill for services under the OPPS prior to November 2, 2015. The financial impact of these changes cannot yet be predicted.
State Laws
States also regulate the delivery of health care services. Much of the regulation is centered on the managed care industry. State legislatures have cited their right and obligation to regulate and oversee health care insurance and have enacted sweeping measures that aim to protect consumers and, in some cases, providers. For example, a number of states have enacted laws mandating minimum 48-hour hospital stays for women after delivery; laws prohibiting “gag clauses” (contract provisions that prohibit providers from discussing various issues with their patients); laws defining “emergencies,” which provide that a health care plan may not deny coverage for an emergency room visit if a layperson would perceive the situation as an emergency; and laws requiring direct access to obstetrician-gynecologists without the requirement of a referral from a primary care physician.
Due to any increase in state oversight, the Senior Credit Group Members could become subject to a variety of state health care laws and regulations affecting health care providers. In addition, the Senior Credit Group Members could be subject to state laws and regulations prohibiting, restricting, or otherwise governing PPOs, third party administrators, physician-hospital organizations, independent practice associations or other intermediaries, fee- splitting, the “corporate practice of medicine,” selective contracting, “any willing provider” laws and “freedom of choice” laws, coinsurance and deductible amounts, insurance agency and brokerage, quality assurance, utilization review, and credentialing activities, provider and patient grievances, mandated benefits, rate increases, “fraud and abuse laws” and many other practices.
Dependence Upon Third-Party Payors
The Senior Credit Group Members’ ability to develop and expand their services and, therefore, profitability, is dependent upon their ability to enter into contracts with third-party payors at competitive rates. There can be no assurance that they will be able to attract third-party payors, and where they do, no assurance can be given that they will be able to contract with such payors on advantageous terms. The inability of the Senior Credit Group Members to contract with a sufficient number of such payors on advantageous terms could have a material adverse effect on the Senior Credit Group Members’ future operations and financial results.
Regulatory Environment
Licensing, Surveys, Investigations and Accreditations. Health facilities, including those of the Senior Credit Group, 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 Conditions of Participation, requirements for participation in Medicaid, state licensing agencies, private payors and the
25 accreditation standards of The Joint Commission or the Healthcare Facilities Accreditation Program. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections, surveys, audits, investigations or other reviews, some of which may require affirmative action(s) by a member of the Senior Credit Group.
Ascension management currently anticipates no difficulty renewing or continuing currently held licenses, certifications or accreditations, nor does management anticipate a reduction in third-party payments from events that would materially adversely affect the operations or financial condition of the Senior Credit Group. Nevertheless, actions in any of these areas could result in the loss of utilization or revenues, or the ability of a member of the Senior Credit Group to operate all or a portion of its health care facilities, and consequently, could have a material and adverse effect on the Senior Credit Group.
Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures. Health plans, Medicare, Medicaid, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and other providers. The ACA shifts payments from paying for volume to paying for value, based on various health outcome measures. Published rankings such as “score cards,” “pay for performance” and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals, the members of their medical staffs and other providers and to influence the behavior of consumers and providers such as the Senior Credit Group Members. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital or other provider negatively may adversely affect its reputation and financial condition.
Enforcement Affecting Clinical Research. In addition to increasing enforcement of laws governing payment and reimbursement, the federal government has also increased enforcement of laws and regulations governing the conduct of clinical trials at hospitals. DHHS elevated and strengthened its Office of Human Research Protection, one of the agencies responsible 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 Office of Inspector General (the “OIG”), in its recent “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. 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 Senior Credit Group Members to sanctions as well as repayment obligations.
Civil and Criminal Fraud and Abuse Laws and Enforcement. Health care “fraud and abuse” laws have been enacted at the federal and state levels to broadly regulate the provision of services to government program beneficiaries and the methods and requirements for submitting claims for services rendered to the beneficiaries. Under these laws, hospitals and others can be penalized for a wide variety of conduct, including submitting claims for services that are not provided, billing in a manner that does not comply with government requirements or including inaccurate billing information, billing for services deemed to be medically unnecessary, or billing accompanied by certain proscribed inducements to utilize or refrain from utilizing a service or product.
Federal and state governments have a broad range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud, including the exclusion of a provider from participation in the Medicare/Medicaid programs, civil monetary penalties and suspension of Medicare/Medicaid payments. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation.
26 Laws governing fraud and abuse may apply to a health care organization and to nearly all individuals and entities with which a health care organization does business. Fraud investigations, settlements, prosecutions and related publicity can have a material adverse effect on health care organizations. Major elements of these often highly technical laws and regulations are generally summarized below.
The ACA authorizes the Secretary of DHHS to exclude a provider’s participation in Medicare and Medicaid, as well as suspend payments to a provider pending an investigation or prosecution of a credible allegation of fraud against the provider.
The members of the Senior Credit Group have internal policies and procedures and have developed and implemented a compliance program that management believes will effectively reduce exposure for violations of these laws. However, because the government’s enforcement efforts presently are widespread within the industry and may vary from region to region, there can be no assurance that the compliance program will significantly reduce or eliminate the exposure of the Senior Credit Group to civil or criminal sanctions or adverse administrative determinations.
False Claims Act. The federal False Claims Act (“FCA”) makes it illegal to knowingly submit or present a false, fictitious or fraudulent claim to the federal government. A person may be charged with knowledge of the falsity of a claim based not only on actual knowledge but also based on deliberate ignorance or reckless disregard of the relevant facts. Due to the broad range of conduct covered by the statute, FCA investigations and cases are common and may cover a range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Damages under the FCA may include “treble damages” (i.e., damages up to three times the amount of the false claims) plus civil monetary penalties of up to $11,000 per false claim for violations that occurred prior to August 1, 2016, and up to $21,563 per false claim for violations that occurred on or after August 1, 2016. As a result, violation or alleged violations of the FCA frequently result in settlements that require multi-million dollar payments and corporate integrity agreements. The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called “qui tam” actions. Qui tam plaintiffs, or “whistleblowers,” can share in the damages recovered by the government or recover independently if the government does not participate. The FCA has become one of the government’s primary weapons against health care fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion or reputation damage that could have a material adverse impact on a hospital.
Under the ACA, the FCA 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. This expansion of the FCA exposes hospitals and other health care providers to liability under the FCA for a considerably broader range of claims than in the past.
Anti-Kickback Law. The federal “Anti-Kickback Law” is a criminal statute that prohibits anyone from soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for a referral (or to induce a referral) for any item or service that is paid by any federal or state health care program. The Anti-Kickback Law potentially applies to many common health care transactions between persons and entities with which a hospital does business, including hospital-physician joint ventures, medical director agreements, physician recruitment agreements, physician office leases and other transactions.
Violations or alleged violations of the Anti-Kickback Law may result in settlements that require multi- million dollar payments and onerous corporate integrity agreements. The Anti-Kickback Law can be prosecuted either criminally or civilly. A criminal violation may be prosecuted as felony, subject to a fine of up to $25,000 for each act (which may be each item or each bill sent to a federal program), imprisonment and/or exclusion from the Medicare and Medicaid programs. In addition, civil monetary penalties may be assessed per item or service in noncompliance (which may be each item or each bill sent to a federal program), plus an “assessment” of three times the amount claimed may be imposed. In addition, violations of the Anti-Kickback Law are increasingly being prosecuted under the FCA, triggering the FCA penalties discussed above. The IRS has taken the position that hospitals which are in violation of the Anti-Kickback Law may also be subject to revocation of their tax status.
27 Stark Law. The federal “Stark” statute prohibits the referral by a physician of Medicare and Medicaid patients for certain designated health services (including inpatient and outpatient hospital services, clinical laboratory services, and radiation and other imaging services) to entities with which the referring physician has a financial relationship unless that relationship fits within a Stark exception. It also prohibits a hospital furnishing the designated services from billing Medicare, or any other payor or individual for services performed pursuant to a prohibited referral. The government does not need to prove that the entity knew that the referral was prohibited to establish a Stark violation. If certain technical requirements of an exception are not satisfied, many ordinary business practices and economically desirable arrangements between hospitals and physicians constitute “financial relationships” within the meaning of the Stark statute, thus triggering the prohibition on referrals and billing. Most providers of designated health services with physician relationships have exposure to liability under the Stark statute.
Medicare may deny payment for all services performed based on a prohibited referral and a hospital that has billed for prohibited services may be obligated to refund the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found to violate Stark, the hospital could be obligated to repay CMS for the payments received from Medicare for all of the heart surgeries performed by all of the physicians in the group for the duration of the noncompliance with the Stark law exception, a potentially significant amount. As a result, even relatively minor, technical violations of the law may trigger substantial refund obligations. Moreover, if the violations of the Stark statute were knowing, the government may also seek civil monetary penalties, and in some cases, a hospital may be excluded from the Medicare and Medicaid programs. In addition, violations of the Stark statute are increasingly being prosecuted under the FCA, triggering the FCA penalties discussed above. Potential repayments to CMS, settlements, fines or exclusion for a Stark violation or alleged violation could have a material adverse impact on a hospital.
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. Ascension or its affiliates may make self-disclosures under this program as appropriate from time to time.
State “Fraud” and “False Claims” Laws. Hospital providers in the states in which the members of the Senior Credit Group operate health facilities also are subject to a variety of state laws related to false claims (similar to the FCA or that are generally applicable false claims laws), anti-kickback (similar to the federal Anti-Kickback Law or that are generally applicable anti-kickback or fraud laws), and physician referral (similar to Stark). These prohibitions while similar in public policy and scope to the federal laws have not in all instances been avidly enforced to date. However, in the future they could pose the possibility of material adverse impact for the same reasons as the federal statutes. See “False Claims Act,” “Anti-Kickback Law” and “Stark Law” above.
Review of Outlier Payments. CMS is reviewing health care providers that are receiving large proportions of their Medicare revenues from outlier payments. Health care providers found to have obtained inappropriately high outlier payments will be subject to further investigation by the CMS Program Integrity Unit and potentially the Office of Inspector General. Management of Ascension does not believe that any potential review of the Senior Credit Group Members would materially adversely affect the Senior Credit Group’s results of operations.
Patient Records and Patient Confidentiality. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) addresses the confidentiality of individuals’ health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions of the HIPAA statute and regulations or authorized by the patient. HIPAA’s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability.
On January 25, 2013, DHHS issued comprehensive modifications to the existing HIPAA regulations to implement the requirements of the HITECH Act (defined below), commonly known as the “HIPAA Omnibus Rule.” The HIPAA Omnibus Rule became effective on March 26, 2013, and covered entities were required to be in compliance by September 23, 2013 (though certain requirements have a longer timeframe). Key aspects of the
28 HIPAA Omnibus Rule include, but are not limited to: (i) a new standard for what constitutes a breach of protected health information, (ii) establishing four levels of culpability with respect to civil monetary penalties assessed for HIPAA violations, (iii) direct liability of business associates for certain violations of HIPAA, (iv) modifications to the rules governing research, (v) stricter requirements regarding non-exempt marketing practices, (vi) modification and re-distribution of notices of privacy practices, and (vii) stricter requirements regarding the protection of genetic information. While the effects of the HIPAA Omnibus Rule cannot be predicted at this time, the obligations imposed thereunder could have a material adverse effect on the financial condition of the Obligated Group.
Criminal penalties will be enforced against persons who obtain or disclose personal health information without authorization. DHHS is also beginning to perform periodic audits of health care providers and group health plans to ensure that required policies under the HITECH Act are in place. Finally, individuals harmed by violations will be able to recover a percentage of monetary penalties or a monetary settlement based upon methods to be established by DHHS for this private recovery within three years of the passage of the HITECH Act.
The Office for Civil Rights (“OCR”) is the administrative office that is tasked with enforcing HIPAA. OCR has stated that it has now moved from education to enforcement in its implementation of the law. Recent settlements of HIPAA violations for breaches involving lost or misappropriated data have reached the millions of dollars. Any breach of HIPAA, regardless of intent or scope, may result in penalties or settlement amounts that are material to a covered health care provider or health plan.
Additionally, OCR has announced plans to conduct random audits of covered entities and business associates beginning in 2016. These audits will primarily focus upon policies and procedures and be conducted remotely; however, some audits will be on-site audits. OCR has stated the audits will be primarily compliance improvement in nature, but if serious compliance issues are identified, OCR may initiate a separate compliance review to further investigate which may result in settlements and fines.
Business Associates. Under existing HIPAA regulations, covered entities must include certain required provisions in their contractual relationships with organizations that perform functions on their behalf which involve use or disclosure of protected health information. These organizations are called business associates, and have been indirectly regulated by HIPAA through those contractual obligations. The HITECH Act and the final rules promulgated thereunder provide that all of the HIPAA security administrative, physical, and technical safeguards, as well as security policies, procedures, and documentation requirements now apply directly to all business associates. In addition, the HITECH Act makes certain privacy provisions directly applicable to business associates. These changes are significant because business associates will now be directly regulated by DHHS for those requirements, and as a result, will be subject to penalties imposed by DHHS and/or state attorneys general. Likewise, to the extent a business associate is deemed to be an agent of the covered entity under the Federal common law, the covered entity will be liable for the breaches of the business associate.
The HITECH Act. Provisions in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of the Recovery Act, increase the maximum civil monetary penalties for violations of HIPAA and grant enforcement authority of HIPAA to state attorneys general. The HITECH Act also (i) extends the reach of HIPAA beyond “covered entities,” (ii) imposes a breach notification requirement on HIPAA covered entities, (iii) further limits certain uses and disclosures of individually identifiable health information, and (iv) restricts covered entities’ marketing communications. Management of Ascension does not anticipate that compliance with the HITECH Act will have a material adverse effect on the operations of Ascension or the other Senior Credit Group Members.
The breach notification obligation, in particular, may expose covered entities such as hospitals to heightened liability. Under the HITECH Act, in the event of a data privacy breach, covered entities are required to notify affected individuals and the federal government. If more than 500 individuals are affected by the breach, (1) the covered entity must also notify the media and (2) the federal government posts a description of the breach on its website. These reporting obligations increase the risk of government enforcement as well as class action lawsuits, especially if large numbers of individuals are affected by a breach.
The HITECH Act also established programs under Medicare and Medicaid to provide incentive payments for the “meaningful use” of certified electronic health record technology (“CEHRT”). Medicare and Medicaid EHR
29 incentive programs provide incentive payments to eligible professionals and eligible hospitals for demonstrating meaningful use of CEHRT. Health care providers demonstrate their meaningful use of CEHRT by utilizing the CEHRT to meet objectives specified by CMS and by reporting on specified clinical quality measures. Hospitals and physicians who have not satisfied the performance and reporting criteria for demonstrating meaningful use will have their Medicare payments significantly reduced. Additionally, beginning in 2014, the federal government began auditing hospitals’ and providers’ records related to their attestation of being “meaningful users” of CEHRT in order to obtain the incentive payments. A hospital or provider that fails the audit has a limited opportunity to appeal. Ultimately, hospitals or providers that fail on appeal must repay any incentive payments they received through these programs.
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. Many states have enacted laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security incidents exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement. Failure to comply with restrictions on patient privacy or to maintain robust information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could consequently damage a health care provider’s reputation and materially adversely affect business operations.
International Classification of Diseases, 10th Revision Coding System. In 2009, CMS published the final rule adopting the International Classification of Diseases, 10th Revision coding system (“ICD-10”), requiring health care organizations to implement ICD-10 no later than October 2013. In August 2012, DHHS issued a rule delaying this compliance deadline until October 2014 and on March 31, 2014, Congress passed legislation further delaying the ICD-10 implementation deadline to October 2015. On October 1, 2015 implementation of ICD-10 became effective. At this time, it is too early to predict whether health care organizations will experience negative effects due to ICD-10 implementation. ICD-10 provides a common approach to the classification of diseases and other health problems, allowing the United States to align with other nations to better share medical information, diagnosis, and treatment codes. In order to implement the ICD-10, staff need to be retrained, processes redesigned, and computer applications modified as the current available codes and digit size will dramatically increase. Due to these changes, there is a potential for temporary coding and payment backlog, increases in claims errors, and revenue stream disruption. Additionally, because of the magnitude of the transition across the industry, implementation of ICD-10 may add pressure to health care organizations cash flows. Furthermore, health care organizations may become dependent on outside software vendors, clearinghouses and third-party billing services to develop products and services to assist in timely, complete and successful implementation of ICD-10 which will likely result in increased training and related implementation costs for the Senior Credit Group. Lastly, although implementation became effective, it remains unclear what potential implementation issues may arise and the costs associated with addressing such issues.
Exclusions from Medicare or Medicaid Participation. The government may exclude a health care provider from Medicare/Medicaid program participation if it is convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, fraud against any federal, state or locally financed health care program or an offense relating to the illegal manufacture, distribution, prescription, or dispensing of a controlled substance. The government also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud, or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion from the Medicare/Medicaid program means that a health care provider would be decertified from program participation and no program payments can be made. Any health care provider exclusion could be a materially adverse event. In addition, exclusion of health care organization employees under Medicare or Medicaid may be another source of potential liability for hospitals or health systems based on services provided by those excluded employees.
30 Administrative Enforcement. Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of administrative enforcement actions.
Civil Monetary Penalties Law. The federal Civil Monetary Penalties Law (“CMPL”) provides for administrative sanctions against health care providers for a broad range of billing and other abuses. A health care provider is liable under the CMPL if it knowingly presents, or causes to be presented, improper claims for reimbursement under Medicare, Medicaid and other federal health care programs. A hospital that participates in arrangements known as “gainsharing” by paying a physician to limit or reduce services to Medicare fee-for-service beneficiaries also could be subject to CMPL penalties. A health care provider that provides benefits to Medicare or Medicaid beneficiaries that such provider knows or should know are likely to induce the beneficiaries to choose the provider for their care also could be subject to CMPL penalties. The CMPL authorizes imposition of a civil money penalty and treble damages. The ACA also amended the CMPL laws to establish various new grounds for exclusion and civil monetary penalties, as well as increased penalty thresholds for existing civil monetary penalties.
Health care providers may be found liable under the CMPL even when they did not have actual knowledge of the impropriety of their action. Knowingly undertaking the action is sufficient. Ignorance of the Medicare regulations is no defense. The imposition of civil money penalties on a health care provider could have a material adverse impact on the provider’s financial condition.
Compliance with Conditions of Participation. CMS, in its role of monitoring participating providers’ compliance with conditions of participation in the Medicare program, may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation may be issued or other sanctions potentially could be imposed.
EMTALA. The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and to stabilize a patient’s emergency medical condition before releasing, discharging or transferring the patient. A hospital that violates EMTALA is subject to civil penalties of up to $104,826 per offense and exclusion from the Medicare and Medicaid programs. In addition, the hospital may be liable for any claim by an individual who has suffered harm as a result of a violation.
Management is not aware of any pending or threatened claim, investigation, or enforcement action regarding patient transfers that, if determined adversely to a Member of the Senior Credit Group, would have material adverse consequences to the Senior Credit Group.
Environmental Laws and Regulations. Health facilities are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the health facility; and requirements for training employees in the proper handling and management of hazardous materials and wastes.
Health facilities may be subject to requirements related to investigating and remedying hazardous substances located on their property, including 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. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with the environmental 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 or fines; and may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance.
The Senior Credit Group’s operations, as well as the Senior Credit Group’s purchases and sales of facilities, also are subject to compliance with various other environmental laws, rules and regulations. The Senior Credit Group anticipates that compliance with such environmental laws and regulations will not materially affect the
31 Senior Credit Group’s business, financial condition or results of operations. Management is not aware of any pending or threatened claim, investigation or enforcement action regarding environmental issues or any instance of contamination that, if determined adversely to a Member of the Senior Credit Group, would have material adverse consequences to the Senior Credit Group.
Enforcement Activity. Enforcement activity against health care providers has increased, and enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to an audit, investigation or other enforcement action regarding the health care fraud laws mentioned above.
Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and similar payments or to recover higher damages, assessments or penalties by instituting criminal action. In addition, the cost of defending such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a health care organization, regardless of outcome.
Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above, and therefore penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals or other facilities in a health system, as the government often extends enforcement actions regarding health care fraud to other entities in the same organization. Therefore, Medicare fraud related risks identified as being materially adverse to a health care organization could have materially adverse consequences to a health system taken as a whole.
Information Technology
The ability to adequately price and bill health care services and to accurately report financial results depends on the integrity of the data stored within information 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 efforts to upgrade and expand information systems capabilities, protect and enhance these systems, and develop new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.
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 “— Regulatory Environment—Patient Records and Patient Confidentiality” above. Technology malfunctions or 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 health care providers, which may increase the cost, complexity and risks of operations. All of these risks may have adverse consequences on hospitals and health care providers.
Future government regulation and adherence to technological advances could result in an increased need of the Senior Credit Group Members to implement new technology. Such implementation could be costly and is subject to cost overruns and delays in application, which could negatively affect the financial condition of the Senior Credit Group.
32 Certain Business Transactions
Integrated Delivery Systems. Health facilities and health care systems often own, control or have affiliations with physician groups and independent practice associations. For a description of certain of Ascension’s affiliations, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES” and “— CORPORATE STRUCTURE AND MANAGEMENT—Affiliated Organizations.” Generally, the sponsoring health facility or health system is the primary capital and funding source for such alliances and may have an ongoing financial commitment to provide growth capital and support operating deficits. As separate operating units, integrated physician practices and medical foundations sometimes operate at a loss and require subsidy from the related hospital or health system.
These types of alliances are likely to become increasingly important to the success of hospitals as a result of changes to the health care delivery and reimbursement systems that are intended to restrain the rate of increases of health care costs, encourage coordinated care, promote collective provider accountability and improve clinical outcomes. The ACA authorizes several alternative payment programs for Medicare that promote, reward or necessitate integration among hospitals, physicians and other providers.
Whether these programs will achieve their objectives and be expanded or mandated as conditions of Medicare participation cannot be predicted. However, Congress and CMS have clearly emphasized continuing the trend away from the fee-for-service reimbursement model, which began in the 1980s with the introduction of the prospective payment system for inpatient care, and toward an episode-based payment model that rewards use of evidence-based protocols, quality and satisfaction in patient outcomes, efficiency in using resources, and the ability to measure and report clinical performance. This shift is likely to favor integrated delivery systems, which may be better able than stand-alone providers to realize efficiencies, coordinate services across the continuum of patient care, track performance and monitor and control patient outcomes. Changes to the reimbursement methods and payment requirements of Medicare, which is the dominant purchaser of medical services, are likely to prompt equivalent changes in the commercial sector, because commercial payors frequently follow Medicare’s lead in adopting payment policies.
While payment trends may stimulate the growth of integrated delivery systems, these systems carry with them the potential for legal or regulatory risks. Many of the risks discussed in “—Regulatory Environment” above, may be heightened in an integrated delivery system. The foregoing laws were not designed to accommodate coordinated action among hospitals, physicians and other health care providers to set standards, reduce costs and share savings, among other things. In October 2011, CMS, the Federal Trade Commission and the Department of Justice jointly issued guidance regarding waivers and safe harbors to enable providers to participate in the Medicare Shared Savings Program (see “Accountable Care Organizations,” below). Although CMS issued the Shared Savings Program final rule in June 2015, there can be no assurance that such waivers or other regulations or guidance issued will sufficiently clarify the scope of permissible activity in all cases. State law prohibitions, such as the bar on the corporate practice of medicine, or state law requirements, such as insurance laws regarding licensure and minimum financial reserve holdings of risk-bearing organizations, may also introduce complexity, risk and additional costs in organizing and operating integrated delivery systems. Tax-exempt hospitals and health systems also face the risk in affiliating with for-profit entities that the IRS will determine that compensation practices or business arrangements result in private benefit or private use or generate unrelated business income for the hospitals and health systems. Some health care organizations that traditionally operated hospitals may, directly or in partnership, take on actual insurance risk, market various health coverage products and access patients by way of new and presently unknown channels. Such new endeavors could adversely affect the financial and operating condition or reputation of an organization.
In addition, integrated delivery systems present business challenges and risks. Inability to attract or retain participating physicians may negatively affect managed care, contracting and utilization. The technological and administrative infrastructure necessary both to develop and operate integrated delivery systems and to implement new payment arrangements in response to changes in Medicare and other payor reimbursement is costly. Hospitals may not achieve savings sufficient to offset the substantial costs of creating and maintaining this infrastructure.
33 Accountable Care Organizations. The ACA establishes a Medicare Shared Savings Program that seeks to promote accountability and coordination of care through the creation of Accountable Care Organizations (“ACOs”). The program will allow hospitals, physicians and others to form ACOs and work together to invest in infrastructure and redesign integrated delivery processes to achieve high quality and efficient delivery of services. ACOs that achieve quality performance standards will be eligible to share in a portion of the amounts saved by the Medicare program. DHHS has significant discretion to determine key elements of the program, including what steps providers must take to be considered an ACO, how to decide if Medicare program savings have occurred, and what portion of such savings will be paid to ACOs. In November 2011, CMS published the final rules regarding ACOs and updated those rules in 2015. The regulations are complex and it remains unclear whether the qualification requirements will be a formidable barrier. It is probable that hospital participants in ACOs will have to marshal a large upfront financial investment to form unique and untested ACO structures, which may or may not succeed in gaining qualification. For those that do qualify, it is not clear if the savings will be adequate to recoup the initial investment. In addition, although the regulation provides for waivers of certain federal laws, there may remain regulatory risks for participating hospitals, as well as financial and operational risks. In particular, since the federal ACO regulation would not preempt state law, providers participating as a federal ACO must be organized and operated in compliance with existing state statutes and regulations. It remains unclear whether providers will pursue federal ACO status or whether the required investment would be warranted by increased payment. Nevertheless, it is anticipated that private insurers may seek to establish similar incentives for providers, while requiring less infrastructural and organizational change. The potential impacts of these initiatives and the regulation for ACOs are unknown, but introduce greater risk and complexity to health care finance and operations.
Bundled Payment Programs. The ACA established a 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. 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.
Physician Relations. The primary relationship between a hospital and physicians who practice in it is through the hospital’s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges, or who have such membership or privileges curtailed 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 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 those owned and operated by the members of the Senior Credit Group, are subject to such risk.
Physician Contracting. The Members of the Senior Credit Group may contract with physician organizations (such as independent physician associations and physician-hospital organizations) to arrange for the provision of physician and ancillary services. Because physician organizations are separate legal entities with their own goals, obligations to shareholders, financial status, and personnel, there are risks involved in contracting with the physician organizations.
The success of the Senior Credit Group will be partially dependent upon its 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 members of the Senior Credit Group 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 Senior Credit Group could fail to be competitive, could fail to keep or attract payor contracts, or could be prohibited from operating until its panel provided adequate access to patients. Such occurrences could have a material adverse effect on the business or operations of the Senior Credit Group.
Physician Supply. Sufficient community-based physician supply is important to hospitals and other health care facilities. CMS annually reviews overall physician reimbursement formulas for Medicare and Medicaid. Changes to physician compensation under these programs could lead to physicians ceasing to accept Medicare and/or Medicaid patients. Regional differences in reimbursement by commercial and governmental payors, along
34 with variations in the costs of living, may cause physicians to avoid locating their practices in communities with low reimbursement or high living costs. Hospitals and health systems may be required to invest additional resources in recruiting and retaining physicians, or may be compelled to affiliate with, and provide support to, physicians in order to continue serving the growing population base and maintain market share.
Section 340B Drug Pricing Program. Hospitals that participate (as “covered entities”) 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 prescription drugs for their patients at a reduced cost. On August 28, 2015 the Health Resources and Services Administration published proposed 340B Drug Pricing Program Omnibus Guidance in the Federal Register, 80 Fed. Reg. 52300 (“Proposed Guidance”). The Proposed Guidance might have restricted the ability of Senior Credit Group Members to purchase drugs under the 340B Program, which potentially could have an adverse effect on those Senior Credit Group Members. On January 30, 2017, the Health Resources and Services Administration withdrew the Proposed Guidance. It is currently not clear whether the Health Resources and Services Administration will seek to promulgate any future rule that might adversely affect the Senior Credit Group Members’ ability to purchase drugs under the 340B Program.
Competition Among Health Care Providers. Increased competition from a wide variety of sources, including specialty hospitals, other hospitals and health care systems, HMOs, inpatient and outpatient health care facilities, long-term care and skilled nursing services facilities, clinics, physicians and others, may adversely affect the utilization and revenues of hospitals. Existing and potential competitors may not be subject to various restrictions applicable to hospitals, and competition, in the future, may arise from new sources not currently anticipated or prevalent.
Freestanding ambulatory surgery centers may attract significant commercial outpatient services traditionally performed at hospitals. Commercial outpatient services, currently among the most profitable services for hospitals, may be lost to competitors who can provide these services in an alternative, less costly setting. Full- service hospitals rely upon the revenues generated from commercial outpatient services to fund other less profitable services, and the decline of such business may result in the significant reduction of profitable income. Competing ambulatory surgery centers, more likely for-profit businesses, may not accept indigent patients or low paying programs and would leave these populations to receive services in the full-service hospital setting. Consequently, hospitals are vulnerable to competition from ambulatory surgery centers.
Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of hospitals in the future or otherwise lead to new avenues of competition. 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.
Action by Purchasers of Hospital Services and Consumers. Major purchasers of hospital services 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.
Employer Status. Hospitals are major employers with mixed technical and nontechnical workforces. Labor costs, including salary, benefits and other liabilities associated with a workforce, have significant impacts on hospital operations and financial condition. Developments affecting hospitals as major employers include: (i) imposing higher minimum or living wages; (ii) enhancing occupational health and safety standards; (iii) expanding the definition of “disability” under the Americans with Disabilities Act; (iv) a proliferation of acceptable bargaining units in health care; and (v) penalizing employers of undocumented immigrants. Legislation or regulation on any of the above or related topics could have a material adverse impact on one or more Senior Credit Group Members.
35 Labor Relations and Collective Bargaining. 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. Responding to union organizing campaigns, negotiating and renegotiating collective bargaining agreements often result in significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an adverse impact on operations, revenue and hospital reputation.
Class Actions. Nonprofit hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for nonprofit hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on nonprofit hospitals and health systems in the future.
Wage and Hour Class Actions and Litigation. Federal law and many states impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces, such as hospitals, are susceptible to actual and alleged violations of these standards. In recent years there has been a proliferation of lawsuits over these “wage and hour” issues, often in the form of large class actions. For large employers, such as hospitals and health systems, such class actions can involve multi-million dollar claims, judgments and settlements. A major class action decided or settled adversely to any of the Senior Credit Group Members could have a material adverse impact on the financial conditions and results of operations. See APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—FINANCIAL AND OPERATING INFORMATION—Litigation—Wage and Hour Litigation.”
Health Care Worker Classification. Health care providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The IRS has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital independent contractors (e.g., physician medical directors) as employees, back taxes and penalties could be material.
Staffing. In recent years, the health care industry has suffered from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care and information system technicians. In addition, aging medical staffs and difficulties in recruiting physicians are leading to physician shortages. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for physicians and other health care professionals, coupled with increased recruiting and retention costs will increase hospital-operating costs, possibly significantly. This trend could have a material adverse impact on the financial conditions and results of operations of hospitals and other health care facilities. This scarcity may further be intensified if utilization of health care services increases as a consequence of the ACA’s expansion of the number of insured consumers. 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.
Professional Liability Claims and General Liability Insurance. In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased in health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher deductibles and generally less coverage. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against health care providers. Insurance does not provide coverage for judgments for punitive damages.
36 Since 2008, CMS will not reimburse hospitals for medical costs arising from certain “never events,” which include specific preventable medical errors. Certain private insurers and HMOs have followed suit. The occurrence of “never events” is 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.
Litigation also arises from the corporate and business activities of hospitals, from a hospital’s status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of a Senior Credit Group Member if determined or settled adversely.
There is no assurance that hospitals will be able to maintain coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice judgments rendered against a hospital or that such coverage will be available at a reasonable cost in the future.
Affiliations, Merger, Acquisition and Divestiture. The members of the Senior Credit Group evaluate and pursue potential acquisition, merger and affiliation candidates as part of the overall strategic planning and development process. As part of its ongoing planning and property management functions, the Senior Credit Group reviews the use, compatibility and business viability of many of the operations of the members, and from time to time the members may pursue changes in the use of, or disposition of, their facilities. Likewise, members of the Senior Credit Group occasionally receive offers from, or conduct discussions with, third parties about the potential acquisition of operations and properties which may become subsidiaries or Affiliates of members of the Senior Credit Group in the future, or about the potential sale of some of the operations or property which are currently conducted or owned by the members. Discussions with respect to affiliation, merger, acquisition, disposition or change of use of facilities, including those which may affect the members, are held from time to time with other parties. These may be conducted with acute care hospital facilities and may be related to potential affiliation with a member of the Senior Credit Group. As a result, it is possible that the current organization and assets of the members may change from time to time.
In addition to relationships with other hospitals and physicians, the members of the Senior Credit Group may consider 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 enterprises that support the overall operations of the members of the Senior Credit Group. In addition, the members of the Senior Credit Group may pursue 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, management will consider these arrangements if there is a perceived strategic or operational benefit for the Senior Credit Group. Any initiative may involve significant capital commitments and/or capital or operating risk (including, potentially, insurance risk) in a business in which the members of the Senior Credit Group may have less expertise than in hospital operations. There can be no assurance that these projects, if pursued, will not lead to material adverse consequences to the Senior Credit Group.
Antitrust. Antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and acquisition activities, certain pricing or salary setting activities, as well as other areas of activity. The application of the federal and state antitrust laws to health care is evolving (especially as the ACA is implemented), and therefore not always clear. Currently, the most common areas of potential liability are joint action among providers with respect to payor contracting and medical staff credentialing disputes and hospital mergers and acquisitions. From time to time, the members of the Senior Credit Group are or may be involved with all of the types of activities described above, and neither Ascension nor the other members of the Senior Credit Group can predict when or to what extent liability, if any, may arise. Liability in any of these or other trade regulation areas may be substantial, depending upon the facts and circumstances of each case.
Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may be entitled to treble damages, and in others, governmental entities may be able to assess substantial monetary fines.
37 New Risk Certifications. Certain states are requiring providers, including hospitals, to obtain insurance certificates or registrations in order to participate in risk-based payer products. In the event hospitals, including those owned and operated by the members of the Senior Credit Group, cannot obtain or qualify for such certifications, such hospitals may not be able to participate in such products, which may lead to decreased patient volume and third-party payor revenue.
Cybersecurity Risks. Health care providers are highly dependent upon integrated electronic medical record and other information technology systems to deliver high quality, coordinated and cost-effective health care. These systems necessarily hold large quantities of highly sensitive protected health information that is highly valued on the black market for such information. As a result, the electronic systems and networks of health care providers are considered likely targets for cyberattacks and other potential breaches of their systems. In addition to regulatory fines and penalties, the health care entities subject to the breaches may be liable for the costs of remediating the breaches, damages to individuals (or classes) whose information has been breached, reputational damage and business loss, and damage to the information technology infrastructure. While the members of the Senior Credit Group have taken, and continue to take measures to protect their information technology system against such cyberattacks, there can be no assurance that the Senior Credit Group Members will not experience a significant breach. If such a breach occurs, the financial consequences of such a breach could have a material adverse impact on the Senior Credit Group.
Tax Matters
Tax Exemption for Not-For-Profit Corporations. Loss of tax-exempt status by a Senior Credit Group Member or certain other affiliates of Ascension could result in loss of tax exemption of tax-exempt debt issued for the benefit of the Senior Credit Group Members and/or certain affiliates, and defaults in covenants regarding the tax- exempt debt would likely be triggered. Such an event could have material adverse consequences on the financial condition of the Senior Credit Group. Management of Ascension is not aware of any transactions or activities currently ongoing that are likely to result in the revocation of the tax-exempt status of any Senior Credit Group Member or the above-referenced affiliates.
The maintenance by each Senior Credit Group Member and certain affiliates of Ascension (which are tax- exempt entities) of its status as an organization described in Section 501(c)(3) of the Code is contingent upon compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and other permissible purposes and their avoidance of transactions that may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities that 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 a modern health care organization. Although traditional activities of health care providers, such as medical office building leases, have been the subject of interpretations by the IRS in the form of Private Letter Rulings, many activities or categories of activities have not been fully addressed in any official opinion, interpretation or policy of the IRS.
The ACA also contains new requirements for tax-exempt hospitals. Under the ACA, each tax-exempt hospital facility is required to (i) conduct a community health needs assessment at least every three years and adopt an implementation strategy to meet the identified community needs, (ii) adopt, implement and widely publicize a written financial assistance policy and a policy to provide emergency medical treatment without discrimination, (iii) limit charges to individuals who qualify for financial assistance under such tax-exempt hospital’s financial assistance policy 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) refrain from taking extraordinary collection actions without first making reasonable efforts to determine whether the individual is eligible for assistance under such tax-exempt hospital’s financial assistance policy. In addition, the Treasury Department is required to review information about each tax-exempt hospital’s community benefit activities at least once every three years, as well as to submit an annual report to Congress with information regarding the levels of charity care, bad debt expenses, unreimbursed costs of government programs, and costs incurred by tax-exempt hospitals for community benefit activities. The periodic reviews and reports to Congress regarding the community benefits provided by 501(c)(3) hospitals may increase the likelihood that Congress will require such hospitals to provide a minimum level of charity care in order to retain tax-exempt status and may increase IRS and/or Congressional
38 scrutiny of particular 501(c)(3) hospital organizations. Because the Senior Credit Group Members conduct large- scale and diverse operations involving private parties, there can be no assurances that certain of their transactions will not be challenged by the IRS.
On December 29, 2014, the Secretary of the Treasury issued final regulations under Section 501(r) of the Code that provide detailed and comprehensive guidance relating to requirements for community health needs assessments, financial assistance policies, emergency medical care policies, limitations on charges and billing and collection practices, and also provide guidance on consequences of failure to satisfy Section 501(r) requirements. These final regulations are complex and may be administratively burdensome to implement. Generally, the regulations apply to tax years beginning after December 29, 2015, and provide that a hospital organization may rely on a reasonable, good faith interpretation of the Section 501(r) requirements for tax years beginning on or before December 29, 2015, which may include compliance with certain prior proposed regulations under Section 501(r).
The Senior Credit Group Members participate in a variety of joint ventures and transactions with physicians either directly or indirectly. Management of Ascension believes that the joint ventures and transactions to which the Senior Credit Group Members are a party are consistent with the requirements of the Code as to tax- exempt status (for those entities that are tax-exempt), but, as noted above, there is uncertainty as to the state of the law.
The IRS has periodically conducted audits and other enforcement activities regarding tax-exempt health care organizations. Certain audits are conducted by teams of revenue agents, often take years to complete and require the expenditure of significant staff time by both the IRS and the audited organization. These audits examine a wide range of possible issues, including tax-exempt bond financings, partnerships and joint ventures, retirement plans and employee benefits, excess benefit transactions, executive compensation, activities that generate unrelated trade or business income, employment taxes, political contributions and other matters. See APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—FINANCIAL AND OPERATING INFORMATION—Regulatory Reviews, Audits and Investigations.”
If the IRS were to find that a Senior Credit Group Member or certain other affiliates of Ascension had participated in activities in violation of certain regulations or rulings, the tax-exempt status of such entity could be in jeopardy. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit health care corporations, it could do so in the future. Loss of tax-exempt status by a Senior Credit Group Member or certain other affiliates of Ascension potentially could result in loss of tax exemption of the tax-exempt debt of such Senior Credit Group Member or certain other affiliates of Ascension, and of other tax-exempt debt of the Senior Credit Group Members and defaults in covenants regarding tax-exempt debt and obligations likely would be triggered. Loss of tax-exempt status also could result in substantial tax liabilities on income of the Senior Credit Group Members. For these reasons, loss of tax-exempt status of any Senior Credit Group Member or certain other affiliates of Ascension which are tax-exempt entities could have a material adverse effect on the financial condition and results of operations of the Senior Credit Group, taken as a whole.
In some cases, the IRS has imposed substantial monetary penalties on tax-exempt hospitals in lieu of revoking their tax-exempt status. In those cases, the IRS and exempt hospitals entered into settlement agreements requiring the hospital to make substantial payments to the IRS. Given the size of the Senior Credit Group, the wide range of complex transactions entered into by the Senior Credit Group Members, and potential exemption risks, Senior Credit Group Members could be at risk for incurring monetary penalties imposed by the IRS.
In recent years, the IRS and state, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt hospitals with respect to their exempt activities and the generation of unrelated business taxable income. The Senior Credit Group Members and certain other affiliates of Ascension participate in activities that may generate unrelated business taxable income. Management of Ascension believes it and the other Senior Credit Group Members and certain other affiliates of Ascension have properly accounted for and reported unrelated business taxable income; nevertheless, an investigation or audit could lead to a challenge which could result in taxes, interest and penalties with respect to unreported unrelated business taxable income and in some cases could ultimately affect the tax-exempt status of a Senior Credit Group Member and certain other affiliates of Ascension as well as the exclusion from gross income for federal income tax purposes of the interest payable on the tax-exempt debt of the Senior Credit Group Members and certain other affiliates of Ascension. In
39 addition, legislation, if any, which may be adopted at the federal, state and local levels with respect to unrelated business income cannot be predicted. Any legislation could have the effect of subjecting a portion of the income of the Senior Credit Group Members to federal or state income taxes.
In lieu of revocation of exempt status, the IRS may impose penalty excise taxes on certain “excess benefit transactions” involving 501(c)(3) organizations and “disqualified persons.” An excess benefit transaction is one in which a disqualified person or entity receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services, or shares the net revenues of the tax-exempt entity. A disqualified person is a person (or an entity) who is in a position to exercise substantial influence over the affairs of the exempt organization during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the disqualified person and any “organizational manager” who knowingly participates in an excess benefit transaction. These rules do not penalize the exempt organization itself, so there would be no direct impact on a Senior Credit Group Member if an excess benefit transaction were subject to IRS enforcement, pursuant to these “intermediate sanctions” rules.
State and Local Tax Exemption. States have generally not been as active as the IRS in scrutinizing the income tax exemption of health care organizations. With some overlap with the ACA’s mandates, state laws also require tax-exempt hospitals to periodically conduct community needs assessment, to adopt an implementation strategy, and to have a charity care policy. It is likely that the loss by Ascension or any of the Senior Credit Group Members of federal tax exemption would also trigger a challenge to their respective state tax-exemption. Depending on the circumstances, such event could be material and adverse.
State, county and local taxing authorities undertake audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the amount of services provided to indigents, the real property tax-exempt status of the health care providers has been questioned. Subjecting significant amounts of real property to taxation could adversely affect health care organizations. The majority of the real property of the Senior Credit Group Members is currently treated as exempt from real property taxation. Although the real property tax exemptions of the Senior Credit Group Members with respect to its core hospital facilities are not, to the knowledge of management of Ascension, under challenge or investigation, an audit could lead to a challenge that could adversely affect the real property tax exemptions of the Senior Credit Group Members.
It is not possible to predict the scope or effect of future state and local legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the financial condition of the Senior Credit Group, by requiring payment of income, local property or other taxes.
Bond Examinations. IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds, including the use of bond proceeds, in the charitable organization sector, with specific reviews of private use. In addition, under its compliance check program, the IRS has from time to time sent post-issuance compliance questionnaires to several hundred nonprofit corporations that have borrowed on a tax-exempt basis regarding their post-issuance compliance with various requirements for maintaining the federal tax exemption of interest on their tax-exempt bonds. The questionnaire includes questions relating to the borrower’s (i) record retention, which the IRS has particularly emphasized, (ii) qualified use of tax-exempt bond-financed property, (iii) arbitrage yield restriction and rebate requirements, (iv) debt management policies, and (v) voluntary compliance and education. The IRS may send questionnaires to additional nonprofit organizations.
Tax-exempt organizations must also complete various schedules to IRS Form 990-Return of Organizations Exempt From Income Tax, which create additional reporting responsibilities. On Schedule H, hospitals and health systems must report how they provide community benefit and specify certain billing and collection practices. Schedule K requires detailed information related to certain outstanding tax-exempt bond issues of tax-exempt borrowers, including, for tax-exempt bonds issued after 2002, information regarding operating, management and research contracts as well as private use compliance. Tax-exempt organizations must also complete Schedule J, which requires reporting of compensation information for the organizations’ officers, directors, trustees, key employees, and other highly compensated employees.
40 Although management of Ascension believes that its expenditure and investment of tax-exempt bond proceeds, use of property financed with tax-exempt debt and record retention practices comply with all applicable laws and regulations, there can be no assurance that an IRS review triggered by information submitted on a Form 990 would not adversely affect the tax-exempt status or the market value of the outstanding tax-exempt indebtedness of the Senior Credit Group. Additionally, the tax-exempt obligations issued for the benefit of the Senior Credit Group Members, may be, from time to time, subject to examinations by the IRS.
Management of Ascension believes that the tax-exempt obligations issued for the benefit of the Senior Credit Group Members properly comply with the tax laws. However, there can be no assurance that any IRS examination of the outstanding tax-exempt indebtedness of the Senior Credit Group will not adversely affect the market value of such indebtedness.
Other Risks
Interest Rate Swaps. Ascension has entered into interest rate swap transactions with a notional amount as of March 31, 2017 of approximately $1.1 billion with respect to its outstanding bonds. Ascension is exposed to “basis risk” to the extent that the rate it receives from the applicable swap counterparty pursuant to the interest rate swaps will not equal the interest rate it is required to pay on such outstanding bonds. The agreement by the applicable swap counterparty to pay certain amounts to Ascension pursuant to the interest rate swaps does not alter or affect Ascension’s obligations to pay principal or redemption price of or interest on any of the outstanding bonds. No person other than Ascension will have any rights under the interest rate swaps or against the applicable swap counterparty.
Under certain circumstances, the interest rate swaps may be terminated prior to the maturity of the related outstanding bonds. If the interest rate swaps are terminated under certain market conditions, Ascension may owe a termination payment to the applicable swap counterparty. Such a termination payment generally would be based upon the market value of the related interest rate swap on the date of termination and could be substantial. In the event of an early termination of an interest rate swap, there can be no assurance that (i) Ascension will receive any termination payment payable to it by the applicable swap counterparty, (ii) Ascension will have sufficient amounts to pay a termination payment payable by it to the applicable swap counterparty and (iii) Ascension will be able to obtain a replacement swap agreement with comparable terms. Ascension has credit risk to the extent the applicable swap counterparty’s credit or ability to perform is reduced. See APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—FINANCIAL AND OPERATING INFORMATION—Interest Rate Swaps.”
Risks Related to Outstanding Variable Rate Obligations. Certain outstanding securities secured by Senior Obligations issued under the Senior Master Indenture are variable 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 Ascension 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. Previous credit market turmoil in the auction rate markets and dislocation among various bond insurers and swap providers triggered suddenly high interest costs to many health care organizations holding debt with interest rates that varied on a periodic basis. If certain variable rate bonds issued for the Obligated Group Members cannot be remarketed when holders demand payment, the Obligated Group Members could be forced to draw under a line of credit, liquidate investments, or apply cash to purchase variable rate bonds, thus reducing its liquid assets available to pay the Bonds and continue their revenue producing operations.
Bond Ratings. There is no assurance that the ratings assigned to the Bonds will not be lowered or withdrawn at any time, the effect of which could adversely affect the market price for and marketability of the Bonds. See also “RATINGS” herein.
Investments. Ascension has significant holdings in a broad range of investments. Market fluctuations have affected and may continue to affect the value of those investments. Those fluctuations may be at times material.
Pension and Benefit Funding. As large employers, health systems may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers’ compensation
41 benefits. Plans are often underfunded, or may become underfunded and funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes. See APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP— FINANCIAL AND OPERATING INFORMATION—Pension Plans.”
Other Risk Factors Generally Affecting Health Care Facilities. In the future, the following factors, among others, may adversely affect the operations of health care providers, including the Senior Credit Group Members or the market value of the Bonds, to an extent that cannot be determined at this time:
(i) Hospitals are major employers, combining a complex mix of professional, quasi- professional, technical, clerical, housekeeping, maintenance, dietary and other types of workers in a single operation. As with all large employers, the Senior Credit Group Members bear a wide variety of risks in connection with their employees. These risks include strikes and other related work actions, contract disputes, discrimination claims, personal tort actions, work-related injuries, exposure to hazardous materials, interpersonal torts (such as between employees, between physicians or management and employees, or between employees and patients), and other risks that may flow from the relationships between employer and employee or between physicians, patients and employees. Many of these risks are not covered by insurance, and certain of them cannot be anticipated or prevented in advance. The Senior Credit Group Members are subject to all of the risks listed above, and such risks, alone or in combination, could have material adverse consequences to the financial condition or operations of the Senior Credit Group.
(ii) Competition from other hospitals and other competitive facilities now or hereafter located in the respective service areas of the facilities operated by Ascension and the Senior Credit Group Members may adversely affect revenues of the Senior Credit Group. Development of health maintenance and other alternative health delivery programs could result in decreased usage of inpatient hospital facilities and other facilities operated by the Senior Credit Group Members.
(iii) Cost and availability of any insurance, including self-insurance, such as malpractice, fire, automobile, and general comprehensive liability, that hospitals and other health care facilities of similar size and type as the Senior Credit Group Members generally carry may adversely affect revenues. The costs of such insurance have increased significantly in the past few years, and such increases are likely to continue in the near future.
(iv) The occurrences of natural or man-made disasters may damage some or all of the facilities, interrupt utility service to some or all of the facilities or otherwise impair the operation of some or all of the facilities operated by the Senior Credit Group Members or the generation of revenues from some or all of the facilities.
(v) 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 facilities. 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 Senior Credit Group Members to offer the equipment or services may be subject to the availability of equipment or specialists, governmental approval or the ability to finance these acquisitions or operations.
(vi) Reduced demand for the services of the Senior Credit Group Members that might result from decreases in population in their respective service areas.
(vii) Increased unemployment or other adverse economic conditions in the service areas of the Senior Credit Group Members which would increase the proportion of patients who are unable to pay fully for the cost of their care.
42 (viii) Any increase in the quantity of indigent care provided which is mandated by law or required due to increased needs of the community in order to maintain the charitable status of the Senior Credit Group Members.
(ix) Regulatory actions which might limit the ability of the Senior Credit Group Members to undertake capital improvements to their respective facilities or to develop new institutional health services.
(x) The occurrence of a large scale terrorist attack that increases the proportion of patients who are unable to pay fully for the cost of their care and that disrupts the operation of certain health care facilities by resulting in an abnormally high demand for health care services.
(xi) Instability in the stock market or other investment markets which may adversely affect both the principal value of, and income from, Ascension’s investment portfolio.
(xii) Bankruptcy of an indemnity/commercial insurer, managed care plan or other payor.
ABSENCE OF MATERIAL LITIGATION
There is no controversy or litigation of any nature, to the knowledge of its officers, now pending or threatened against Ascension or any other Senior Credit Group Member restraining or enjoining the issuance, sale, execution or delivery of the Series 2016A Additional Bonds, or in any way contesting or affecting the validity of the Bonds.
As with most hospitals, Senior Credit Group Members and Ascension are subject to legal actions which, in whole or in part, are not or may not be covered by insurance or self-insurance because of the type of action (such as employee, contract or competition law claims) or remedies requested (such as punitive damages), because of a reservation of rights by an insurance carrier or self-insurance program, or because the action has not proceeded to a stage which permits full evaluation. Since these actions either claim punitive damages which could become a liability of the Senior Credit Group Members or Ascension and/or state or threaten causes of action which may not be covered by insurance or self-insurance, insurers for the Senior Credit Group Members or Ascension and the self- insurance program have not provided assurance of coverage, and to the extent any cases have not been served, counsel has not been retained to evaluate them. For a discussion of certain recently filed litigation affecting Ascension and certain Senior Credit Group Members, see APPENDIX A – “INFORMATION CONCERNING THE ASCENSION SENIOR CREDIT GROUP—FINANCIAL AND OPERATING INFORMATION—Litigation.”
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations generally applicable to holders of the Series 2016A Additional Bonds that acquired those Series 2016A Additional Bonds in the initial offering. The discussion below is based upon laws, regulations, rulings, and decisions in effect and available on the date hereof, all of which are subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been or are expected to be sought from the IRS with respect to any of the U.S. federal tax considerations discussed below, and no assurance can be given that the IRS will not take contrary positions. Further, the following discussion does not deal with U.S. tax consequences applicable to any given investor, nor does it address the U.S. tax considerations applicable to all categories of investors, some of which may be subject to special taxing rules (regardless of whether or not such investors constitute U.S. Holders), such as certain U.S. expatriates, banks, REITs, RICs, insurance companies, tax-exempt organizations, dealers or traders in securities or currencies, partnerships, S corporations, estates and trusts, investors that hold their Series 2016A Additional Bonds as part of a hedge, straddle or an integrated or conversion transaction, or investors whose “functional currency” is not the U.S. dollar. Furthermore, it does not address (i) alternative minimum tax consequences, or (ii) the indirect effects on persons who hold equity interests in a holder. This summary also does not consider the taxation of the Series 2016A Additional Bonds under state, local or non-U.S. tax laws. In addition, this summary generally is limited to U.S. tax considerations applicable to investors that acquire their Series 2016A Additional Bonds pursuant to this offering for the issue price that is applicable to such Series 2016A Additional Bonds (i.e., the price at which a
43 substantial amount of the Series 2016A Additional Bonds is sold to the public) and who will hold their Series 2016A Additional Bonds as “capital assets” within the meaning of Section 1221 of the Code.
As used herein, “U.S. Holder” means a beneficial owner of a Series 2016A Additional Bond that for U.S. federal income tax purposes is an individual citizen or resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), an estate the income of which is subject to U.S. federal income taxation regardless of its source or a trust where a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons (as defined in the Code) have the authority to control all substantial decisions of the trust (or a trust that has made a valid election under U.S. Treasury Regulations to be treated as a domestic trust). As used herein, “Non-U.S. Holder” generally means a beneficial owner of a Series 2016A Additional Bond (other than a partnership) that is not a U.S. Holder. If a partnership holds Series 2016A Additional Bonds, the tax treatment of such partnership or a partner in such partnership generally will depend upon the status of the partner and upon the activities of the partnership. Partnerships holding Series 2016A Additional Bonds, and partners in such partnerships, should consult their own tax advisors regarding the tax consequences of an investment in the Series 2016A Additional Bonds (including their status as U.S. Holders or Non-U.S. Holders).
There are certain tax reform proposals currently being considered in connection with the recent U.S. elections. While it is uncertain whether any such proposals would be enacted into law, and it is impossible to predict whether this will be the case, if any such proposals were to become law, they could materially change the U.S. federal income tax consequences described below.
Prospective investors should consult their own tax advisors in determining the U.S. federal, state, local or non-U.S. tax consequences to them from the purchase, ownership and disposition of the Series 2016A Additional Bonds in light of their particular circumstances.
U.S. Holders
Interest
Payments of interest on a Series 2016A Additional Bond generally will be taxable to a U.S. Holder as ordinary interest income at the time such payments are accrued or are received (in accordance with the U.S. Holder’s regular method of tax accounting), provided such interest is “qualified stated interest” within the meaning of section 1272 of the Code. For purposes of this discussion, the term ”qualified stated interest” on a Series 2016A Additional Bond means all interest thereon based on a fixed rate, and payable unconditionally at fixed periodic intervals of one year or less during the entire term of the instrument.
Original Issue Discount
To the extent that the issue price of any bond of a maturity of the Series 2016A Additional Bonds is less than the aggregate of the amounts (other than qualified stated interest) to be paid over the term of that bond by more than a de minimis amount, the difference may constitute original issue discount (“OID”) on that bond. U.S. Holders of Series 2016A Additional Bonds will be required to include OID in income for U.S. federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest (which may be before the receipt of cash payments attributable to such income). Under this method, U.S. Holders generally will be required to include in income increasingly greater amounts of OID in successive accrual periods.
Amortizable Bond Premium
A holder of a Series 2016A Additional Bond that purchased that bond for an amount that was greater than its stated redemption price at maturity will be considered to have purchased the Series 2016A Additional Bond with “amortizable bond premium” equal in amount to such excess. For purposes of this discussion, the “stated redemption price at maturity” of a Series 2016A Additional Bond, as of any date, is an amount equal to the aggregate of the amounts (other than qualified stated interest) to be paid on that bond over the remaining term. A U.S. Holder of a Series 2016A Additional Bond purchased with amortizable bond premium may elect to amortize
44 such premium using a constant yield method over the remaining term of the Series 2016A Additional Bond and may offset interest otherwise required to be included in respect of the Series 2016A Additional Bond during any taxable year by the amortized amount of such excess for the taxable year. Bond premium on a Series 2016A Additional Bond held by a U.S. Holder that does not make such an election will decrease the amount of gain or increase the amount of loss otherwise recognized on the sale, exchange, redemption or retirement of a Series 2016A Additional Bond. However, if the Series 2016A Additional Bond may be optionally redeemed after the beneficial owner acquires it at a price in excess of its stated redemption price at maturity, special rules would apply under the Treasury Regulations that could result in a deferral of the amortization of some bond premium until later in the term of the Series 2016A Additional Bond. Any election by a U.S. Holder to amortize bond premium applies to all taxable debt instruments beneficially owned by that person on or after the first day of the first taxable year to which such election applies and may be revoked only with the consent of the IRS. That a Series 2016A Additional Bond was purchased by the holder with amortizable bond premium may affect the computation of includable original issue discount for that holder.
Sale or other Taxable Disposition of a Series 2016A Additional Bond; Market Discount
Unless a nonrecognition provision of the Code applies, the sale, exchange, redemption, retirement (including pursuant to an offer by Ascension) or other taxable disposition of a Series 2016A Additional Bond will be a taxable event for U.S. federal income tax purposes. In such event, in general, a U.S. Holder of a Series 2016A Additional Bond will recognize gain or loss equal to the difference between (i) the amount of cash plus the fair market value of property received (except to the extent attributable to accrued but unpaid qualified stated interest on the Series 2016A Additional Bond, which will be taxed in the manner described above) and (ii) the U.S. Holder’s adjusted U.S. federal income tax basis in the Series 2016A Additional Bond (generally, the purchase price paid by the U.S. Holder for the Series 2016A Additional Bond, decreased by any amortized premium, and increased by the amount of any OID previously included in income by such U.S. Holder with respect to such Series 2016A Additional Bond). Any such gain or loss generally will be capital gain or loss. In the case of a non-corporate U.S. Holder of the Series 2016A Additional Bonds, the maximum marginal U.S. federal income tax rate applicable to any such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income if such U.S. Holder’s holding period for the Series 2016A Additional Bonds exceeds one year. The deductibility of capital losses is subject to limitations.
Under current law, a U.S. Holder of a Series 2016A Additional Bond that did not purchase that Series 2016A Additional Bond at its issue price in the initial public offering (a “subsequent purchaser”) generally will be required, on the disposition (or earlier partial principal payment) of such Series 2016A Additional Bond, to recognize as ordinary income a portion of the gain (or partial principal payment), if any, to the extent of the accrued “market discount.” In general, market discount is the amount by which the price paid for such Series 2016A Additional Bond by such a subsequent purchaser is less than the stated redemption price at maturity of that Series 2016A Additional Bond (or, in the case of a Series 2016A Additional Bond bearing original issue discount, is less than the “revised issue price” of that Series 2016A Additional Bond (as defined below) upon such purchase), except that market discount is considered to be zero if it is less than one quarter of one percent of the principal amount times the number of complete remaining years to maturity. The Code also limits the deductibility of interest incurred by a subsequent purchaser on funds borrowed to acquire Series 2016A Additional Bonds with market discount. As an alternative to the inclusion of market discount in income upon disposition, a subsequent purchaser may elect to include market discount in income currently as it accrues on all market discount instruments acquired by the subsequent purchaser in that taxable year or thereafter, in which case the interest deferral rule will not apply. The recharacterization of gain as ordinary income on a subsequent disposition of such Series 2016A Additional Bonds could have a material effect on the market value of such Series 2016A Additional Bonds.
Medicare Tax
Certain non-corporate U.S. Holders of Series 2016A Additional Bonds are subject to a 3.8% tax on the lesser of (1) the U.S. Holder’s “net investment income” (in the case of individuals) or “undistributed net investment income” (in the case of estates and certain trusts) for the relevant taxable year and (2) the excess of the U.S. Holder’s “modified adjusted gross income” (in the case of individuals) or “adjusted gross income” (in the case of estates and certain trusts) for the taxable year over a certain threshold (which in the case of individuals is between $200,000 and $250,000, depending on the individual’s circumstances). A U.S. Holder’s calculation of net
45 investment income generally will include its interest income on the Series 2016A Additional Bonds and its net gains from the disposition of the Series 2016A Additional Bonds, unless such interest income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are an individual, estate, or trust, you are urged to consult your tax advisors regarding the applicability of this tax to your income and gains in respect of your investment in the Series 2016A Additional Bonds.
Information Reporting and Backup Withholding
Payments on the Series 2016A Additional Bonds generally will be subject to U.S. information reporting and possibly to “backup withholding.” Under Section 3406 of the Code and applicable U.S. Treasury Regulations issued thereunder, a non-corporate U.S. Holder of the Taxable Bonds may be subject to backup withholding at the current rate of 28% with respect to “reportable payments,” which include interest paid on the Series 2016A Additional Bonds and the gross proceeds of a sale, exchange, redemption, retirement or other disposition of the Series 2016A Additional Bonds. The payor will be required to deduct and withhold the prescribed amounts if (i) the payee fails to furnish a U.S. taxpayer identification number (“TIN”) to the payor in the manner required, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) there has been a “notified payee underreporting” described in Section 3406(c) of the Code or (iv) the payee fails to certify under penalty of perjury that the payee is not subject to withholding under Section 3406(a)(1)(C) of the Code. Amounts withheld under the backup withholding rules may be refunded or credited against the U.S. Holder’s federal income tax liability, if any, provided that the required information is timely furnished to the IRS. Certain U.S. holders (including among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. A holder’s failure to comply with the backup withholding rules may result in the imposition of penalties by the IRS.
Non-U.S. Holders
Under sections 1441 and 1442 of the Code, nonresident alien individuals and foreign corporations are generally subject to withholding at the current rate of 30% (or any lower rate specified in an income tax treaty) on periodic income items arising from sources within the United States, provided such income is not effectively connected with the conduct of a United States trade or business.
The foregoing notwithstanding, but subject to the discussions below under the headings “Information Reporting and Backup Withholding” and “Foreign Account Tax Compliance Act (“FATCA”)—U.S. Holders and Non-U.S. Holders,” and assuming the interest income of Non-US Holder on the Series 2016A Additional Bonds is not treated as effectively connected income within the meaning of section 864 of the Code, such interest will not be subject to withholding under section 1441 or section 1442 of the Code to the extent that the interest income is treated as “portfolio interest”. Interest paid to a Non-U.S. Holder will be treated as portfolio interest as to that holder if: (i) the Non-U.S. Holder provides a statement to the payor certifying, under penalties of perjury, that the Non-U.S. Holder is not a United States person and providing the name and address of such Non-U.S. Holder; (ii) such interest is treated as not effectively connected with a United States trade or business of the Non-U.S. Holder; (iii) such interest payments are not made to a person within a foreign country that the Service has included on a list of countries having provisions inadequate to prevent United States tax evasion; (iv) such interest is not deemed “contingent interest” within the meaning of the portfolio debt provisions of the Code; (v) the Non-U.S. Holder is not a controlled foreign corporation, within the meaning of section 957 of the Code; and (vi) the Non-U.S. Holder is not a bank receiving interest on the Series 2016A Additional Bonds pursuant to a loan agreement entered into in the ordinary course of the Non-U.S. Holder’s banking trade or business.
Subject to the discussions below under the headings “Information Reporting and Backup Withholding” and “Foreign Account Tax Compliance Act (“FATCA”)—U.S. Holders and Non-U.S. Holders,” any capital gain realized by a Non-U.S. Holder upon the sale, exchange, redemption, retirement (including pursuant to an offer by Ascension) or other taxable disposition of a Series 2016A Additional Bond generally will not be subject to U.S. federal income tax, unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business within the United States; or (ii) in the case of any gain realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of such sale, exchange, redemption, retirement (including pursuant to an offer by Ascension) or other disposition and certain other conditions are met.
46 Information Reporting and Backup Withholding
Subject to the discussion below under the heading “Foreign Account Tax Compliance Act (“FATCA”)— U.S. Holders and Non-U.S. Holders,” under current U.S. Treasury Regulations, payments of principal and interest on any Series 2016A Additional Bonds to a Non-U.S. Holder will not be subject to any backup withholding tax requirements if the Non-U.S. Holder of the Series 2016A Additional Bond or a financial institution holding the Series 2016A Additional Bond on behalf of the Non-U.S. Holder in the ordinary course of its trade or business provides an appropriate certification to the payor and the payor does not have actual knowledge that the certification is false. If a Non-U.S. Holder provides the certification, the certification must give the name and address of such Non-U.S. Holder, state that such Non-U.S. Holder is not a United States person, or, in the case of an individual, that such Non-U.S. Holder is neither a citizen nor a resident of the United States, and the Non-U.S. Holder must sign the certificate under penalties of perjury. The current backup withholding tax rate is 28%.
Foreign Account Tax Compliance Act (“FATCA”)—U.S. Holders and Non-U.S. Holders
Sections 1471 through 1474 of the Code (commonly referred to as “FATCA”) impose a reporting regime and potentially a 30% withholding tax on certain payments made to or through (i) a “foreign financial institution” (as specifically defined in the Code) that does not enter into an agreement with the IRS to provide the IRS with certain information in respect of its account holders and investors or (ii) a “non-financial foreign entity” (as specifically defined in the Code) that does not provide sufficient information with respect to its substantial U.S. owners, if any. The United States has entered into, and continues to negotiate, intergovernmental agreements (each, an “IGA”) with a number of other jurisdictions to facilitate the implementation of FATCA. An IGA may significantly alter the application of FATCA and its information reporting and withholding requirements with respect to any particular investor.
Failure to comply with the additional certification, information reporting and other specified requirements imposed under FATCA could result in the 30% withholding tax being imposed on payments of interest and principal under the Series 2016A Additional Bonds and sales proceeds of Series 2016A Additional Bonds held by or through a foreign entity. In general, withholding under FATCA currently applies to payments of U.S. source interest (including OID) and, under current guidance, will apply to (i) gross proceeds from the sale, exchange or retirement of debt obligations paid after December 31, 2018 and (ii) certain “passthru” payments no earlier than January 1, 2019. Prospective investors should consult their own tax advisors regarding FATCA and its effect on them.
The foregoing summary is included herein for general information only and does not discuss all aspects of U.S. federal taxation that may be relevant to a particular holder of Series 2016A Additional Bonds in light of the holder’s particular circumstances and income tax situation. Prospective investors are urged to consult their own tax advisors as to any tax consequences to them from the purchase, ownership and disposition of the Series 2016A Additional Bonds, including the application and effect of state, local, non-U.S., and other tax laws.
Effect of Defeasance
Pursuant to the Bond Indenture, the Series 2016A Additional Bonds are subject to legal defeasance without the consent of the holders of the Series 2016A Additional Bonds. Defeasance of any of the Series 2016A Additional Bonds may be treated as a taxable constructive exchange of that Series 2016A Additional Bond for the defeased Series 2016A Additional Bond, in which event, the holder will recognize gain or loss for federal income tax purposes equal to the difference between the amount realized from the sale, exchange or retirement (less any accrued qualified stated interest, which will be taxable as described above) and the holder’s adjusted tax basis in the Series 2016A Additional Bonds (described above).
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), imposes certain restrictions on employee pension and welfare benefit plans subject to ERISA (“ERISA Plans”) regarding prohibited transactions, and also imposes certain obligations on those persons who are fiduciaries with respect to ERISA Plans. Section 4975 of the Code imposes similar prohibited transaction restrictions on (i) tax-qualified retirement plans
47 described in Section 401(a) and 403(a) of the Code, which are exempt from tax under section 501(a) of the Code and which are not governmental and church plans as defined herein (“Qualified Retirement Plans”), and (ii) Individual Retirement Accounts described in Section 408(b) of the Code (“Tax-Favored Plans”). Certain employee benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA), and, if no election has been made under Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA requirements. Additionally, such governmental and non-electing church plans are not subject to the requirements of Section 4975 of the Code. Although assets of such governmental or non-electing church plans may be invested in the Series 2016A Additional Bonds without regard to the ERISA and Code considerations described below, any such investment may be subject to provisions of applicable federal and state law that are, to a material extent, similar to the requirements of ERISA and Section 4975 of the Code (“Similar Law”).
In addition to the imposition of general fiduciary obligations, including those of investment prudence and diversification and the requirement that a plan’s investment be made in accordance with the documents governing the plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions involving assets of ERISA Plans and Tax-Favored Plans and entities whose underlying assets include plan assets by reason of ERISA Plans or Tax-Favored Plans investing in such entities (collectively, “Benefit Plans”) and persons who have certain specified relationships to the Benefit Plans (such persons are referred to as “Parties in Interest” or “Disqualified Persons”), unless a statutory or administrative exemption is available. Certain Parties in Interest (or Disqualified Persons) that participate in a prohibited transaction may be subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of ERISA (or Section 4975 of the Code) unless a statutory or administrative exemption is available.
Certain transactions involving the purchase, holding or transfer of the Series 2016A Additional Bonds might be deemed to constitute prohibited transactions under ERISA and the Code if assets of Ascension were deemed to be assets of a Benefit Plan. Under final regulations issued by the United States Department of Labor (the “Plan Assets Regulation”), the assets of Ascension would be treated as plan assets of a Benefit Plan for the purposes of ERISA and the Code if the Benefit Plan acquires an “equity interest” in Ascension and none of the exceptions contained in the Plan Assets Regulation is applicable. An equity interest is defined under the Plan Assets Regulation as an interest in an entity other than an instrument which is treated as indebtedness under applicable local law and which has no substantial equity features. Although there can be no assurances in this regard, it appears that the Series 2016A Additional Bonds should be treated as debt without substantial equity features for purposes of the Plan Assets Regulation. However, without regard to whether the Series 2016A Additional Bonds are treated as an equity interest for such purposes, the acquisition or holding of Series 2016A Additional Bonds by or on behalf of a Benefit Plan could be considered to give rise to a prohibited transaction if Ascension, the Senior Obligated Group Members, the Master Trustee or the Bond Trustee, or any of their respective affiliates, is or becomes a Party in Interest or a Disqualified Person with respect to such Benefit Plan. The fiduciary of a Benefit Plan that proposes to purchase and hold any Series 2016A Additional Bonds should consider, among other things, whether such purchase and holding may involve (i) the direct or indirect extension of credit to a Party in Interest, (ii) the sale or exchange of any property between a Benefit Plan and a Party in Interest, and (iii) the transfer to, or use by or for the benefit of, a Party in Interest, of any Benefit Plan assets.
Certain exemptions from the prohibited transaction rules could be applicable depending on the type and circumstances of the plan fiduciary making the decision to acquire a Series 2016A Additional Bond. Included among these exemptions are: Prohibited Transaction Class Exemption (“PTCE”) 75-1, relating to certain broker- dealer transactions, PTCE 96-23, regarding transactions effected by “in-house asset managers”; PTCE 90-1, regarding investments by insurance company pooled separate accounts; PTCE 95-60, regarding transactions effected by “insurance company general accounts”; PTCE 91-38, regarding investments by bank collective investment funds; and PTCE 84-14, regarding transactions effected by “qualified professional asset managers.” In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code generally provide for a statutory exemption from the prohibitions of Section 406(a) of ERISA and Section 4975 of the Code for certain transactions between Benefit Plans and persons who are Parties in Interest solely by reason of providing services to such Benefit Plans or who are persons affiliated with such service providers, provided generally that such persons are not fiduciaries with respect to “plan assets” of any Benefit Plan involved in the transaction and that certain other conditions are satisfied.
By its acceptance of a Series 2016A Additional Bond, each purchaser will be deemed to have represented and warranted that either (i) no “plan assets” of any Plan have been used to purchase such Series 2016A Additional
48 Bond, or (ii) each Underwriter is not a Party in Interest with respect to the “plan assets” of any Plan used to purchase such Series 2016A Additional Bond, or (iii) the purchase and holding of such Series 2016A Additional Bonds is exempt from the prohibited transaction restrictions of ERISA and Section 4975 of the Code pursuant to a statutory exemption or an administrative class exemption.
Any Benefit Plan fiduciary considering whether to purchase Series 2016A Additional Bonds on behalf of an ERISA Plan should consult with its counsel regarding the applicability of the fiduciary responsibility and prohibited transaction provisions of ERISA and the Code to such investment and the availability of any of the exemptions referred to above. In addition, persons responsible for considering the purchase of Series 2016A Additional Bonds by a governmental plan or non-electing church plan should consult with its counsel regarding the applicability of any Similar Law to such an investment.
APPROVAL OF LEGALITY
Certain legal matters will be passed upon for Ascension, the other Senior Credit Group Members and certain other Ascension affiliates by Hall, Render, Killian, Heath & Lyman, P.C., Indianapolis, Indiana, and for the Underwriters by their counsel, Norton Rose Fulbright US LLP, San Francisco, California.
RATINGS
Fitch, Inc. (“Fitch”), Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC business (“S&P”), and Moody’s Investors Services, Inc. (“Moody’s”) have assigned their long-term municipal bond ratings of “AA+,” “AA+” and “Aa2,” respectively, to the Bonds.
Any explanation of the significance of ratings may only be obtained from the rating agencies.
Ascension and the other Senior Credit Group Members have furnished to the rating agencies certain information and material concerning the Bonds and themselves. Generally, rating agencies base their ratings on this information and materials and on investigations, studies and assumptions made by the rating agencies themselves. There is no assurance that the ratings mentioned above will remain in effect for any given period of time or that they might not be lowered or withdrawn entirely by the rating agency, if in its judgment circumstances so warrant. Any downward change in or withdrawal of any ratings might have an adverse effect on the market price or marketability of the Bonds.
UNDERWRITING
Morgan Stanley & Co. LLC, as representative of the Underwriters named on this Offering Memorandum Supplement (collectively, the “Underwriters”), has agreed to purchase the Series 2016A Additional Bonds pursuant to a Bond Purchase Contract with Ascension. The Series 2016A Additional Bonds will be purchased at an aggregate purchase price of $______(which represents the par amount of the Series 2016A Additional Bonds, less the Underwriters’ discount of $______, plus/less an original issue premium/discount of $______, plus accrued interest of $______). The Bond Purchase Contract for the Series 2016A Additional Bonds provides that the Underwriters will purchase all of the Series 2016A Additional Bonds, if any are purchased, and contains the agreements of Ascension on behalf of the Senior Credit Group to indemnify the Underwriters against certain liabilities. The Bond Purchase Contract also provides that J.P. Morgan Securities LLC (“JPMS”) is not participating in the underwriting of any Series 2016A Additional Bonds to be sold outside of the United States of America and will not receive any compensation associated with such sales. Ascension will pay the fees and expenses of Underwriters’ Counsel.
Ascension intends to use a portion of the proceeds of the Series 2016A Additional Bonds to refund the Prior Bonds. To the extent an Underwriter or an affiliate thereof is an owner of any Prior Bonds, such Underwriter or its affiliate, as applicable, would receive a portion of the proceeds from the issuance of the Series 2016A Additional Bonds contemplated herein in connection with the refunding of such Prior Bonds.
49 Morgan Stanley & Co. LLC, as one of the Underwriters of the Series 2016A Additional Bonds, has entered into a retail distribution arrangement with its affiliate Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Series 2016A Additional Bonds.
JPMS, one of the Underwriters of the Series 2016A Additional 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 at the original issue prices. Pursuant to each Dealer Agreement, each of CS&Co. and LPL may purchase Series 2016A Additional Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Series 2016A Additional Bonds that such firm sells.
FINANCIAL ADVISOR
Ascension has retained Kaufman, Hall & Associates, LLC, Skokie, Illinois, as financial advisor in connection with the issuance of the Series 2016A Additional Bonds. Although Kaufman, Hall & Associates, LLC has assisted in the preparation of this Offering Memorandum Supplement, Kaufman, Hall & Associates, LLC was not and is not obligated to undertake, and has not undertaken to make, an independent verification and assumes no responsibility for the accuracy, completeness or fairness of the information contained in this Offering Memorandum Supplement.
MISCELLANEOUS
Any statements in this Offering Memorandum Supplement involving matters of opinion, whether or not expressly stated as such, are so intended and are not representations of fact.
The foregoing and subsequent summaries or description of provisions of the Series 2016A Additional Bonds, the Bond Indenture, the Senior Master Indenture and the Series 2016 Taxable Senior Obligation and all references to other materials not purporting to be quoted in full are only brief outlines of some of the provisions thereof and do not purport to summarize or describe all of the provisions thereof. Reference is made to said documents for full and complete statements of their provisions. The Appendices attached hereto are a part of this Offering Memorandum Supplement. Copies, in reasonable quantity, of the Bond Indenture, the Senior Master Indenture and the Series 2016 Taxable Senior Obligation may be obtained during the offering period upon request directed to Morgan Stanley & Co. LLC, 555 California Street, Floor 21, San Francisco, California 94104.
DOCUMENTS INCORPORATED BY REFERENCE
The members of the Senior Credit Group and Subordinate Credit Group are identical. As a result, financial and operating information for the Ascension Credit Group apply to both the Senior Credit Group and Subordinate Credit Group. The following documents are incorporated herein by reference and are available from the MSRB’s EMMA system:
• 2016 Offering Memorandum • 2016 Annual Report • Unaudited Consolidated Financial Statements and Supplementary Information for the Quarters and Nine Months Ended March 31, 2017 and 2016 • Management’s Discussion and Analysis of Financial Condition and Results of Operations for Ascension as of and for the Nine Months Ended March 31, 2017 and 2016 • Informational Filing – Information Concerning the Ascension Senior Credit Group for the period ended March 31, 2017, posted May 15, 2017
50 OTHER MATTERS
This Offering Memorandum Supplement has been executed and delivered by Ascension on behalf of the Senior Credit Group Members.
This Offering Memorandum Supplement is not to be considered as a contract or agreement between Ascension or any other Senior Credit Group Member and the purchasers or Holders of any of the Bonds.
ASCENSION HEALTH ALLIANCE (d/b/a “Ascension”), as Senior Credit Group Representative
By: Anthony J. Speranzo Executive Vice President and Chief Financial Officer
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APPENDIX A
Information Concerning the Ascension Senior Credit Group
The information contained in this Appendix A has been obtained from Ascension.
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TABLE OF CONTENTS Page INTRODUCTION ...... A-1 General ...... A-1 Ascension Senior Credit Group ...... A-1 Strategic Direction ...... A-2 One Ascension Journey ...... A-3 AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES ...... A-4 Lourdes Health Network and St. Joseph Regional Medical Center (Lewiston, Idaho and Pasco, Washington) ...... A-4 Sale of Saint Joseph’s Hospital of Marshfield, Inc. to Marshfield Clinic Health Systems, Inc...... A-5 Catholic Health (Western New York) ...... A-5 Wheaton Franciscan Services, Inc. - Southeast Wisconsin...... A-5 R1 RCM ...... A-6 Crittenton Hospital Medical Center ...... A-6 Carondelet Health Network (Tucson, Arizona) ...... A-6 River Park Hospital, Highlands Medical Center, DeKalb Community Hospital and Stones River Hospital (Middle Tennessee) ...... A-7 Mount St. Mary’s Hospital and Health Center (Niagara County, New York) ...... A-7 U.S. Health Holdings Limited ...... A-7 Carondelet Health (Kansas City, Missouri) ...... A-7 AMITA Health (Alexian Brothers Adventist Joint Operating Company) ...... A-7 Sale of 50% Interest in Ministry Holdings, Inc. to Froedtert Health, Inc...... A-8 FINANCIAL AND OPERATING INFORMATION ...... A-8 General ...... A-8 Summary Consolidated Statements of Operations ...... A-10 Summary Consolidated Balance Sheets ...... A-11 Sources of Revenue...... A-13 Historical Utilization ...... A-14 Capitalization ...... A-15 Indebtedness and Certain Liabilities ...... A-16 Debt Service Coverage ...... A-16 Litigation ...... A-17 Regulatory Reviews, Audits and Investigations ...... A-19 Interest Rate Swaps ...... A-20 Liquidity, Investment Policies and Income ...... A-20 Pension Plans ...... A-22 Care of Persons Living in Poverty and Community Benefit ...... A-22 Symphony ...... A-23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE CREDIT GROUP’S RECENT FINANCIAL PERFORMANCE ...... A-23 Significant Accounting Policies and Estimates ...... A-23 Health Care Reform ...... A-24 Historical Performance – Nine Months Ended March 31, 2016 and 2017 ...... A-24 Historical Performance – Fiscal Years Ended June 30, 2015 and 2016 ...... A-26
A-i
CORPORATE STRUCTURE AND MANAGEMENT ...... A-27 Sponsorship ...... A-27 Ascension as Sole Corporate Member of Ascension Health ...... A-28 Board of Directors...... A-28 Management ...... A-29 Ministry Market Executives ...... A-35 Committees ...... A-36 System Office and Ministry-wide Functions ...... A-37 Common Financial Practices ...... A-40 Affiliated Organizations ...... A-41 Insurance ...... A-44 Employees ...... A-45 LIST OF MEMBERS OF THE ASCENSION CREDIT GROUP AS OF THE DATE HEREOF ...... A-46
Capitalized terms used, but not defined, in this APPENDIX A are defined in the forepart of this Offering Memorandum Supplement and in APPENDIX C to the 2016 Offering Memorandum.
A-ii
INTRODUCTION
General
Ascension Health Alliance (“Ascension”) is a Missouri nonprofit corporation formed in September 2011 and is the sole corporate member of Ascension Health, a Missouri nonprofit corporation formed in August 1999. Ascension is the parent organization of a national health system consisting primarily of nonprofit corporations that own and operate local health care facilities, or “health ministries.” Most of the health ministries that are part of Ascension were formerly part of the Daughters of Charity National Health System, the Sisters of St. Joseph Health System, the Alexian Brothers Health System, the Carondelet Health System, the Marian Health System, or the southeast Wisconsin operations of Wheaton Franciscan Services, Inc. (“Wheaton”). See also “CORPORATE STRUCTURE AND MANAGEMENT —Sponsorship” herein. Ascension is the largest nonprofit Catholic health care system in the United States. From time to time in this APPENDIX A, Ascension, its affiliated corporations and the health ministries are referred to collectively as the “System.”
Ascension Health is transitioning to no longer use the name “Ascension Health” as part of its public identity, instead Ascension is referring to its healthcare delivery operations in the aggregate as Ascension’s Healthcare Division.
In December 2011, Ascension became a member of the Senior Credit Group and the Subordinate Credit Group and was appointed as the Senior Credit Group Representative under the Senior Master Indenture and as the Subordinate Credit Group Representative under the Subordinate Master Indenture.
Through its Healthcare Division, Ascension is the indirect sole corporate member of certain corporations that own and operate acute care hospitals and other health care facilities and service providers with approximately 24,251 available beds as of June 30, 2016. As of June 30, 2016, these corporations owned and operated 111 general acute care hospitals, two long-term acute care hospitals, nine psychiatric hospitals and six rehabilitation hospitals.
Ascension Senior Credit Group
The Senior Master Indenture provides for the creation of the Senior Credit Group, which is comprised of the Senior Obligated Group Members, Senior Designated Affiliates and Senior Limited Designated Affiliates. The Senior Obligated Group Members are jointly and severally obligated to make payments on Senior Obligations issued and outstanding under the Senior Master Indenture. The Senior Designated Affiliates and Senior Limited Designated Affiliates are not obligated to make any debt service payments on any Senior Obligations. However, they may be required to transfer funds to Senior Obligated Group Members in amounts necessary to enable the Senior Obligated Group Members to make payments due on Senior Obligations. The obligations of the Senior Limited Designated Affiliates are limited to those amounts set forth on page A-51. The Subordinate Master Indenture requires that the members of the Subordinate Credit Group must be identical to the members of the Senior Credit Group. The Senior Credit Group and the Subordinate Credit Group are referred to collectively herein as the “Credit Group.” In addition, several Ascension affiliated entities are not Members of the Credit Group and are not included in the Credit Group Financial Statements as presented in the Supplementary Information of the Ascension Consolidated Financial Statements for the years ended June 30, 2016 and 2015. At June 30, 2016, those entities included Alexian Brothers Health System, St. John Health System, Inc. and most of their subsidiaries. Those entities had combined assets and net assets of $2.9 billion and $1.3 billion, respectively, at June 30, 2016 and total operating revenue and excess of revenues and gains over expenses and losses of $2.3 billion and $44.5 million, respectively, for the fiscal year then ended. Ministry Health Care, Inc. and certain of its subsidiary organizations (collectively
A-1
“MHC”) joined the Credit Group on June 24, 2016, with the exception of St. Joseph’s Hospital of Marshfield, Inc., as described further herein under the caption “AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES.”
For a list of Members of the Senior Credit Group as of the date hereof see “LIST OF MEMBERS OF THE ASCENSION CREDIT GROUP AS OF THE DATE HEREOF” herein.
Strategic Direction
Ascension’s Strategic Direction describes the System’s commitment to those we serve to provide them with compassionate, personalized healthcare that works, is safe and leaves no one behind, for life.
(i) Healthcare That Works is Ascension’s commitment to make healthcare convenient, accessible and affordable for the individuals and communities we serve through our existing care sites and emerging access channels. It also includes the System’s ongoing efforts to improve the engagement and experience of patients and families across the continuum of care.
(ii) Healthcare That Is Safe is Ascension’s commitment to be a national leader in the delivery of safe, high quality healthcare that is designed around the person in our hospitals, physician offices, ambulatory sites, post-acute settings and throughout the continuum. It also encompasses the System’s efforts to be a High Reliability Organization and use evidence-based clinical guidelines and common metrics to eliminate preventable disparities in health outcomes and optimize the health and well-being of those we serve.
(iii) Healthcare That Leaves No One Behind is Ascension’s commitment to ensure high quality, affordable healthcare is available to all. It characterizes our national, state and local advocacy agenda to promote expanded coverage and access. It is also reflective of our community-level collaborations with other organizations to identify and address high priority community health needs and the social determinants of health to improve health outcomes within vulnerable populations.
In order to deliver on the call to action promise to those served by the System, Ascension has identified the need to build four “Enabling Strengths”:
(i) Through the Enabling Strength of “Inspired People” Ascension strives to build a community of engaged, Mission-focused, capable and flourishing associates where people are called to serve and can express their gifts in support of the common good, while optimizing their health and well-being.
(ii) Through the Enabling Strength of “Trusted Partnerships,” Ascension seeks to serve as a catalyst for regional collaboration around the country, build a network of aligned partners with compatible values and develop innovative business relationships with other participants in the healthcare ecology (e.g., educational institutions, payers, governmental entities).
(iii) Through the Enabling Strength of “Empowering Knowledge,” Ascension strives to develop and deploy a robust, scalable information infrastructure that connects our ministry with people, their families, physicians, other caregivers, communities and our partners across the continuum of care.
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(iv) Through the Enabling Strength of “Vital Presence,” Ascension seeks to ensure a long- term, sustainable presence that meets the defined needs of the communities we serve.
In September 2016, in a further refinement of its operating model, Ascension announced the transformation of its national structure and local identity to better identify every aspect of care and innovation across its care sites and subsidiaries.
Ascension’s new Healthcare Division comprises the entities and operations of Ascension Health, includes including the organization’s hospitals and related sites of care, as well as community clinics, Ascension Senior Living, the home care and hospice partnership Ascension At Home, Ascension Clinical Holdings, and Ascension Medical Group.
One Ascension Journey
In calendar year 2015, Ascension began an important internal process designed to help lead the transformation of health care in a rapidly evolving environment. Leaders, associates, and aligned physicians began a shared journey to becoming a truly integrated healing ministry in what Ascension calls the One Ascension journey. The goal of this journey is to deliver improved health outcomes and enhance person-centered and provider experiences at a lower cost of care to those Ascension serves. The One Ascension journey is a recognition that the component parts of Ascension are stronger operating together. By adopting consistent models and best practices from all of Ascension’s health ministries, the organization strives to improve the health of individuals and populations of people across the care continuum and in communities across the country.
A key element of the One Ascension journey is aligning certain operations and functions more effectively both locally and nationwide. Across the System, Ascension’s sites of care have been organized into groupings called “Ministry Markets” based on ways they are strategically similar and to take better advantage of geographic alignment in markets where it makes sense. This supports greater coordination and collaboration among the care delivery sites within each Ministry Market, including common leadership teams and greater alignment of strategies to meet community needs.
The One Ascension journey consists of three major actions being taken to create a truly integrated ministry:
1. Develop new and creative ways to organize, manage and market Ascension’s Ministry Markets, where thousands of dedicated associates and physicians provide care to individuals in communities.
2. Align governance structures – boards at the national and local level – to support and strengthen the integrated brand identity.
3. Reimagine how best to coordinate the essential services at the System Office (defined herein under “Corporate Structure and Management – System Office”) and Ministry Markets that support the entire organization and enable it to remain true to its mission.
Ascension and its Ministry Markets are leading change through the development of clinically integrated systems of care in communities across America, whereby providers, physicians, insurers, community agencies and others come together to provide care that is more integrated and more person centered; care delivered not just when a patient is sick, one episode at a time, but throughout a person’s life, in a relationship that includes wellness, spirituality and good health. A clinically integrated system of care requires collaboration among private practice physicians, employed physicians, other caregivers
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and health systems to develop a program of clinical initiatives that improves quality and efficiency of care delivery.
In addition, Ascension has reorganized several functional areas that support the entire enterprise. These Ministry-wide Functions are Human Resources, Legal, Finance, Clinical, Marketing and Communications, Mission Integration, Strategy, and Advocacy. Utilizing a variety of matrix organizational structures, leaders and associates in each of these areas serve the needs of the full enterprise, including the Ministry Markets.
AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES
The corporate structure of Ascension is designed to accommodate the addition of new affiliates to the System. Additional entities may become Members of the Credit Group. Ascension has adopted strategies encouraging the Members of the Credit Group to explore regional integrated delivery networks with other health care providers in their respective service areas. These activities could lead to the addition of other entities or affiliates to the System and/or the Senior Credit Group, the withdrawal of entities or affiliates from the System and/or the Credit Group, or the purchase or divestiture of assets. The ongoing nature of these activities is such that management is unable to conclude whether they will result in any form of affiliation or divestiture or the addition of Members to or the withdrawal of Members from the Credit Group, other than those described herein.
While there are no formal agreements for additions to or deletions from the System, other than those described below, Ascension expects that such additions and/or deletions will occur in the future. Additions to the System may be individual hospitals or other nonhospital health care providers or health care systems. These additions may be done through Ascension Health or Ascension.
In addition to acquisitions and affiliations, Ascension and Ascension Healthcare have in the past and will in the future make investments in subsidiaries or affiliates. Some of these investments may be made in or by entities which are not Credit Group Members and may involve amounts which are material. Significant potential and recent additions to and deletions from the System are described below.
No assurances can be given that any proposed acquisition, affiliation or divestiture described herein will be completed.
Lourdes Health Network and St. Joseph Regional Medical Center (Lewiston, Idaho and Pasco, Washington)
On June 12, 2015, Ascension Health entered into non-binding Letters of Intent with Capella Healthcare (“Capella”), a privately held for-profit hospital operating company, for the sale of Our Lady of Lourdes Hospital at Pasco d/b/a Lourdes Health Network (“LHN”), located in Pasco, Washington, and St. Joseph Regional Medical Center (“SJRMC”), located in Lewiston, Idaho, to Capella. On May 2, 2016, Capella Healthcare announced it had merged with RegionalCare Hospital Partners to create RCCH HealthCare Partners (“RCCH”), a privately held for-profit hospital operating company, and Ascension Health continued discussions with RCCH for the sale of LHN and SJRMC. On September 28, 2016, Ascension and RCCH announced that definitive agreements had been reached for the acquisition of LHN and SJRMC by RCCH.
On March 20, 2017, the Attorney General of Idaho approved the SJRMC transaction, and the transition of SJRMC from Ascension to RCCH occurred effective May 1, 2017. For the LHN transaction, Ascension and RCCH are pursuing required governmental reviews and approvals in the state of Washington. There is no anticipated closing date at this time for the LHN transaction. As of March 31,
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2017, LHN reported $58 million in total assets and $21 million in net assets with no tax-exempt debt secured under the Senior Master Indenture or the Subordinate Master Indenture. For the nine months ended March 31, 2017, LHN reported $101 million in total revenues and excess of revenues and gains over expenses and losses of $4 million. As of March 31, 2017, SJRMC reported $101 million in total assets and $61 million in net assets with $12 million of tax-exempt debt secured under the Senior Master Indenture that is in the process of being discharged since the completion of the transaction. For nine months ended March 31, 2017, SJRMC reported $116 million in total revenues and a deficit of revenues and gains over expenses and losses of $1 million. Prior to the completion of such sale, LHN and SJRMC, each Senior Obligated Group Members, will be removed from the Credit Group. See further information as discussed herein under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE CREDIT GROUP’S RECENT FINANCIAL PERFORMANCE.”
Sale of Saint Joseph’s Hospital of Marshfield, Inc. to Marshfield Clinic Health Systems, Inc.
On March 9, 2016, Marshfield Clinic Health Systems, Inc. (“Marshfield”) and MHC, entered into a non-binding memorandum of understanding to work towards a definitive agreement for the sale of substantially all of the assets of Saint Joseph’s Hospital of Marshfield, Inc. (“Saint Joseph’s”), a 524 bed acute care hospital in Marshfield, Wisconsin to Marshfield, and for MHC to acquire full ownership of The Diagnostic & Treatment Center, LLC (“Diagnostic Center”) in Weston, Wisconsin from Marshfield. On April 3, 2017, Ascension/MHC and Marshfield announced they had reached a definitive agreement for Saint Joseph’s to become part of Marshfield. After completion of due diligence and further discussion the parties agreed to exclude the Diagnostic Center from the transaction. The Saint Joseph’s transaction is expected to close in fourth quarter fiscal year 2017 pending regulatory approvals.
Catholic Health (Western New York)
Since it was formed in 1997, Catholic Health in Western New York has been jointly sponsored by the Catholic Diocese of Buffalo, Ascension (currently through the Ascension Sponsor), and Catholic Health Ministries (sponsor of Trinity Health). Its corporate members are Ascension Healthcare, Trinity Health and the Diocese of Buffalo. Consistent with Ascension’s efforts to align its governance and operating model as an integrated national health ministry, the Ascension Sponsor and Board of Directors have approved its withdrawal as a sponsor and member of Catholic Health prior to the end of this fiscal year, which ends on June 30, 2017. Because Ascension did not have an equity interest in Catholic Health, this action will not result in any compensation or payment to Ascension.
Wheaton Franciscan Services, Inc. - Southeast Wisconsin
Effective March 1, 2016, the transfer of the corporate membership of Wheaton Franciscan Healthcare – Southeast Wisconsin, Inc. (“Wheaton Southeast”) from Wheaton to Ascension Health was completed. Prior to the transaction, Wheaton was an Illinois not-for-profit organization with health care and affordable housing operations in Iowa, Illinois, Wisconsin and Colorado. Only the health care operations of Wheaton Southeast were transferred to Ascension Health. This transaction added eight hospital campuses (comprising approximately 1,000 hospital beds), including two specialty hospitals, three long-term care facilities, and other sites of care to the Ascension Wisconsin Ministry Market. The transaction also added over 11,000 employees, including 350 medical group physicians. At December 31, 2015, the operations subject to the transaction reported approximately $684 million in net long term debt. As part of the transaction Ascension issued $637 million of taxable commercial paper to fund on an interim basis the defeasance or redemption of Wheaton’s hospital revenue bonds, and the interim debt was refinanced in May 2016. As part of the transaction, Wheaton transferred $221 million to the Alpha Fund as discussed herein under the caption “FINANCIAL AND OPERATING INFORMATION— Liquidity, Investment Policies and Income.” The fair value of net assets totaling $182 million was
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recognized in the Consolidated Statements of Operations and Changes in Net Assets for the year ended June 30, 2016 as a nonoperating contribution from business combination. As of June 30, 2016, Wheaton Southeast reported $1,283 million in total assets and $192 million in net assets. For the fiscal year ended June 30, 2016, Wheaton Southeast reported $457 million in total revenues and excess of revenues and gains over expenses and losses of $11 million. Wheaton Southeast; Wheaton Franciscan, Inc.; Wheaton Franciscan Healthcare – St. Francis, Inc.; Wheaton Franciscan Healthcare – All Saints, Inc.; and Wheaton Franciscan Healthcare – Franklin, Inc. were added to the Credit Group, effective March 15, 2016.
R1 RCM
Effective December 7, 2015, TCP-ASC ACHI Series LLLP (“LLLP”), a limited liability limited partnership which is jointly owned by Ascension and investment funds affiliated with TowerBrook Capital Partners, entered into a Securities Purchase Agreement with Accretive Health, Inc. (“Accretive”). Under the terms of this Agreement, the LLLP purchased 200,000 shares of Accretive’s 8% Series A Convertible Preferred Stock, and a warrant to acquire up to 60 million shares of common stock of Accretive for an aggregate purchase price of $200 million. On an as-converted basis at the close of the transaction, the preferred stock and common stock represented approximately 44% of Accretive’s shares outstanding. The transaction closed on February 16, 2016, and is accounted for as an investment with an aggregate value of approximately $90 million as of June 30, 2016.
Ascension and Accretive renewed their existing professional services agreement, with a 10 year term, whereby Accretive will become Ascension’s exclusive revenue cycle solution partner and physician advisory services provider. Ascension will transition the remaining revenue cycle operations that are not currently under the existing Accretive contract to Accretive over the next three years. On January 5, 2017, Accretive Health announced it had changed its name to R1 RCM.
Crittenton Hospital Medical Center
Effective October 1, 2015, the transfer of the corporate membership of Crittenton Hospital Medical Center (“Crittenton”) to Ascension Health was completed. Crittenton is a 290-bed acute care hospital located in Rochester Hills, Michigan, a community north of Detroit, which is complementary to Ascension’s existing facilities of St. John Providence Health System and Genesys Health System. As of and for the fiscal year ended December 31, 2014, Crittenton reported $154 million in net long term debt (of which approximately $150 million was secured under a master indenture). Effective October 2, 2015, the Crittenton master trust indenture was discharged and Ascension issued $161 million of commercial paper to redeem and defease all of Crittenton’s previously outstanding master indenture debt as well as a Crittenton Development Corporation Note in the amount of $1.9 million. Such commercial paper was refinanced in May 2016. The fair value of net assets totaling $141 million was recognized in the Consolidated Statements of Operations and Changes in Net Assets for the fiscal year ended June 30, 2016 as a nonoperating contribution from business combination. As of June 30, 2016, Crittenton reported $406 million in total assets and $137 million in net assets. For the fiscal year ended June 30, 2016, Crittenton reported $154 million in total revenues and excess of revenues and gains over expenses and losses of $4 million. Crittenton joined the Credit Group effective January 31, 2016.
Carondelet Health Network (Tucson, Arizona)
Effective September 1, 2015, Ascension Health created a joint venture, CHN Holdings, LLC, with Tenet Health System Medical Inc. (“Tenet”) and Dignity Health to own and operate the assets of Carondelet Health Network (“Carondelet”) in Tucson, Arizona. Tenet is the majority partner in the joint venture and has management responsibility for health system operations including Carondelet’s
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St. Joseph’s Hospital and St. Mary’s Hospital in Tucson, Arizona, and Holy Cross Hospital, Inc. in Nogales, Arizona.
This partnership has been structured to enable Carondelet to strengthen and grow its relationships with physicians and payers, fund strategic growth initiatives for the Tucson community, and connect with a well-established and rapidly growing accountable care organization. The joint venture is not a member of the Credit Group. Carondelet and Holy Cross Hospital, Inc. have withdrawn from the Credit Group.
River Park Hospital, Highlands Medical Center, DeKalb Community Hospital and Stones River Hospital (Middle Tennessee)
Effective August 1, 2015, Saint Thomas Health, a subsidiary of Ascension Health, acquired certain assets, liabilities and hospital operations of four middle Tennessee hospitals previously jointly owned by Capella, Saint Thomas Health and certain other entities. These hospitals are now wholly owned by Ascension affiliates. The hospitals are River Park Hospital in McMinnville, Tennessee; Highlands Medical Center in Sparta, Tennessee; DeKalb Community Hospital in Smithville, Tennessee; and Stones River Hospital in Woodbury, Tennessee. The hospital names have been changed to Saint Thomas River Park Hospital, Saint Thomas Highlands Hospital, Saint Thomas DeKalb Hospital, and Saint Thomas Stones River Hospital, respectively. Each of these entities was added to the Credit Group, effective March 25, 2016.
Mount St. Mary’s Hospital and Health Center (Niagara County, New York)
Effective July 1, 2015, Mount St. Mary’s Hospital and Health Center (“Mount St. Mary’s”), formerly a subsidiary of Ascension Health, became a full member of Catholic Health Inc. of Buffalo. Our Lady of Peace Nursing Care Residence remains part of Ascension Health. Mount St. Mary’s withdrew from the Credit Group, effective April 1, 2015.
U.S. Health Holdings Limited
Ascension completed the acquisition of U.S. Health Holdings Limited (“USHH”), a Michigan- based corporation that provides life, accident and health related insurance policies on a group basis and provides benefits processing, payments and other services. The transaction closed in April 2015, with an effective date of December 31, 2014. USHH is not a member of the Credit Group.
Carondelet Health (Kansas City, Missouri)
Effective February 13, 2015, the majority of the assets of Carondelet Health in Kansas City, Missouri (“Carondelet Health”), a subsidiary of Ascension Health, were acquired by Prime Healthcare Services Inc. The transaction included the majority of the facilities of Carondelet Health, including St. Joseph Medical Center in Kansas City and St. Mary’s Medical Center in Blue Springs, Missouri, and most of their subsidiaries and affiliated facilities. In connection with the transaction, Carondelet Health, St. Joseph Medical Center and St. Mary’s Medical Center withdrew from the Credit Group. The three Carondelet Health long-term care facilities – Carondelet Manor, Villa Saint Joseph and St. Mary’s Manor – and the two hospitals’ charitable foundations remain part of Ascension Health.
AMITA Health (Alexian Brothers Adventist Joint Operating Company)
Adventist Health System Sunbelt Healthcare Corporation and Ascension Health, the sponsors of Adventist Midwest Health (“Adventist”) and Alexian Brothers Health System (“Alexian”) respectively, entered into an Affiliation Agreement that established the joint operating company, Alexian Brothers-
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AHS Midwest Region Health Co. d/b/a AMITA Health (“AMITA Health”), an integrated health delivery system in Illinois, which became operational on February 1, 2015. The Affiliation Agreement preserves each of Alexian’s and Adventist’s ownership over its respective operations, and as such, Ascension continues to consolidate Alexian in the Ascension consolidated financial statements, although Alexian is not part of the Credit Group and therefore has been, and remains, excluded from the Credit Group’s financial statements. However, Alexian and Adventist share in cash flows of the joint operating company based on a predetermined percentage split. The integrated health care system serves a combined population of more than 4.1 million people, making it one of the largest health systems in Illinois.
Sale of 50% Interest in Ministry Holdings, Inc. to Froedtert Health, Inc.
Effective November 1, 2014, MHC sold a 50% membership interest in its wholly owned subsidiary, Ministry Holdings, Inc. (“MHI”), to Froedtert Health, Inc. MHI is the holding company of two insurance companies, Network Health Plan and Network Health Insurance Corporation. As a result of this transaction, MHC deconsolidated MHI for financial reporting purposes, and the name of MHI was changed to Network Health, Inc. MHC now reports its 50% interest in Network Health, Inc. on the equity method of accounting. MHC was not part of the Credit Group at the time; as such, the transaction had no impact on the Credit Group’s financial statements for the fiscal year ended June 30, 2015. This transaction resulted in a recognition of the $31.6 million gain in the fiscal year June 30, 2015 for Ascension.
FINANCIAL AND OPERATING INFORMATION
General
The summary consolidated statements of operations and summary consolidated balance sheets for the Credit Group for the fiscal years ended June 30, 2016 and 2015 included herein have been derived by Ascension management from the sections entitled “Credit Group Consolidated Statements of Operations and Changes in Net Assets for the Years Ended June 30, 2016 and 2015” and “Credit Group Consolidated Balance Sheets as of June 30, 2016 and 2015” in the Supplementary Information in the audited consolidated financial statements of Ascension. This summarized financial information should be read in conjunction with the audited consolidated financial statements of Ascension for the years ended June 30, 2016 and 2015, including the related notes.
The interim financial information for the Credit Group for the nine months ended March 31, 2017 and 2016 has been derived by Ascension management from the sections entitled “Credit Group Consolidated Statements of Operations and Changes in Net Assets for the nine months ended March 31, 2017 and 2016” and “Credit Group Consolidated Balance Sheets as of March 31, 2017 and 2016” in the unaudited consolidated financial statements of Ascension and includes all adjustments that management of Ascension considers necessary to fairly present such information in accordance with U.S. generally accepted accounting principles. Operating results for the nine months ended March 31, 2017 are not necessarily indicative of the results which may be expected for the entire fiscal year ending June 30, 2017.
The financial information summarized herein, the audited consolidated financial statements include consolidated financial information for the Credit Group. This summarized financial information and the information included in the sections entitled “Credit Group Consolidated Statements of Operations and Changes in Net Assets for the Years Ended June 30, 2016 and 2015” and “Credit Group Consolidated Balance Sheets as of June 30, 2016 and 2015” in the audited consolidated financial statements include the results of operations of the Material Credit Group Members (defined in the Senior Master Indenture as the Obligated Group Members and Designated Affiliates whose aggregate net assets
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are equal to or greater than 90% of the consolidated net assets of the Credit Group) for the fiscal years ended June 30, 2016 and 2015, as well as the results of operations of certain Immaterial Affiliates (defined in the Senior Master Indenture as Persons, whether or not Designated Affiliates, whose total net assets are less than 10% of the consolidated net assets of the Credit Group).
None of the financial or operational information contained herein, except as may otherwise be noted, includes information relating to Alexian and St. John Health System, Inc. (“St. John”) and most subsidiaries thereof, as they are not currently Credit Group Members.
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Summary Consolidated Statements of Operations
The following table summarizes the consolidated operating results for the Credit Group for the fiscal years ended June 30, 2016 and 2015 and the unaudited operating results for the nine months ended March, 2016 and 2017.
ASCENSION CREDIT GROUP Consolidated Statements of Operations (Dollars in Thousands)
Fiscal Years Ended Nine Months Ended June 30, March 31, 2015 2016(1) (3) 2016(3) 2017(3) Operating revenue: (unaudited) (unaudited) Net patient service revenue $16,151,787 $18,973,765 14,039,431 15,169,605 Less provision for doubtful accounts 937,646 991,536 761,908 762,546 Net patient service revenue, less provision for doubtful accounts 15,214,141 17,982,229 13,277,523 14,407,059 Other revenue 1,496,945 1,782,810 1,205,655 1,292,060 Total operating revenue 16,711,086 19,765,039 14,483,178 15,699,119 Operating expenses: Salaries and wages 6,929,569 8,123,907 5,982,413 6,363,970 Employee benefits 1,391,593 1,587,726 1,199,817 1,301,520 Purchased services 982,118 1,308,812 935,051 1,266,188 Professional fees 1,089,779 1,259,951 937,803 922,077 Supplies 2,381,789 2,776,848 2,044,229 2,215,994 Insurance 158,954 174,040 141,135 143,341 Interest 152,851 169,591 124,970 152,126 Depreciation and amortization 749,206 913,493 676,328 729,122 Other 2,153,158 2,520,736 1,878,844 1,940,794 Total operating expenses before impairment, restructuring and nonrecurring losses, net 15,989,017 18,835,104 13,920,590 15,035,132 Income from operations before self-insurance trust fund investment return and impairment, restructuring and nonrecurring losses, net 722,069 929,935 562,588 663,987 Self-insurance trust fund investment return (15,137) (16,334) (32,911) 31,069 Impairment, restructuring and nonrecurring losses, net (126,927) (193,831) (111,009) (90,605) Income from operations 580,005 719,770 418,668 604,451 Nonoperating gains (losses) Investment return(2) 43,227 (335,296) (634,780) 937,540 Loss on extinguishment of debt (992) (5,849) (33) (580) Gains (Losses) on interest rate swaps (24,495) (85,884) (54,272) 55,429 Income (loss) from unconsolidated entities 4,689 (41,188) (39,002) 4,191 Contributions from business combinations - 304,961 304,493 - Other (64,786) (74,498) (40,489) (116,453) Total nonoperating income (losses), net (42,357) (237,754) (464,083) 880,127 Excess (Deficit) of revenues and gains over expenses and losses 537,648 482,016 (45,415) 1,484,578 Less noncontrolling interests 75,805 16,365 (32,030) 156,038 Excess (Deficit) of revenues and gains over expenses and losses attributable to controlling interest $461,843 $465,651 (13,385) 1,328,540
(1) Includes operating results since March 1, 2016 for the Wheaton Entities. (2) Includes the investment return of ($34,180) and ($411,690) for the fiscal years ended June 30, 2015 and 2016, respectively, and ($732,569) and $920,654 for the nine months ended March 31, 2016 and 2017, respectively, attributable to the Alpha Fund described below under “FINANCIAL AND OPERATING INFORMATION—Liquidity, Investment Policies and Income.” Of the Alpha Fund’s investment return, ($9,563) and ($42,756) for the fiscal years ended June 30, 2015 and 2016, respectively, and ($80,935) and $97,765 for the nine months ended March 31, 2016 and 2017, respectively, is included in the noncontrolling interests. (3) While not added to the Ascension Credit Group, the senior care facilities previously affiliated with Alexian Brothers are included in the presentation of Credit Group (as immaterial affiliates) during fiscal year 2017, and the financial results for these senior care facilities for fiscal year 2017 are included in the Credit Group Consolidated Statements of Operations and Changes in Net Assets as if the change had occurred as of July 1, 2016. As Ministry Health Care, Inc. became a member of the Credit Group during fiscal year 2016, the financial results for fiscal year 2016 are included in the Credit Group Consolidated Statement of Operations and Changes in Net Assets as if the change had occurred as of July 1, 2015.
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Summary Consolidated Balance Sheets
The following tables present the summary consolidated balance sheets of the Credit Group at June 30, 2015 and 2016 and March 31, 2017.
ASCENSION CREDIT GROUP Consolidated Balance Sheets (Dollars in Thousands)
June 30, March 31, 2015 2016(1) (3) 2017(3) Assets (unaudited) Current assets: Cash and cash equivalents $369,707 $676,338 $555,735 Short-term investments 107,148 120,139 104,215 Accounts receivable, less allowance for doubtful accounts (2) 2,019,830 2,457,775 2,528,191 Inventories 266,412 313,373 318,401 Due from brokers 148,865 313,717 157,196 Estimated third-party payor settlements 219,754 180,655 154,232 Other 1,021,679 1,047,280 1,055,003 Total current assets 4,153,395 5,109,277 4,872,973
Long-term investments 14,825,293 14,995,607 16,629,051
Property and equipment, net 6,196,874 7,713,956 7,836,091
Other assets: Investment in unconsolidated entities 554,999 959,823 1,042,087 Capitalized software costs, net 707,888 874,921 830,374 Due from affiliates 629,727 445,066 419,680 Other 817,376 833,765 837,180 Total other assets 2,709,990 3,113,575 3,129,321
Total assets $27,885,552 $30,932,415 $32,467,436
(1) 2016 column includes the Wheaton Entities. (2) Allowance for doubtful accounts totaled $1,086,946, $1,203,752 and $1,194,712 at June 30, 2015 and 2016 and March 31, 2017, respectively. (3) While not added to the Ascension Credit Group, the senior care facilities previously affiliated with Alexian Brothers are included in the presentation of Credit Group (as immaterial affiliates) during fiscal year 2017, and the financial results for these senior care facilities for fiscal year 2017 are included in the Credit Group Consolidated Statements of Operations and Changes in Net Assets as if the change had occurred as of July 1, 2016. As Ministry Health Care, Inc. became a member of the Credit Group during fiscal year 2016, the financial results for fiscal year 2016 are included in the Credit Group Consolidated Statement of Operations and Changes in Net Assets as if the change had occurred as of July 1, 2015.
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ASCENSION CREDIT GROUP Consolidated Balance Sheets (continued) (Dollars in Thousands)
June 30, March 31, 2015 2016(1) 2017 (unaudited) Liabilities and net assets Current liabilities: Current portion of long-term debt $55,018 $74,088 $76,210 Long-term debt subject to short-term remarketing arrangements 1,176,790 1,666,245 887,205 Accounts payable and accrued liabilities 1,929,677 2,321,853 2,290,469 Estimated third-party payor settlements 303,952 403,974 334,580 Due to brokers 131,061 105,660 425,992 Current portion of self-insurance liabilities 228,470 208,023 217,910 Other 318,696 244,790 247,852 Total current liabilities 4,143,664 5,024,633 4,480,218
Noncurrent liabilities: Long-term debt (senior and subordinated) 3,990,388 4,910,997 5,579,157 Self-insurance liabilities 483,041 483,404 489,929 Pension and other postretirement liabilities 435,919 1,211,038 983,967 Other(2) 2,361,698 1,896,020 1,557,447 Total noncurrent liabilities 7,271,047 8,501,459 8,610,500 Total liabilities 11,414,711 13,526,092 13,090,718
Net assets: Unrestricted Controlling interest 14,401,351 15,348,952 17,001,193 Noncontrolling interests(3) 1,570,641 1,430,052 1,741,445 Unrestricted net assets 15,971,992 16,779,004 18,742,638
Temporarily restricted 373,721 440,555 438,792 Permanently restricted 125,128 186,764 195,288 Total net assets 16,470,841 17,406,323 19,376,718
Total liabilities and net assets $27,885,552 $30,932,415 $32,467,436
(1) 2016 column includes the Wheaton Entities. (2) Includes $1,444,171 at June 30, 2015 representing the amounts due to Alexian Brothers, St. John and Ministry from Ascension attributable to interests in investments held by Ascension and $735,440 and $481,231 at June 30, 2016 and March 31, 2017, respectively, representing the amounts due to Alexian Brothers and St. John from Ascension attributable to interests in investments held by Ascension. (3) Includes $1,405,401, $1,256,666 and $1,558,274 at June 30, 2015 and 2016 and March 31, 2017, respectively, attributable to the Alpha Fund.
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Sources of Revenue
Health care providers receive patient service revenue under various contractual agreements under the Medicare and Medicaid programs, with managed care payors and commercial insurers, as well as from self-paying patients and other sources. The following tables set forth the Credit Group’s mix of consolidated net patient service revenue by payor for the fiscal years ended June 30, 2015 and 2016.
The information in this table has been derived by management of Ascension from the consolidated financial records of the Credit Group.
ASCENSION CREDIT GROUP Sources of Net Patient Service Revenue
Fiscal Year Ended June 30, 2015 2016 Medicare – traditional and managed 37% 36% Medicaid – traditional and managed 11 13 Commercial and other managed care 50 50 Self-Pay and other 2 1 100% 100%
The Credit Group’s payor mix and sources of patient service revenue can be expected to change from time to time.
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Historical Utilization
The following table shows selected utilization statistics for the hospitals operated by the Credit Group Members for the fiscal years ended June 30, 2015 and 2016. The utilization data excludes psychiatric care, rehabilitation care and subacute care. The hospitals are grouped by major market areas and in many locations include more than one hospital and more than one Member of the Credit Group.
Historical Utilization Data of the Hospitals Operated by the Ascension Credit Group for the Fiscal Years Ended June 30, 2015 and 2016
Date Available Acute Average Established Acute Beds Acute Discharges Acute Patient Days Length of Stay 2015 2016 2015 2016 2015 2016 2015 2016 ALABAMA Birmingham 1898 721721 33,700 33,807 168,200 172,087 5.0 5.1 Mobile 1854 302 302 15,503 15,322 77,555 77,113 5.0 5.0 CONNECTICUT Bridgeport 1903 278 278 14,466 13,525 77,216 70,186 6.2 6.0 DISTRICT OF COLUMBIA Washington D.C. 1864 195 261 9,337 8,937 41,111 41,480 4.4 4.7 FLORIDA Jacksonville 1916 836818 41,453 41,663 181,001 179,357 4.4 4.3 Pensacola 1915 530 550 30,008 30,112 136,664 137,763 4.6 4.6 INDIANA Evansville 1872 424 424 16,665 16,716 76,511 73,778 4.6 4.4 Indianapolis 1881 1,254 1,302 51,541 49,420 266,981 264,169 5.2 5.3 KANSAS Wichita (Via Christi) 1883 863 874 37,788 38,257 163,339 159,662 4.3 4.2 MARYLAND Baltimore 1862 327 327 16,376 16,450 70,613 72,355 4.3 4.4 MICHIGAN Detroit 1934 1,734 1,708 87,125 84,940 407,291 393,479 4.7 4.6 Flint 1921 378 378 20,735 20,463 97,042 94,487 4.8 4.8 Kalamazoo 1888 301 276 17,429 17,169 71,847 73,042 4.1 4.3 Rochester (Crittenton) 1900 N/A 199 N/A 6,592 N/A 24,942 N/A 3.8 Saginaw 1874 261 261 10,186 10,478 50,082 51,023 6.3 6.3 Tawas 1955 15 15 1,389 1,356 3,786 3,434 2.7 2.5 NEW YORK Amsterdam 1903 9696 5,327 5,598 25,355 24,392 4.8 4.4 Binghamton 1926 154154 10,080 10,097 43,045 41,163 4.3 4.1 TENNESSEE Nashville 1898 1,147 1,147 54,583 59,667 241,742 267,417 4.4 4.5 TEXAS Austin 1902 1,348 1,336 65,569 64,661 296,908 295,511 4.5 4.6 Waco 1904 242 242 15,093 16,405 62,727 68,294 4.2 4.2 WISCONSIN Glendale (Wheaton) 1879 N/A 613 N/A 9,624 N/A 41,599 N/A 4.3 Milwaukee 1848 365 365 16,179 15,408 74,933 72,548 4.6 4.7 Milwaukee (MHC) 1890 N/A 628 N/A 26,495 N/A 96,123 N/A 3.6
TOTAL 11,771 13,275 570,532 613,162 2,633,949 2,795,404 4.6 4.5
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Capitalization
The following table sets forth the capitalization of the Credit Group as of June 30, 2016 and as adjusted to reflect the issuance of the Series 2016A Additional Bonds and their application as described in the forepart of this Offering Memorandum Supplement under the caption “PLAN OF FINANCE” as if the Series 2016A Additional Bonds were issued on June 30, 2016.
ASCENSION CREDIT GROUP (Dollars in Thousands)
June 30, 2016 As Adjusted Actual (Pro Forma)*(1) Outstanding Long-Term Debt Senior Obligations(2) $6,079,170 $6,299,170 Subordinate Obligations and Other Long- Term Debt 572,160 572,160 Less: Current Portion Senior Obligations (30,884) (30,884) Subordinate Obligations and Other Long- Term Debt (43,204) (43,204) Net Long-Term Debt Senior Obligations(2) 6,048,286 6,268,286 Subordinate Obligations and Other Long- Term Debt 528,956 528,956 Total 6,577,242 6,797,242 Unrestricted Net Assets – Controlling Interest 15,348,952 15,348,952 Total Capitalization 21,926,194 22,146,194 Percent Net Senior Long-Term Debt to Capitalization 28.3% 29.0% Percent Net Total Long-Term Debt to Capitalization 30.0% 30.7%
* Preliminary, subject to change. (1) Reflects the issuance of the Series 2016A Additional Bonds, and their application, as if such Series 2016A Additional Bonds had been issued and the refunding of the Prior Bonds had been completed on June 30, 2016. (2) $1,666,245 of this Long-Term Debt was subject to short-term remarketing arrangements at June 30, 2016. Includes $242,338 of unamortized premium, net, at June 30, 2016. Excludes $55,465 of debt guaranteed by the Senior Credit Group but not included in the Ascension consolidated balance sheet at June 30, 2016.
The capitalization ratios of the Credit Group are calculated excluding the assets and liabilities of those Members of the Credit Group that are not included in the consolidated financial statements of Ascension. The addition of the assets, liabilities and net assets of these Members of the Credit Group to the financial information of the Credit Group results in an increase in unrestricted net assets of $174 million at June 30, 2016, and no increase in net long-term debt. The inclusion of the assets and liabilities of these Credit Group Members results in Net Senior Long-Term Debt to Capitalization of 28.0% at June 30, 2016, and a Net Total Long-Term Debt to Capitalization of 29.8% at June 30, 2016. Following the completion of the Plan of Finance and the implementation of decisions as to management of Ascension’s debt as described in the forepart of this Offering Memorandum Supplement in the section entitled “PLAN OF FINANCE,” there will be an increase in the total net Senior Long-Term Debt of approximately $214 million. Ascension has a promissory note from Alexian in the approximate amount of $378 million and from St. John Health in the approximate amount of $47 million, in each case as a result of Ascension’s discharge of previous indebtedness. The Alexian and St. John Health promissory note amounts are expected to be approximately $378 million and $260 million following the issuance of the Series 2016A Additional Bonds.
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Indebtedness and Certain Liabilities
As of March 31, 2017, the aggregate principal amount of Senior Obligations outstanding was approximately $5.8 billion, including approximately $5.8 billion of tax-exempt and taxable indebtedness issued or guaranteed by the Senior Credit Group and approximately $54.3 million in guarantees of tax- exempt indebtedness of entities that are not Members of the Senior Credit Group. As of March 31, 2017, the aggregate principal amount of Subordinate Obligations outstanding was approximately $426 million.
As of March 31, 2017, the Senior Credit Group has two lines of credit totaling $1 billion. The first line of credit totals $500 million which may be used as a source of funding for unremarketed variable rate debt (including commercial paper) or for general corporate purposes. The second line of credit totals $500 million which may be used for general corporate purposes. Both lines are committed to November 3, 2017 and as of March 31, 2017, there were no borrowings under either line of credit.
A separate line of credit with a commercial bank, which is dedicated to covering failed repayment of draws on various individual letters of credit issued by the same bank for the benefit of Ascension and its health ministries, is secured by a Senior Obligation issued by Ascension in November 2012 in a principal amount not to exceed $100 million.
Debt Service Coverage
The Senior Master Indenture requires that the Senior Credit Group maintain a Debt Service Coverage Ratio of at least 1.10 to 1 measured as of the end of each fiscal year. When determining Income Available for Debt Service, as required by the Senior Master Indenture, such calculation does not include various items such as (i) any gain or loss resulting from the extinguishment of Indebtedness, (ii) changes in market value of interest rate swaps and (iii) unrealized gains or losses on marketable securities. See the definition of “Income Available for Debt Service” in APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS – DEFINITIONS OF CERTAIN TERMS” in the 2016 Offering Memorandum.
The following table sets forth the Senior Credit Group’s coverage of the Debt Service Coverage Requirement on Senior Long-Term Indebtedness as required by the Senior Master Indenture for the fiscal year ended June 30, 2016. The adjusted pro forma figures additionally include the issuance of the Series 2016A Additional Bonds as if such Series 2016A Additional Bonds had been issued on July 1, 2015.
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ASCENSION CREDIT GROUP (Dollars in Thousands)
Fiscal Year Ended June 30, 2016 As Adjusted Actual(1)(2)(3)(4) (Pro Forma)* Excess of Revenues and Gains over Expenses and Losses $465,651 $465,651 Contribution from Business Combinations (304,961) (304,961) Depreciation and Amortization 913,493 913,493 Interest Expense 169,591 178,044 Change in Market Value of Interest Rate Swaps 82,621 82,621 Unrealized (Gains) Losses on Marketable Securities 424,556 424,556 Other Net Adjustments to Excess of Revenue Over Expenses Per MTI (169,116) (169,116) Total Income Available for Debt Service $1,581,835 $1,590,288
Debt Service Requirements Principal paid on Long Term Indebtedness $72,860 $72,860 Interest paid on Long Term Indebtedness 195,082 203,535 Total Annual Debt Service $267,942 $276,395 Debt Service Coverage Ratio (times) 5.90 5.75
* Preliminary, subject to change. (1) Calculation reflects aggregate debt service coverage ratio including both Senior and Subordinate debt service. The Members of the Senior and Subordinate Credit Groups are identical. (2) As defined in Article 1 of the Master Trust Indenture dated November 1, 1999, excludes income from equity investment in St. John Health System and Alexian Brothers Health System (ABHS), including senior care facilities previously a part of ABHS and still a member of the Alexian Brothers Health System Master Trust Indenture (Alexian Brothers), which are not part of the Credit Group Financial Statements. (3) Annual required debt service ratio above is historical coverage ratio based only on 12 months through June 30, 2016 results, not a Max. Annual Debt Service calculation. It does not reflect the projected ratio for any future years. (4) While not added to the Ascension Credit Group, the senior care facilities previously affiliated with Alexian Brothers are included in the presentation of Credit Group (as immaterial affiliates) during fiscal year 2017, and the financial results for these senior care facilities for fiscal year 2017 are included in the Credit Group Consolidated Statements of Operations and Changes in Net Assets as if the change had occurred as of July 1, 2016. Ministry Health Care (Ministry) became a member of the Credit Group in June 2016. Ministry’s financial results for the fiscal year ended June 30, 2016 are included in the calculation of income available for debt service as well as total annual debt service for purposes of computing the Ascension Health Alliance Credit Group annual debt service coverage ratio as if the change had occurred as of July 1, 2015.
Litigation
Pension Plan Litigation. In March 2013, the System and some of its affiliates were named as defendants in litigation surrounding the Church Plan status of its System Plans. On May 9, 2014, the United States District Court, Eastern District of Michigan, Southern Division, issued its Decision and Order Granting Defendants’ Motion to Dismiss, which effectively dismissed the case against Ascension and its affiliates. On June 6, 2014, Plaintiff filed a Notice of Appeal to the United States Court of Appeal for the Sixth Circuit. On March 17, 2015, the Sixth Circuit granted the parties’ motion to stay and a limited remand to the District Court to approve a settlement of the lawsuit. On May 11, 2015, the District Court granted preliminary approval of a Settlement Agreement. On September 17, 2015, the District Court issued its Order approving the Settlement, which became final on November 16, 2015. This matter is now closed and management of Ascension does not believe this matter will have a material adverse impact on the System’s financial position or results of operations.
In April 2016, Wheaton Franciscan Services, Inc. (“Wheaton”) was named as a defendant to litigation filed in the United States District Court for the Northern District of Illinois, Eastern Division,
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surrounding the Church Plan status of its defined benefit plan (hereinafter, the “Curtis lawsuit”). On April 28, 2016, Wheaton moved to transfer venue of the Curtis lawsuit to the United States District Court for the Eastern District of Missouri on the grounds that Ascension Health is the current sponsor of the Wheaton plan and such plan contains a Missouri choice of venue clause. In June 2016, Wheaton, Ascension Health, and Ascension Health Alliance and some related pension committees were named as defendants in additional litigation concerning the Church Plan status of Wheaton’s defined benefit plan (hereinafter, the “Bowen lawsuit”). The defendants motion to transfer the lawsuits from the Northern District of Illinois to the Eastern District of Missouri was denied. On January 4, 2017, the Court stayed the lawsuits pending the United States Supreme Court’s resolution of Advocate Health Care Network v. Stapleton, Nos. 16-74, 16-86, 16-258 (U.S.). The management of Ascension does not believe this matter, if decided adversely, would have a material adverse impact on the financial position or results of operations of Ascension.
New England Compounding Pharmacy Cases. Saint Thomas Health, Saint Thomas West Hospital (each a Senior Obligated Group Member), and Saint Thomas Network, all System Affiliates (referred to as the “Saint Thomas Entities”) have been named as defendants in approximately 100 personal injury or wrongful death lawsuits filed by “Tennessee Plaintiffs” that have been transferred from the United States District Court for the Middle District of Tennessee to a Multi-District Litigation matter pending in the United States District Court for the District of Massachusetts captioned “In Re New England Compounding Pharmacy, Inc. Products Liability Litigation” (hereinafter “MDL Litigation”). Ascension and Ascension Health (referred to as the “Ascension Entities”) have been named as defendants in some of the lawsuits filed against the Saint Thomas Entities, but as indicated below, have been dismissed as to the Ascension Entities. In the MDL Litigation, the Tennessee Plaintiffs are seeking damages for wrongful death or personal injuries resulting from the development of fungal meningitis and related serious health conditions they claim occurred as a result of receiving epidural injections of an allegedly contaminated steroid, methylprednisolone acetate (“MPA”), in treatment from defendant Saint Thomas Outpatient Neurosurgical Center (“STOPNC”), a venture which is 50% owned by Saint Thomas Network and 50% owned by defendant Howell Allen Clinic. STOPNC purchased the MPA from the New England Compounding Center (“NECC”). The Tennessee Plaintiffs allege only vicarious liability against the Saint Thomas Entities and the Ascension Entities, where applicable, for the actions of STOPNC, Howell Allen Clinic, and their employees. On January 10, 2014, the Saint Thomas Entities and the Ascension Entities filed motions to dismiss the complaints of the Tennessee Defendants. On August 27, 2014, the court granted the Ascension Entities’ motion, but denied the Saint Thomas Entities’ motion. In addition to these claims, a Master Complaint is pending in the MDL Litigation against the NECC, Ameridose LLC, Alanus Pharmaceuticals, Inc., GDC Holdings and several individual defendants (referred to as the “NECC Affiliated Defendants”), which is the subject of a court ordered stay due to a Chapter 11 proceeding in the United States Bankruptcy Court, District of Massachusetts, Eastern Division. The Chapter 11 Trustee filed motions on May 6, 2014, seeking the Bankruptcy Court’s approval of a $100 million settlement on behalf of the NECC Affiliated Defendants. Additional parties have since settled and the available settlement amount is expected to be $211,150,000. On May 20, 2015, the Bankruptcy Court entered an Order approving the Chapter 11 Plan, which establishes a Tort Trust from the settlement funds to compensate NECC’s creditors, including victims who became ill or died as a result of receiving an injection of MPA. The St. Thomas Entities mediated this matter and reached a confidential settlement with the Tennessee Plaintiffs. This matter is now closed and management of Ascension does not believe this matter will have a material adverse impact on the System’s financial position or results of operations.
Wage and Hour Litigation. A complaint asserting state wage and hour law violations for failing to pay overtime for meal periods and rest breaks was filed in Washington state court on June 27, 2012 against Our Lady of Lourdes Hospital at Pasco (a Senior Obligated Group Member) and its President, by four associates seeking to represent a class of similarly situated registered nurses. The case was assigned
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to a state court judge in January 2013. The depositions of the named plaintiffs have been completed. On April 1, 2013, the plaintiffs filed their Motion for Class Certification. The Motion was heard on May 17, 2013. Following the Motion for Class Certification arguments, the Court did not certify the class but instead instructed the plaintiffs to bring a series of summary judgment motions related to the issues raised in the complaint. Arguments on the plaintiffs’ partial summary judgment motions were held on August 22 and October 17, 2014. At a hearing on February 27, 2015, the Court entered orders on the plaintiffs’ partial motions for summary judgment denying them all in full, but granted the plaintiffs’ leave to file a First Amended Complaint, which was filed on March 2, 2015. The plaintiffs renewed their motion to certify a class and the renewed motion came before the Court on April 10, 2015. On May 21, 2015, the Court denied plaintiff’s motion to certify a class and plaintiff sought discretionary review of the Court’s Order from the Court of Appeals for the State of Washington. On August 14, 2015, the Court of Appeals granted plaintiff motion for discretionary review and set a briefing schedule for the parties. On February 9, 2017, the Court of Appeals issued its Unpublished Order affirming the trial court’s order denying class certification. At this time, management of Ascension does not believe that this matter, if decided adversely to the defendants, would have a material adverse impact on the financial position or results of operations of the Senior Credit Group taken as a whole.
In July 2015, a collective action was filed in the United States District Court for the Northern District of Illinois asserting home health clinicians were improperly classified for purposes of overtime under the Fair Labor Standards Act and the Illinois Minimum Wage Law. The complaint was filed by three formerly employed clinicians, seeking to represent a class of similarly situated clinicians, against Alexian Brothers Medical Center d/b/a Alexian Brothers Home Health, Alexian Brothers Health System, and Ascension Health. In January 2016, the District Court conditionally certified the opt-in class and 14 out of 83 potential class members opted-in. The parties mediated this matter and reached a confidential memorandum of understanding concerning settlement. This matter is now closed and management of Ascension does not believe this matter will have a material adverse impact on the System’s financial position or results of operations.
In November 2016, a collective action, filed in the United States District Court for the Western District of Texas, was served on Ascension Health Alliance (“Ascension”), Seton Family of Hospitals, Inc. and its Seton Family affiliated hospitals (Seton Family of Hospitals, Inc. and its affiliated hospitals collectively referred to herein as “Seton Family”). The collective action asserts Seton Family’s non-exempt nurses were not properly compensated for work performed during meal breaks under the Fair Labor Standards Act and Texas state law. The Complaint was filed by a nurse, Jenny Stepp, seeking to represent a class of similarly situated nurses, against Ascension and Seton Family. On December 22, 2016, the District Court entered an order dismissing Ascension without prejudice. The matter continues against Seton Family and remains in the early stages of litigation. At this time, management of Ascension does not believe that this matter, if decided adversely to the defendants, would have a material adverse impact on the financial position or results of operations of the Senior Credit Group taken as a whole.
Vendor Litigation. On January 5, 2017, Comprehensive Pharmacy Services, LLC (“CPS”) filed a lawsuit against Ascension Health Resource and Supply Management, LLC (“The Resource Group”), alleging breach of contract by The Resource Group. The allegations stem from a termination of the contract by The Resource Group for CPS’ failure to pay the agreed-upon shortfall of promised savings. The lawsuit is in its very early stages, but management believes that the outside liability is not material, and intends to vigorously defend the claims and assert counterclaims against CPS.
Regulatory Reviews, Audits and Investigations
Ascension, like all major health care systems, periodically undergoes investigations or audits by federal, state and local agencies involving compliance with a variety of laws and regulations. These
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investigations seek to determine compliance with, among other things, laws and regulations relating to Medicare and Medicaid reimbursement, including billing practice for certain services. Several Credit Group Members have been, and are currently, the subject of investigations or audits of this type. While no assurance can be given concerning the outcome of any current investigation, management of Ascension believes that adequate reserves have been established, where estimates of liability have been or can be reached relative to the impact of the investigation, and the outcome of any current investigations will not have a material effect on the financial position of the Senior Credit Group.
Interest Rate Swaps
Ascension Health, formerly the Credit Group Representative, entered into interest rate swap transactions intending to hedge interest rate payments on certain outstanding bonds and issued Senior Obligations to secure its obligations under these swap transactions. Ascension became Senior Credit Group Representative in December 2011. At March 31, 2017 and June 30, 2016, the notional values of the outstanding Senior Credit Group interest rate swaps were approximately $1.1 billion and $2.1 billion, respectively. Ascension recognizes the fair value of its interest rate swaps in its consolidated balance sheets. At March 31, 2017 and June 30, 2016, the fair value of the Senior Credit Group’s interest rate swaps in an asset position were $441 thousand and $10.7 million, respectively, while the fair value of interest rate swaps in a liability position were $156.3 million and $236.4 million, respectively.
Ascension’s interest rate swap agreements include bilateral collateral requirements based upon specific contractual criteria. At its current ratings, the Senior Credit Group is required to post collateral if the market value liability of its interest rate swap agreements with a single counterparty exceeds $125 million. Each counterparty is also required to post collateral if the market value liability of its interest rate swap agreements with the Senior Credit Group exceeds contractual thresholds based on the counterparty’s ratings. Market value is calculated on a daily basis. To date, no collateral has been posted by the Senior Credit Group or either of its counterparties.
Liquidity, Investment Policies and Income
On November 3, 2011, Ascension formed Ascension Alpha Fund, LLC (the “Alpha Fund”) (f/k/a CHIMCO Alpha Fund, LLC). The Alpha Fund is a Delaware limited liability company and was formed as part of Ascension’s long-term business strategy. In April 2012, Ascension transferred a significant portion of its investments to the Alpha Fund in exchange for membership interests in the Alpha Fund. Certain legacy Ascension assets, two private fund investments, and an operating cash account are held directly by Ascension or its subsidiaries and managed by AIM as described below. Included in Ascension’s investments are assets held and managed directly by Ascension or its subsidiaries. The Alpha Fund assets are held outside of the Credit Group.
Ascension Investment Management, LLC (“AIM”), a wholly owned subsidiary of Ascension, serves as the manager and primary investment advisor of the Alpha Fund, overseeing the investment strategies offered to the Alpha Fund’s members. AIM utilizes professional investment management firms to invest nearly all of the resources of the Alpha Fund. The Alpha Fund’s members include Ascension and other Alpha Fund investors. As the Alpha Fund is managed by AIM and AIM is a wholly owned subsidiary of Ascension, Ascension began consolidating the Alpha Fund in its consolidated financial statements in April 2012. The consolidation of the Alpha Fund by the System in April 2012 resulted in an increase of net assets of approximately $440.0 million, representing the noncontrolling interests of the Alpha Fund (i.e., the net assets of the Alpha Fund owned by unrelated entities) as of the date investments were transferred into the Alpha Fund. At June 30, 2016 and March 31, 2017, a significant portion of Ascension’s investments consist of Ascension’s interest in the Alpha Fund. The portions of the Alpha Fund’s net assets representing interests held by entities other than Ascension reflected in noncontrolling
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interests in the Consolidated Balance Sheet at June 30, 2016 and March 31, 2017, were approximately $1.3 billion and $1.6 billion, respectively.
The Credit Group’s cash and investments excluding the noncontrolling interests held by other Alpha Fund members and assets limited to use represent the Credit Group’s unrestricted cash and investments, net, as reflected in the Supplementary Information to the Ascension consolidated financial statements for the years ended June 30, 2016 and 2015. The Credit Group’s unrestricted cash and investments, net, increased by 7.7% from approximately $12.8 billion to $13.8 billion between June 30, 2016 and March 31, 2017. This unrestricted cash and investment position, net, represented 210% of the Credit Group’s total debt as of March 31, 2017.
The investment return as presented in the Credit Group Financial Statements in the Supplementary Information to the Ascension consolidated financial statements for the years ended June 30, 2016 and 2015 represent the return in the Alpha Fund, including the return earned by the noncontrolling interests of the other Alpha Fund members. For the fiscal years ended June 30, 2015 and 2016 and the nine months ended March 31, 2017, the investment income (loss) attributable to the Credit Group, excluding the portion of the return attributable to noncontrolling interests, was $52.8 million, ($293.0) million and $839.8 million, respectively.
Ascension’s investment policies are determined by the Ascension Finance Committee and are designed to meet the objectives of supporting the mission, values and beliefs of Ascension and its subsidiaries; providing for the availability of funds needed by Ascension; maintaining Ascension’s purchasing power; achieving superior returns subject to prudent risk-taking; diversifying assets across and within capital markets; and adhering to the Ascension Investment Management Socially Responsible Investment Guidelines. Ascension has implemented its investment policies primarily through its investment in the Alpha Fund.
Ascension’s objectives relating to its short-term investments are to provide adequate liquidity for operating cash needs of Ascension; to provide funds as a source of liquidity backup for the Ascension Centralized Debt Management Program; and to protect principal and earn a rate of return in excess of a customized index over a full market cycle.
Ascension’s objectives relating to its long-term investments are to provide adequate liquidity for operating and capital needs; to provide funds as a source of liquidity backup for the Ascension Centralized Debt Management Program; to protect principal and earn a rate of return in excess of a customized index over a full market cycle; and to provide a source of funds for Ascension, including Credit Group members.
As of March 31, 2017, the target asset allocation of the long-term investments was approximately 56.5% growth strategies (including 30% long-only equity, 5% long-short equity, 5% hedged equity, 7.5% private equity, and 9% credit related), 28% deflation strategies (including approximately 18% core fixed income, 7.5% absolute return hedge funds, and 2.5% cash) and 15.5% inflation strategies (including approximately 4% inflation-linked bonds, 4% commodity related investments, and 7.5% real assets).
The Credit Group’s ability to generate investment income is dependent in large measure on market conditions and the composition of the Alpha Fund’s investment portfolio. The value of the Alpha Fund’s investment portfolio, and the investment income attributed to the Credit Group, has fluctuated significantly in the past and may fluctuate significantly in the future. Pursuant to generally accepted accounting principles currently applicable to Ascension, substantially all unrealized gains and losses are reported as non-operating gains/losses within the excess of revenues and gains over expenses and losses. Given the significant value and diversification of the Alpha Fund’s investments, Ascension management
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believes that changes in investment portfolio returns, as well as the timing of recognition of those returns, will likely continue to have a significant impact on the Credit Group’s excess of revenues and gains over expenses and losses.
As of March 31, 2017, the Credit Group had outstanding $584.6 million of bonds bearing interest at weekly interest rates which could be put upon seven days’ notice and $1.8 billion of bonds bearing fixed rates of interest for fixed interim periods subject to mandatory tender for purchase at the end of their respective interest rate periods. Funds for the payment of these bonds that are tendered for purchase and not remarketed will be provided by Ascension from its own funds as described above and from a working capital line of credit which provides liquidity support for both bonds and commercial paper, and serves as a source of general liquidity.
Additional information detailing Ascension’s liquidity is updated monthly and is incorporated by reference to the liquidity worksheet (the “Liquidity Report”) on file with the Municipal Securities Rulemaking Board on its Electronic Municipal Market Access system. Such Liquidity Report details Ascension’s cash and liquid securities and its debt consisting of daily and 7-day put debt and other debt with mandatory tender scheduled to occur (or able to be invoked) within 13 months of the date of such Liquidity Report.
Pension Plans
Certain Ascension entities (excluding notably Brighton Hospital in Brighton, Michigan (“Brighton”), Saint Thomas Rutherford Hospital Center in Murfreesboro, Tennessee (formerly Middle Tennessee Medical Center ), and Crittenton participate in defined-benefit pension plans (the “System Plans”), which are noncontributory, defined-benefit plans. The System Plans qualify as “Church Plans” and are not subject to the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). See “FINANCIAL AND OPERATING INFORMATION—Litigation” herein. The defined benefit pension plans sponsored by Brighton, Saint Thomas Rutherford Hospital, and Crittenton are subject to, and in all material respects in compliance with, the provisions of ERISA. Benefits are based on each participant’s years of service and compensation. Substantially all of the System Plans’ assets are invested in a master trust consisting of cash and cash equivalents, equity, fixed income funds, and alternative investments. Contributions to the System Plans are based on actuarially determined amounts sufficient to meet the benefits to be paid to plan participants. The assets of the System Plans are available to pay the benefits of eligible employees and retirees of all participating entities. In the event entities participating in the System Plans are unable to fulfill their financial obligations under the System Plans, the other participating entities are obligated to do so.
Most System Plans were frozen effective December 31, 2012. During the year ended June 30, 2016, four of the System Plans remained active with approximately $25.5 million of service cost recognized. In conjunction with the transfer of corporate membership of Wheaton Southeast from Wheaton to Ascension Health, Ascension Health became the plan sponsor for the Wheaton Franciscan Retirement Plan, an active plan, effective March 1, 2016. During the six months ended December 31, 2016, the System froze a defined benefit plan which resulted in the recognition of a curtailment gain of $40.0 million.
Care of Persons Living in Poverty and Community Benefit
The Credit Group Members that operate health care facilities provide health care to patients regardless of their ability to pay. In addition to providing charity care, the health care entities provide other programs and services which benefit persons living in poverty, other vulnerable persons and the community.
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Ascension uses the following four categories to identify the resources utilized for the care of persons living in poverty and other vulnerable persons and community benefit: (a) traditional charity care, which includes the cost of services provided to persons who cannot afford health care because of inadequate resources and/or who are uninsured or underinsured; (b) unpaid cost of public programs, excluding Medicare, which represents the unpaid cost of services provided to persons covered by public programs for persons living in poverty; (c) cost of other programs for persons living in poverty, which includes unreimbursed costs of programs intentionally designed to serve persons living in poverty and other vulnerable persons of the community, including substance abusers, the homeless, victims of child abuse, and persons with acquired immune deficiency syndrome; and (d) community benefit, which consists of the unreimbursed costs of community benefit programs and services for the general community (not solely for persons living in poverty and other vulnerable persons), including health promotion and education, health clinics and screenings, and medical research.
The cost of providing care to persons who are living in poverty and community benefit programs is estimated using each facility’s internal cost data. These estimates may continue to be refined subsequent to the balance sheet date.
Discounts are provided to all uninsured patients, including those with the means to pay. Discounts provided to those patients who did not qualify for assistance under charity care guidelines are not included in the cost of providing care of persons who are living in poverty and community benefit programs.
Symphony
Ascension has designed Symphony, a business change, enterprise resource planning initiative, to standardize processes, replace information systems, and create an efficient, cost-effective shared services environment to more economically support supply chain, human resources, payroll and finance services across all health ministries. Symphony does not include electronic medical records, which is the subject of a separate Ascension initiative. To date, the Symphony initiative has successfully completed all major phases on time. Currently, 28 health ministries representing nearly 179,000 associates (including approximately 35,000 contingent workers) are now live with the Symphony program’s people, process, and technology changes. The remaining health ministries (including recent acquisitions through February 29, 2016) are expected to be fully implemented by the end of calendar year 2017. As of March 31, 2017, Symphony’s estimated cumulative cost (for both operating and capital expenditures) is approximately $1.9 billion and is estimated to be approximately $2.2 billion upon its completion by the end of fiscal year 2018. Management projects that the total ten-year (fiscal years 2009-2018) costs and savings associated with Symphony will be $2.2 billion and $2.7 billion, respectively. No assurances can be given that these projections will be realized.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE CREDIT GROUP’S RECENT FINANCIAL PERFORMANCE
The Credit Group comprised approximately 95.7% of consolidated total assets and 95.1% of the consolidated net assets of the System at March 31, 2017, and approximately 91.9% of consolidated total operating revenue, 94.2% of consolidated income from operations and 96.1% of consolidated excess of revenues and gains over expenses and losses of the System for the nine months ended March 31, 2017.
Significant Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of Ascension to make assumptions, estimates and
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judgments that affect the timing and amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. Ascension management considers critical accounting policies to be those that require more significant judgments and estimates in the preparation of its consolidated financial statements, including the following: recognition of net operating revenues, which includes contractual allowances; impairment of long-lived assets; provisions for doubtful accounts; reserves for losses and expenses related to health care professional and general liability risks; and recognition of losses related to commitments and contingencies, if any. Management relies on historical experience and on other assumptions believed to be reasonable under the circumstances in making these judgments and estimates. Actual results could differ materially from those estimates.
Health Care Reform
Future results of operations of the Members of the Credit Group are likely to be impacted by external forces and resulting changes in their business model and strategy. In 2010, the U.S. Congress passed and the President signed into law the Patient Protection and Affordable Care Act, or ACA, as well as the Health Care and Education Reconciliation Act of 2010, or HCERA, or collectively, Health Care Reform, which represented significant changes to the U.S. health care system. See “BONDHOLDERS’ RISKS—Health Care Reform” in the forepart of this Offering Memorandum Supplement.
Historical Performance – Nine Months Ended March 31, 2016 and 2017
Statement of Operations and Changes in Net Assets
Operating Results. For the nine months ended March 31, 2017, income from operations was $604.5 million, an increase of $185.8 million compared to $418.7 million for the nine months ended March 31, 2016 with Wheaton representing $70.7 million of the increase.
Total operating revenue increased $1.2 billion, or 8.4% for the nine months ended March 31, 2017 compared to the same period in the prior year with Wheaton representing $868.4 million of the increase. Net patient service revenue, less provision for doubtful accounts, increased $1.1 billion, or 8.5% with Wheaton representing $786.0 million of the increase. Net patient service revenue per equivalent discharge increased 1.8% over the prior period while equivalent discharges increased by 6.6%. The increase in net patient service revenue per equivalent discharge is primarily due to the 1.9% increase in case mix index reflecting higher intensity of services provided and supplemental payments received in certain markets for Medicaid Disproportionate Share Hospital (DSH) programs. Other revenue increased by $86.4 million, or 7.2%, primarily due to additional gain on sale recognized during the nine months ended March 31, 2017 related to certain attributes of the sale of half of Ascension’s interest in TriMedx that occurred in May 2016 and other gains on sales of other assets. In addition, the self-insurance trust fund had favorable investment returns of $31.1 million during the nine months ended March 31, 2017.
Total operating expenses increased $1.1 billion, or 8.0%, for the nine months ended March 31, 2017 compared to the same period in the prior year with Wheaton representing $821.7 million of the increase. Salaries, wages and employee benefits, excluding Wheaton, increased $36.6 million, or 0.5%, primarily due to an increase in benefit claims expense. Purchased services and professional fees, excluding Wheaton, increased $224.0 million, or 12.5%, compared to the same period in the prior year, primarily due to an increase in revenue cycle management fees as the System is transitioning all hospitals to a single common revenue cycle process. The increase in revenue cycle management fees is offset by a decrease in salaries and wages as employees transition to the third party vendor.
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Impairment, Restructuring, and Nonrecurring Losses, Net. The Credit Group recorded total impairment, restructuring, and nonrecurring losses, net, of $90.6 million during the nine months ended March 31, 2017 compared to losses of $111.0 million during the nine months ended March 31, 2016. Nonrecurring expenses associated with Symphony totaled $69.4 million and $82.5 million for the nine months ended March 31, 2017 and 2016, respectively.
Total Nonoperating Gains (Losses), Net. For the nine months ended March 31, 2017, net nonoperating gains were $880.1 million compared to net nonoperating losses of $464.1 during the same period in the prior year. The increase is due to nonoperating investment gains of $937.5 million and gains on interest rate swaps of $55.4 million for the nine months ended March 31, 2017 compared to the same period in the prior year. Prior period losses were partially offset by contributions from business combinations of $304.5 million.
Excess (Deficit) of Revenues and Gains Over Expenses and Losses. The excess of revenues and gains over expenses and losses for the nine months ended March 31, 2017 was $1.5 billion compared to a deficit of revenues and gains over expenses and losses of $45.4 million for the same period in the prior year primarily due to the change in nonoperating gains/losses discussed above.
Discontinued Operations. As discussed herein under the caption “AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES,” Mount St. Mary’s Hospital and Health Center (Niagara County, New York) and Carondelet (Tucson, Arizona) separated from the System effective July 1, 2015 and September 1, 2015, respectively, and the operations are reflected as discontinued operations for the nine months ended March 31, 2016. In addition, the System has entered into asset purchase agreements for the sale of LHN (Lewiston, Idaho) and SJRMC (Pasco, Washington) and, therefore, the operations are reflected as discontinued operations for the nine months ended March 31, 2017 and 2016. The Credit Group reported an increase (decrease) in net assets from discontinued operations of $2.6 million and ($18.3) million for the nine months ended March 31, 2017 and 2016, respectively, representing the excess (deficit) of revenues over expenses for previously discontinued lines of business in the States of Arizona, Idaho, Washington, and New York. These entities recorded operating revenues totaling $216.9 million and $284.7 million during the period they were operational during the nine months ended March 31, 2017 and 2016, respectively.
Balance Sheet.
Total Assets. Total assets increased $1.5 billion, or 5.0%, from June 30, 2016 to $32.5 billion at March 31, 2017, primarily due to nonoperating investment gains on long-term investments and stronger income from operations during the nine months ended March 31, 2017.
Patient Accounts Receivable. Net accounts receivable increased $70.4 million, or 2.9%, from June 30, 2016 to $2.5 billion at March 31, 2017. Net days in accounts receivable decreased from 50 days at June 30, 2016 to 48 days at March 31, 2017. Payor mix has improved since June 30, 2016 with an increase in governmental net accounts receivable and a decrease in self-pay and other net accounts receivable.
Total Debt. Total debt decreased 1.6% from $6.65 billion at June 30, 2016 to $6.54 billion at March 31, 2017 primarily due to scheduled principal payments made during the nine months ended March 31, 2017.
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Historical Performance – Fiscal Years Ended June 30, 2015 and 2016
Statement of Operations and Changes in Net Assets
Operating Results. For the fiscal year ended June 30, 2016, income from operations was $719.8 million, an increase of $139.8 million compared to $580.0 million for the fiscal year ended June 30, 2015.
Total operating revenue increased $3.1 billion, or 18.3% for the fiscal year ended June 30, 2016 compared to the prior fiscal year primarily due to the addition of certain members to the Credit Group (Wheaton Southeast, Crittenton, and MHC). These members accounted for $2.2 billion of the increase in total operating revenues. Net patient service revenue, less provision for doubtful accounts, increased $2.8 billion, or 18.2% with Credit Group additions accounting for $2.1 billion of the increase. Net patient service revenue per equivalent discharge increased 2.6% over the prior fiscal year while equivalent discharges increased 15.2% (14.9% from Credit Group additions). Net patient service revenue per equivalent discharge increased primarily due to an increase in case mix index due to intensity of services provided and favorable shifts in payor mix partially due to more patients having insurance coverage as a result of the Affordable Care Act and Medicaid expansion in certain states. Other revenue increased by $285.9 million, or 19.1%, primarily due to net gains on sales of assets, increased income from unconsolidated entities, and additions to the Credit Group accounting for $96.9 million of the increase.
Total operating expenses increased $2.8 billion, or 17.8%, to $18.8 billion for the fiscal year ended June 30, 2016 with Credit Group additions accounting for $2.1 billion of the increase. Salaries, wages and employee benefits increased $1.4 billion, or 16.7%, with Credit Group additions accounting for $1.2 billion of the increase. The remaining increase was primarily due to volume and moderate wage increases partially offset by a reduction in health insurance benefit expense. Purchased services and professional fees increased $496.9 million, or 24.0%, with Credit Group additions accounting for $322.1 million of the increase. The remaining increase was primarily due to one-time costs to implement a common practice management software platform for physician practices designed to reduce the cost to collect on patient accounts in the future and several markets transitioning to a third-party contractor to provide dietary and housekeeping services at a reduced rate with a reduction in salaries and wages for these departments. Supplies expense increased $395.1 million, or 16.6%, with Credit Group additions accounting for $295.9 million of the increase for the fiscal year ended June 30, 2016 compared to the prior fiscal year primarily due to increasing specialty and generic drug pricing and higher intensity service mix as demonstrated by the previously mentioned increased in case mix index. Other expenses increased $367.6 million, or 17.1%, with Credit Group additions accounting for $179.6 of the increase. The remaining increase was primarily due to an increase in state sponsored provider tax expenses primarily in Indiana, Connecticut, and Texas. The increase in total provider tax expenses are partially offset by an increase in reimbursement received in connection with provider tax programs which in included in total operating revenue.
Impairment, Restructuring, and Nonrecurring Losses, Net. The Credit Group recorded total impairment, restructuring, and nonrecurring losses, net, of $193.8 million during the fiscal year ended June 30, 2016 compared to losses of $126.9 million during the prior fiscal year. Nonrecurring expenses associated with Symphony totaled $112.0 million and $97.9 million for the fiscal years ended June 30, 2016 and 2015, respectively.
Total Nonoperating Gains (Losses), Net. For the fiscal year ended June 30, 2016, net nonoperating losses were $237.8 million compared to net losses of $42.4 million for the fiscal year ended June 30, 2015. Fiscal year ended June 30, 2016 includes a $41.2 million loss from unconsolidated entities,
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an $85.9 million loss on interest rate swaps and a $335.3 million investment loss partially offset by contributions from business combinations of $305.0 million.
Excess of Revenues and Gains Over Expenses and Losses. The excess of revenues and gains over expenses and losses for the fiscal year ended June 30, 2016 was $482.0 million compared to $537.6 million for the fiscal year ended June 30, 2015.
Discontinued Operations. As discussed herein under the caption “AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES,” Carondelet Health (Kansas City, Missouri) and Mount St. Mary’s Hospital and Health Center (Niagara County, New York) separated from the System effective February 13, 2015 and July 1, 2015, respectively, and the operations are reflected as discontinued operations for the year ended June 30, 2015. Carondelet (Tucson, Arizona) separated from the System effective September 1, 2015, and the operations are reflected as discontinued operations for the years ended June 30, 2015 and 2016. In addition, the System has entered into asset purchase agreements for the sale of LHN (Lewiston, Idaho) and SJRMC (Pasco, Washington) and, therefore, the operations are reflected as discontinued operations for the years ended June 30, 2016 and 2015. The Credit Group reported a decrease in net assets from discontinued operations of $16.2 million and $44.1 million for the years ended June 30, 2016 and 2015, respectively, representing the deficit of revenues over expenses for previously discontinued lines of business in the States of Arizona, Idaho, Washington, Missouri and New York. These entities recorded operating revenues totaling $355.5 million and $1,020.3 million during the period they were operational during the years ended June 30, 2016 and 2015, respectively.
Balance Sheet.
Total Assets. Total assets increased $3.0 billion, or 10.9%, from June 30, 2015 to $30.9 billion at June 30, 2016. Assets from member additions to the Credit Group were $3.3 billion. Excluding the addition of those entities to the Credit Group, total assets would have decreased by $247.5 million primarily attributable to investment losses for the year ended June 30, 2016.
Patient Accounts Receivable. Net accounts receivable increased $437.9 million from June 30, 2015 to $2.5 billion at June 30, 2016 with the member additions to the Credit Group accounting for $370.6 million of the increase. The remaining increase was primarily due to implementation of ICD-10 which resulted in coding and billing delays. Net days in accounts receivable increased from 48 days at June 30, 2015 to 50 days at June 30, 2016.
Total Debt. Total debt increased 27.4% from $5.2 billion at June 30, 2015 to $6.7 billion at June 30, 2016 due to the debt held by members that were added to the Credit Group partially offset by principal payments made during the year.
CORPORATE STRUCTURE AND MANAGEMENT
Sponsorship
General. Ascension is sponsored by Ascension Health Ministries (“Ascension Sponsor”), a public juridic person of the Roman Catholic Church. Ascension Sponsor was granted such status on June 30, 2011. The participating entities of Ascension Sponsor are (i) Daughters of Charity of St. Vincent de Paul in the United States, Province of St. Louise; (ii) Congregation of St. Joseph; (iii) Congregation of the Sisters of St. Joseph of Carondelet; (iv) Congregation of Alexian Brothers of the Immaculate Conception Province – American Province; and (v) Sisters of the Sorrowful Mother of the Third Order of St. Francis of Assisi – US/Caribbean Province.
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Reserved Powers of Ascension Sponsor. The Ascension Sponsor is the public juridic person that serves as the canonical sponsor of Ascension, acting through its members in accordance with the approved canonical statutes and bylaws of the Ascension Sponsor. The following matters are decided by the Ascension Sponsor according to the Ascension bylaws: (i) compliance with, changes or interpretations of the philosophy, mission, vision, expectations and core values of Ascension; (ii) changes to the Articles of Incorporation and Bylaws of Ascension; (iii) appointment/removal of the members of the Board of Directors of Ascension; (iv) appointment/removal of the Chair of the Board of Directors of Ascension; and (v) the overall debt limit for Ascension and the incurrence of debt by Ascension in excess of that limit.
Members of Ascension Sponsor. The participating entities of Ascension Sponsor have appointed the following individuals, comprised of both religious and lay individuals, to serve as the members of Ascension Sponsor. These individuals serve one to three year terms.
The current members of Ascension Sponsor are as follows:
Members of Ascension Sponsor
Sr. Mary Anne Rodgers, CSJ Sr. Barbara Moore, CSJ (Chair) Mr. Gino Pazzaglini Zeni Fox, PhD Mr. LeRoy Rheault Sr. Mary Kay Hadican, CSJ Sr. Rita Ann Teichman, CSJ (Secretary/Treasurer) Sr. Mary Walz, DC Sr. Catherine Marie Hanegan, SSM Mr. John “Jack” W. Logue (Vice Chair)
Ascension as Sole Corporate Member of Ascension Health
As the sole corporate member of Ascension Health, Ascension has retained certain reserved powers over Ascension Health. The following matters are decided by Ascension according to the Ascension Health bylaws: (i) changes to the articles of incorporation and bylaws of Ascension Health, (ii) major transactions involving Ascension Health, and (iii) expenditure of funds or investment of capital by Ascension Health exceeding $100 million.
Board of Directors
The business, property, affairs and funds of Ascension are managed, supervised and controlled by the Board of Directors, who exercise all powers of Ascension not reserved to Ascension Sponsor and in accordance with Ascension System policy and subject to the limitations contained in Ascension’s Articles of Incorporation and Bylaws and applicable law. The Board of Directors consists of five to nine members, as fixed from time to time by Ascension Sponsor (as of the date hereof, there are eight members of the Board of Directors). Board members are appointed, upon the recommendation of the Board of Directors, by Ascension Sponsor. Actions of the Board of Directors are taken by majority vote of a quorum. Board members may be removed, with or without cause, by Ascension Sponsor.
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The current members of the Board of Directors are as follows:
Members of the Board of Directors
Rev. Dennis Holtschneider, CM, Ed.D. Mr. Stephen Dufilho, CPA (Vice Chair) (Chair) Eve Higginbotham, SM, MD (Secretary) Regina Benjamin, MD, MBA Mr. Stancil “Stan” Starnes, JD Ms. Sheila Burke, MPA, RN, FAAN (Treasurer) Mr. Eduardo Conrado Anthony Tersigni, Ed.D., FACHE ex officio
Rev. Dennis H. Holtschneider, CM, Ed.D., who currently serves as President of DePaul University in Chicago, will join Ascension as Executive Vice President/Chief Operations Officer effective July 1, 2017. Fr. Dennis will step down from his position on the Board and a new Board Chair for Ascension will be appointed.
Management
Following the Chief Executive Officer, the current senior management of Ascension is listed below in alphabetical order.
Anthony R. Tersigni, Ed.D., FACHE, President and Chief Executive Officer. Dr. Anthony Tersigni serves as President and Chief Executive Officer of Ascension. He previously served as President and Chief Executive Officer of Ascension Health since June 18, 2004. Prior to his appointment as President and Chief Executive Officer of Ascension Health, he served as Ascension Health’s Executive Vice President and Chief Operating Officer from January 2001 through December 2003. He was interim Chief Executive Officer for the System beginning in January 2004. From 1995 to 2000, Dr. Tersigni was President and Chief Executive Officer at St. John Health (now St. John Providence), Detroit, Michigan, which at the time was Ascension Health’s largest integrated health system. He also served the St. John system as Executive Vice President and Chief Operating Officer from 1994 to 1995. He has held senior leadership positions for numerous other health care organizations, including the Sisters of St. Joseph Health System, Ann Arbor, Michigan; Sisters of Charity Healthcare Systems, Cincinnati, Ohio; the Detroit Medical Center, Detroit, Michigan; and Hospital Corporation of America, Nashville, Tennessee. Since 1985, Dr. Tersigni has been a Clinical Professor of Health and Behavioral Sciences at Oakland University, Rochester, Michigan. He is chair of the St. Louis Regional Business Council. He is past chair and currently serves on the board of the Healthcare Leadership Council. He is a board member of the National Catholic Bioethics Center, the Catholic University of America, and the St. Louis Regional Chamber. He is a former board member of the Detroit Economic Club and the United Way of Greater St. Louis, as well as a former board member and past chair of the Catholic Health Association of the United States. He is a member of the Coalition to Protect America’s Health Care and was elected President of the International Confederation of Catholic Health Care Institutions, a Committee of the Vatican’s Pontifical Council for Health Care Workers. Dr. Tersigni has been listed as one of Modern Healthcare’s 100 Most Powerful People in Healthcare from 2006 to 2016, most recently ranking No. 3, and was listed as one of the St. Louis Business Journal’s Most Influential St. Louisans from 2009 through 2012. He is the recipient of many professional awards. Dr. Tersigni holds a doctorate in the field of leadership/organizational development from Western Michigan University, Kalamazoo, Michigan. He also has honorary doctorate degrees from Saint Louis University, St. Louis, Missouri, the Aquinas Institute of Theology at Saint Louis University, and the Dominican School of Philosophy and Theology, Berkeley, California.
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Sr. Bernice Coreil, DC, Senior Executive Advisor to the President. Sr. Bernice Coreil, DC, is the Senior Executive Advisor to the President at Ascension. Her experience in health ministry ranges from Business Manager to Chief Executive Officer, and in Provincial Leadership as Health Councilor and Visitatrix of the Daughters of Charity, West Central Province. Prior to the formation of Ascension Health, Sr. Bernice served as Senior Vice President for System Integration for the Daughters of Charity National Health System from 1993 to 1999. Sr. Bernice currently serves as a member of several professional organizations including: Diplomat of the American College of Healthcare Executives; Mercy Housing Strategic Health Care Partners; Catholic Charities USA; Lifetime Advanced Member, Healthcare Financial Management Association; Council on Philanthropy; Hospital Sisters Health System Board; Ascension Health Ventures Board; Ascension Information Services Board; Health City Cayman Islands (HCCI) Board; and Ascension Investment Management Board. Sr. Bernice is the recipient of the 1994 Samuel Cardinal Strich Award for Health Affairs, and received the Archbishop John L. May Leadership Award for Distinguished Health Care Ministry from the Archbishop’s Commission on Community Health in 1997. Sr. Bernice also received the American College of Healthcare Executives Senior Level Healthcare Executive Regents Award at the 1999 Missouri Hospital Association Convention. In 2003, she received the Lifetime Achievement award from the Catholic Health Association. She received a bachelor’s degree in business administration in 1969 from Regis College, Denver, Colorado, graduating magna cum laude; a master’s degree in health care administration in 1972 from George Washington University, Washington, D.C.; and an honorary doctorate in 2006 from Aquinas Institute of Theology, St. Louis, Missouri.
John D. Doyle, Executive Vice President. John D. Doyle serves as Executive Vice President of Ascension and the President and Chief Executive Officer of Ascension Holdings, LLC, a subsidiary of Ascension. In this role he has responsibility for a portfolio of companies designed to add value to the organization by providing services to the health ministries of Ascension’s Healthcare Division and other health systems in the United States and internationally through Ascension Holdings International, which was formed in June 2016 to take a strategic approach to international markets. Mr. Doyle’s responsibilities also include overseeing incubation of transformational/disruptive solutions and innovative relationships that have the potential to accelerate accomplishment of Ascension’s Strategic Direction. Previously, Mr. Doyle served as Ascension Health’s Chief Strategy Officer and General Manager of Transformational Development. As Chief Strategy Officer, Mr. Doyle had responsibility for developing and ensuring implementation of Ascension’s overall Strategic Direction. In this role, Mr. Doyle served as the architect for the framework to create the capabilities necessary to achieve the organization’s Vision by 2020. As General Manager of Transformational Development, Mr. Doyle provided the overall vision and management of the Transformational Development organization, including developing a portfolio of activities to extend the organization’s line of sight into the future. The team seeks to dramatically enhance the existing service model and provide new ways of serving into the future. Earlier he was Senior Vice President, Strategic Business Development & Innovation for Ascension Health. Before joining Ascension’s System Office, Mr. Doyle was Executive Vice President for Strategic Development for St. Vincent Hospitals and Health Services (now St. Vincent Health) in Indiana, overseeing strategic planning, network development, managed care, marketing, corporate communications and government affairs. Mr. Doyle is a former Vice President of Marketing, Public Affairs and Product Line Management for MacNeal Health Network in Chicago and served as director of marketing and public relations for the Educational Services Unit of ITT Corp. He began his career with St. Jude Children’s Research Hospital. Mr. Doyle earned a bachelor’s degree from Butler University, Indianapolis, Indiana, and a master’s degree from Ball State University, Muncie, Indiana.
Robert J. Henkel, FACHE, Executive Vice President. Robert J. Henkel serves as Executive Vice President of Ascension. Mr. Henkel also assumed the role of President and Chief Executive Officer of Ascension Healthcare, a division of Ascension (then called Ascension Health), on January 1, 2012, after having served as President, Healthcare Operations and Chief Operating Officer for Ascension
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Health. Previously Mr. Henkel served as President of the Great Lakes and Mid-Atlantic States Operating Group at Ascension Health. In that role, he was responsible for health care operations in Connecticut, Maryland, Michigan, New York, Wisconsin and Washington, D.C. Mr. Henkel has held executive positions with numerous other health care organizations, including the Daughters of Charity National Health System, St. Louis, Missouri; Mount Sinai Medical Center, Miami Beach, Florida; SSM Health Care, St. Louis, Missouri; and Montefiore Medical Center, Bronx, New York. He currently serves as Board Chair of the Catholic Health Association; Board member with the United Way of Greater St. Louis; Board member with the Coalition to Protect America’s Health Care; Fellow of the American College of Healthcare Executives; and member of the Healthcare Executives Network. He is a University of Pittsburgh Legacy Laureate. Mr. Henkel received a bachelor’s degree in economics from Union College, Schenectady, New York, and a master’s degree in public health from the University of Pittsburgh, Pennsylvania, where he now serves as an Adjunct Professor in the Graduate School of Public Health. On January 12, 2017, Ascension announced Mr. Henkel’s intention to retire on June 30, 2017.
Eric S. Engler, Senior Vice President and Chief Strategy Officer. Eric S. Engler is the Senior Vice President and Chief Strategy Officer for Ascension. In this role, Mr. Engler serves as the architect for Ascension’s strategy with responsibility for identifying opportunities and designing approaches to transform the organization and sustain its Mission. As Chief Strategy Officer, Mr. Engler provides strategic thought leadership for Ascension and partners with Subsidiary and Market leaders to build a dynamic ministry for the future. He also leads the Strategy Mission-wide Function toward delivering on Ascension’s Strategic Direction commitment of Healthcare That Works, Healthcare That Is Safe and Healthcare That Leaves No One Behind, for Life. Prior to joining Ascension in 2001, Mr. Engler served in financial planning roles for Reuters, plc and Bridge Information Systems, Inc., both providers of financial market data services. Prior to that tenure, Mr. Engler served as a Transaction Services Director for PricewaterhouseCoopers LLP, leading merger and acquisition transactions for large public companies and private equity funds. Mr. Engler is also a former Equity Research Associate with Morgan Stanley & Co., Inc. in New York. He began his career in the Assurance and Business Advisory Services practice of Price Waterhouse. Mr. Engler is a C.P.A. and holds a B.S. in Accountancy from the University of Illinois at Champaign/Urbana and an M.B.A. from the University of Chicago Graduate School of Business.
Susan M. Huber, Senior Vice President. Susan M. Huber is the Senior Vice President, Global Mission, Governance and Sponsor Relations for Ascension. In this role Ms. Huber leads Ascension Global Mission and guides Ascension’s international mission outreach efforts to improve the health and living status of underserved global populations. She previously served as Vice President, Governance and Sponsor Relations, and continues her responsibilities working with members of the Ascension Sponsor and Ascension Board of Directors. Ms. Huber also serves on the Board of Directors of Global Health Partnership Initiative (GHPI), a non-profit corporation that collaborates with in-country leaders and like- minded organizations to create and sustain lasting health infrastructure in order to achieve measurable, sustainable health improvement for the world’s most neglected persons. GHPI was co-founded by Ascension Global Mission, along with the Daughters of Charity of St. Vincent DePaul, Province of St. Louise; the Sisters of St. Joseph of Carondelet; the Congregation of St. Joseph; and the Alexian Brothers. Ms. Huber joined the Daughters of Charity National Health System, one of the founding organizations of Ascension, in 1997 as a member of Decision and Strategy Support. Earlier she was Director, Strategic Planning, at Health Midwest, Kansas City, Mo., and Senior Consultant at both KPMG Peat Marwick in Kansas City and Price Waterhouse in St. Louis. She holds a Bachelor of Business Administration degree from Southern Illinois University, Edwardsville, Illinois, and Master of Business Administration degree from University of Missouri, Kansas City. Ms. Huber serves on the Governance Committee of the Catholic Health Association and is a member of the Advisory Board of Center for World Health & Medicine. She served previously as a Board member and Committee Chair of the Alumni Association at University of Missouri, Kansas City, and a Board member of the People’s Community Development Corporation.
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Joseph R. Impicciche, Executive Vice President and General Counsel. Joseph Impicciche is the Executive Vice President and General Counsel for Ascension. He is responsible for providing legal counsel to the corporation, Board of Directors and executive management. He coordinates legal services for major projects and transactions, leads system-to-system affiliation initiatives, assists with business development activities, and manages outside legal relationships on behalf of the organization. Previously, he served as Senior Vice President, Legal Services and General Counsel for Ascension Health. In addition, he provides executive leadership to Ascension Care Management, a subsidiary of Ascension designed to support and advance the population health initiatives of Ascension and its health ministries. Ascension Care Management encompasses several entities including Ascension Risk Services, U.S. Health Holdings Limited and Mission Point Health Partners. Prior to joining Ascension, Mr. Impicciche was a Partner in a private law firm with a major concentration in public finance, business and tax law for nonprofit organizations. He also served as General Counsel for St. Vincent Health in Indianapolis, Indiana. Because of his expertise, Mr. Impicciche has made presentations on tax and business related subjects to numerous organizations. He is a member of the Indiana State Bar Association and the Missouri State Bar Association. He has served on the Board of numerous organizations, including currently, St. Joseph Institute for the Deaf in St. Louis. He was recently recognized among the Legal 500 Corporate Counsel 100. He received a bachelor’s degree from Wabash College, Crawfordsville, Indiana, where he was a Lilly Scholar. Mr. Impicciche earned a juris doctorate from Indiana University School of Law, Indianapolis, Indiana, and a master’s degree in health care administration from Indiana University. He was an adjunct professor of commercial law at Indiana University, Indianapolis, School of Business for 15 years, and was an adjunct professor at Indiana University Law School, Indianapolis, from 1999 to 2003. He has also served as an adjunct professor at Saint Louis University Law School.
Patricia A. Maryland, Dr.P.H. President, Healthcare Operations and Chief Operating Officer, Ascension Healthcare, a division of Ascension. Patricia A. Maryland, Dr.P.H., is the President, Healthcare Operations and Chief Operating Officer of Ascension Healthcare, a division of Ascension (formerly known as Ascension Health). On January 12, 2017, Ascension announced that Dr. Maryland will assume the position of Executive Vice President, Ascension, and President and Chief Executive Officer, Ascension Healthcare, effective July 1, 2017. She previously served as the Michigan Ministry Market Leader for Ascension and the President and Chief Executive Officer of St. John Providence Health System, Warren, Michigan (“St. John Providence”), where she provided strategic and operational leadership for St. John Providence while promoting alignment among health ministries within Ascension Michigan market and the System Office on issues related to Mission and Vision. Prior to that role, Dr. Maryland served as the President, St. Vincent Indianapolis Hospital, and also as the Executive Vice President and Chief Operating Officer for St. Vincent Health. In this dual role she oversaw operations for St. Vincent Hospitals and Health Services, the flagship tertiary hospital of the St. Vincent system. In addition, the executives for St. Vincent Women’s Hospital, St. Vincent Children’s Hospital, Stress Center and St. Vincent Carmel Hospital reported directly to her. Dr. Maryland has extensive experience in strategic planning, patient care operations, service line management, finance, clinical program development and evaluation. At St. Vincent Health she helped to create six Centers of Excellence, and developed an agreement with Cincinnati Children’s Hospital Medical Center to enhance the pediatric subspecialty services to St. Vincent Children’s Hospital. Under her leadership, St. Vincent Indianapolis Hospital received top-ranking recognitions by Anthem, Leapfrog and Healthgrades, and received the Consumer Choice Award for nine consecutive years. Before joining St. Vincent Health, Dr. Maryland served as President of Sinai-Grace Hospital and Senior Vice President of Detroit Medical Center. She also served as Executive Vice President / Chief Operating Officer at North Oakland Medical Centers, Pontiac, Michigan, and worked for 15 years at Cleveland Clinic in Ohio. Dr. Maryland received a bachelor’s degree in applied mathematics from Alabama State University, Montgomery, and a master’s degree in biostatistics from the University of California, Berkeley. She holds a Doctorate of Public Health from the University of Pittsburgh, concentrating in health services administration and planning.
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Sr. Maureen McGuire, DC, Executive Vice President, Mission Integration. Sr. Maureen McGuire is Executive Vice President, Mission Integration for Ascension. In this role, she provides leadership in creating strategy and initiatives in the areas of mission and values integration, workplace spirituality, ethics, leadership formation and spiritual care. Her work supports the efforts of health ministry Chief Executive Officers, vice presidents for mission integration and executive teams in their leadership of Ascension as a ministry continuing the healing mission of Jesus. Immediately prior to joining the senior leadership team of Ascension in 2002, Sr. Maureen served as Vice President, Service Culture Development for the Catholic Health System of Western New York in Buffalo, and concurrently as Vice President, Mission Integration for Mount St. Mary’s Hospital and Health Center in Lewiston, New York. She also had served as Vice President, Mission Integration for Sisters of Charity Hospital in Buffalo, New York, and participated in the early formation of the Catholic Health System of Western New York while in that role. Prior to entering the health care ministry, Sr. Maureen held various leadership and direct service roles in professional social work. She began as a caseworker and counselor in child welfare and mental health settings in Philadelphia, Pennsylvania. She then served as a supervisor at the Family Life Bureau of the Diocese of Allentown in two large rural counties, where she initiated programs of lay formation in 84 parishes, preparing married couples to serve as facilitators of programs for engaged couples. She then assumed a leadership role as part of Catholic Charities of the Diocese of Albany, New York, serving as Executive Director of Catholic Family and Community Services in two counties. In this capacity she worked with an interfaith local board to develop a wide variety of community-based services. In 1992, she initiated the Nazareth Residence for Mothers and Children in Roxbury, Massachusetts, one of the first transitional housing programs in the nation for homeless women and children affected by HIV/AIDS. Sr. Maureen served for six years as Seminary Directress of the Daughters of Charity of St. Vincent De Paul, working with the new members of the community and developing the interprovincial formation program for the five United States provinces. Sr. Maureen earned her bachelor’s degree, summa cum laude, from St. Joseph College in Emmitsburg, Maryland, and received her master’s of social work from Temple University in Philadelphia, Pennsylvania, in 1977.
David Pryor, M.D., Chief Clinical Officer. David B. Pryor, MD, supports all divisions of Ascension and the more than 40,000 Ascension physicians and caregivers, and their practices, in delivering improved care to patients as the senior clinical officer of the System. David has been part of Ascension for more than a decade, previously serving as President and Chief Executive Officer of Ascension Clinical Holdings and Chief Medical Officer for Ascension Health. Prior to joining Ascension, Dr. Pryor was Senior Vice President and Chief Information Officer for Allina Health System in Minneapolis, Minnesota. Prior to Allina, Dr. Pryor was President of the New England Medical Center Hospitals in Boston, Massachusetts. Dr. Pryor began his rise to prominence in clinical excellence at Duke University Medical Center in Durham, North Carolina, where he served as a practicing cardiologist and director of the cardiology consultation service, the section of Clinical Epidemiology and Biostatistics, the Duke Database for Cardiovascular Disease, and clinical program development. In his 15 years at Duke, Dr. Pryor chaired numerous committees including the Patient Care Subcommittee, the Duke University Heart Center Database Committee, the Quality Care Task Force and the Medical Center Computer Advisory Committee. Dr. Pryor has served on the editorial boards of the American Journal of Medical Quality, the American Journal of Managed Care, the International Journal of Cardiology, Cardiology Emergency Decisions, and as a reviewer for numerous other medical journals. He has authored more than 250 publications and has been the principal investigator of a number of significant research investigations. Dr. Pryor also has participated on numerous national and international committees including the Earnest Codman Awards Committee (JCAHO National Quality Awards, 1997-1999); The Advisory Council for Performance Measurement for the Joint Commission (1995 - present, chairman 1998-2003), the national scientific session committees for the American Medical Informatics Association (AMIA) 2000 Spring Congress, the American College of Cardiology, 1991-1992, and the American Heart Association, 1994-1996. He was listed as one of Modern Healthcare’s 100 Most Influential People in Healthcare in 2002 and 2005 and as one of Modern Healthcare’s 50 Most Powerful Physician Executives
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in 2006 and 2008. He received the CareScience Executive Leadership Award in 2006. In addition to his position at Ascension, Dr. Pryor’s academic appointments include Consulting Associate Professor of Medicine at Duke University Medical Center and Adjunct Professor at Saint Louis University School of Public Health. Dr. Pryor is a graduate of the University of Michigan Medical School in Ann Arbor, Michigan, and he completed his medical internship and residency at Pennsylvania Hospital in Philadelphia, and his fellowship in cardiovascular diseases at Duke University in Durham, North Carolina.
Nick Ragone, Esq., Senior Vice President and Chief Marketing and Communications Officer. Nick Ragone is Senior Vice President and Chief Marketing and Communications Officer, Ascension. In this role, he oversees the creation and execution of brand and marketing, public relations, social, digital, and internal communications for Ascension and its subsidiaries. Since joining Ascension, Mr. Ragone has led efforts to centralize the marketing and communications functions to support the creation of a highly integrated health system. In addition, he focuses on defining and strengthening the Ascension brand, implementing a robust thought leadership plan, and developing a corporate social responsibility platform for the national health system. Prior to joining Ascension, Mr. Ragone was the Director of the Washington, D.C., office of Ketchum, a global public relations firm. In that capacity he oversaw operations for the 130-person office. In addition, Mr. Ragone served as a senior strategist, counselor and media trainer to many of the agency’s clients, including JPMorgan Chase & Co., Express Scripts, H&R Block, Universal Health Services, FedEx, Blue Cross/Blue Shield, Macy’s, and the U.S. Farmers and Ranchers Alliance, among others. Before leading the Washington, D.C., office, Mr. Ragone was the Associate Director of Ketchum’s New York office, where he ran the media, social media, corporate and issues practices. In that capacity, Mr. Ragone helped create Ketchum’s national media group, which consists of 19 full-time media professionals, the largest dedicated group in the agency. Mr. Ragone, a former Adjunct Professor at Georgetown University, Washington, D.C. is a graduate of Rutgers University, Piscataway Township, N.J., and earned a Juris Doctor degree from the Georgetown University Law Center. Mr. Ragone is the author of five books, including four on government and politics, with his most recent being “Presidential Leadership: 15 Decisions That Changed the Nation” (February 2011).
Anthony J. Speranzo, Executive Vice President and Chief Financial Officer. Anthony J. (Tony) Speranzo is the Executive Vice President and Chief Financial Officer of Ascension. Previously, he served as the Senior Vice President and Chief Financial Officer of Ascension Health. Mr. Speranzo is a proven leader with extensive health care experience and expertise in treasury functions, debt management, investments, and mergers and acquisitions. Prior to joining Ascension in 2002, Mr. Speranzo served as Managing Director at U.S. Bancorp Piper Jaffray in Newport Beach, California, where he was responsible for strategic financial advisory services related to mergers, acquisitions, and divestitures, private debt placements, valuations and strategic market planning. His clients included hospitals, integrated health systems, medical group practices and managed care organizations nationwide. He entered investment banking in 1996 as Vice President and Manager, Corporate Finance for John Nuveen & Co., Inc. in Irvine, California, where he was responsible for the development and management of the health care corporate finance division within the investment banking operation. Prior to 1996, Mr. Speranzo spent 11 years at the St. Joseph Health System in Orange, California, holding several positions, including Vice President, Finance and Operations and Senior Vice President, Chief Financial Officer. Mr. Speranzo has served on several hospital and corporate boards. Mr. Speranzo received his bachelor’s degree in economics from the University of Massachusetts in Boston, Massachusetts. He went on to complete his Master’s in Business Administration degree from Suffolk University in Boston, Massachusetts.
Herbert J. Vallier, Executive Vice President and Chief Human Resources Officer. Herbert J. (Herb) Vallier is the Executive Vice President and Chief Human Resources Officer of Ascension and Chief Executive Officer of Ascension SmartHealth Solutions. As part of the executive management team,
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Mr. Vallier provides strategic thought leadership on, and oversees the development of, human resource initiatives and capabilities throughout Ascension. Mr. Vallier most recently served as Executive Vice President/CHRO for Dignity Health, a faith-based health system serving California, Arizona and Nevada. From 2006 to 2013, Mr. Vallier was a member of the Board of Trustees of Ascension Health. Mr. Vallier brings more than 25 years of experience in Human Resources administration to his role with Ascension. Prior to joining Dignity Health, Mr. Vallier served as Senior Vice President of Human Resources at Catholic Health Initiatives. He also has served as the Executive Vice President for Human Resources for Revlon, Inc., and as the Director of Strategic Staffing for the Office of the President and Provost at Harvard University. He has held leadership positions in human resources and administration with Central Massachusetts Health Care, Inc., Health America Corporation and Shell Oil Company. Mr. Vallier also served in the United States Air Force Chaplain Service and Social Actions Division. He received his bachelor’s degree in personnel and labor relations from the University of Maryland, College Park, Maryland, and served as co-chairman of the Harvard University Association of Black Faculty and Administrators. He partnered with the Workplace Diversity Network, a joint project of the National Conference for Community and Justice and Cornell University, ILR, on diversity issues. The project focused on creating a framework for building organizational inclusion and developing a diversity inclusion model.
Ministry Market Executives
Ascension uses the concept of “Ministry Market Executives” to provide leadership, support and direction to a group of health ministries within a specific geographic or operational area. Ministry Market Executives share accountability for strategic positioning and operational performance for the health ministries in their geographic market. The health ministry Chief Executive Officers within each market report jointly to their Ministry Market Executive and their local board of trustees.
The current Ministry Market Executives for each of the specified geographic areas are set forth below:
Geographic or Functional Area Ministry Market Executive AMITA Health1 Mark Frey, Senior Vice President, Ascension Healthcare and President/CEO, AMITA Health Baltimore Keith Vander Kolk, Health System President and CEO - Saint Agnes HealthCare Birmingham (includes certain facilities in the State of Neeysa Biddle2, 3, Senior Vice President, Ascension Alabama) Healthcare and Birmingham Ministry Market Executive Bridgeport, Connecticut Vincent (Vince) Caponi, Health System President and CEO - St. Vincent’s Health Services Gulf Coast (includes certain facilities in the States of Susan Davis, Ed.D., RN, Senior Vice President, Alabama and Florida) Ascension Healthcare and Gulf Coast Ministry Market Executive Indiana Jonathan S. Nalli, Senior Vice President, Ascension Healthcare and Indiana Ministry Market Executive Jacksonville, Florida Tom VanOsdol, Interim President and CEO, St. Vincent’s HealthCare
1 For more information on AMITA Health, see “AFFILIATIONS, ACQUISITIONS, DISAFFILIATIONS AND DIVESTITURES—AMITA Health (Alexian Brothers Adventist Joint Operating Company)” herein.
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Geographic or Functional Area Ministry Market Executive Kansas Michael Mullins, Senior Vice President, Ascension Healthcare and Kansas Ministry Market Executive Michigan (includes all facilities in the State of Gwen MacKenzie, Senior Vice President, Ascension Michigan) Healthcare and Ministry Market Executive, Ascension Michigan Amsterdam, New York Victor Giulianelli, Health System President and CEO - St. Mary’s Healthcare Binghamton, New York Kathryn Connerton, Health System President and CEO, Our Lady of Lourdes Memorial Hospital, Inc. Tennessee Karen Springer, Senior Vice President, Ascension Healthcare and Tennessee Ministry Market Executive Texas (includes all facilities in the State of Texas) Jesús Garza3, Senior Vice President, Ascension Healthcare and Texas Ministry Market Executive Tulsa, Oklahoma David Pynn, Senior Vice President, Ascension Healthcare and Tulsa Ministry Market Executive Washington, D.C. Darcy K. Burthay, RN, MSN, Health System President and CEO – Providence Hospital Pasco, Washington John Serle, Health System President and CEO – Lourdes Health Network Wisconsin (includes all facilities in the State of Bernie Sherry, Senior Vice President, Ascension Wisconsin) Healthcare and Ministry Market Executive, Ascension Wisconsin 2 Neeysa Biddle has announced her plans to retire as Birmingham Ministry Market Executive effective June 30, 2017. Jason Alexander was announced as the new Birmingham Ministry Market Executive. 3 Jesús Garza has announced his plans to retire as Texas Ministry Market Executive effective August 1, 2017. A new Texas Ministry Market Executive has not yet been announced. Beginning on May 1, 2017, Neeysa Biddle will partner with the leadership of the Ascension Texas Ministry Market in a temporary consulting role to assess the operations and to determine best next steps in preparation for a new Texas Ministry Market Executive being identified.
Committees
The bylaws of Ascension create standing committees (the Audit Committee, the Executive Committee, the Executive Compensation Committee and the Finance Committee) and authorize the creation of special committees from time to time by the Board of Directors. Each of the current committees of Ascension is described below.
Audit Committee. The Audit Committee is the Audit Committee for the System and is responsible for (a) examining the accuracy and validity of the financial and statistical information used by the Board of Directors and the Finance Committee or by external agencies to evaluate Ascension’s financial affairs; (b) determining what the Corporation is doing to provide reliable financial statements and the maintenance of financial controls; (c) evaluating audit performance; (d) corporate compliance; and (e) appointing the auditors of the System.
Executive Committee. The Executive Committee consists of the Board Chair, Vice Chair, Secretary, Treasurer and President/CEO. The Chair of the Board of Directors is the chair of the Executive Committee. The Executive Committee has responsibility and authority for taking any action permitted by law in lieu of a meeting of the Board of Directors. The Executive Committee meets at such
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time as is determined by the chair of the Executive Committee. When action is taken by the Executive Committee, it is reported to the Board of Directors at the next meeting of the Board of Directors.
Executive Compensation Committee. The Executive Compensation Committee is the Executive Compensation Committee for the System and (a) oversees the System’s Executive Compensation Program; (b) determines the philosophy of the Executive Compensation Program; (c) approves the design of the executive benefits program for the System’s executives; (d) reviews the job performance and determines the compensation and benefits of the Corporation’s President/CEO; and (e) reviews the recommendations of the President/CEO on the job performance and pay of the Corporation’s executive management team.
Finance Committee. The Finance Committee is responsible for (a) reviewing and recommending to the Board of Directors the guidelines for the System Integrated Strategic, Operational and Financial Plan, including the annual system integrated scorecard and System initiatives, and the financial policies and procedures of the System; (b) developing and recommending to the Board of Directors a long range financial plan for the System; (c) monitoring the financial condition of the System; (d) making appropriate recommendations on financial issues arising in the System; and (e) maintaining current knowledge of the management and investment of all the endowment, trust and other funds of the System.
System Office and Ministry-wide Functions
Ascension and its Healthcare and Solutions divisions’ main offices (the “System Office”) are located in St. Louis, Missouri, and together employ over 800 people as of June 30, 2016. The System Office provides a wide range of strategic, corporate and shared services designed to meet the needs of the Ascension subsidiaries, in some cases as part of Ministry-wide Functions that also include associates working at other locations across Ascension’s national geographic footprint. In addition, the System Office and Ministry-wide Functions have implemented policies and procedures to encourage that best practices and knowledge are implemented throughout the System. Following is a list of available shared services staffed by the System Office and/or Ministry-wide Functions.
Mission Integration Ministry-wide Function. The purpose of the Mission Integration Ministry- wide-Function is to foster a shared accountability for stewarding Ascension’s identity as a Ministry of the Church through the work of Mission Integration while promoting a new model for delivering Ethics services and developing added approaches to Formation for leaders, associates and caregivers.
Mission and Ethics. Mission and Ethics provides strategic leadership in the integration of the mission, vision and values throughout all sponsored organizations and partnerships of Ascension in support of System strategy and the direction articulated in the Strategic Direction. This includes collaboration with local mission leaders by offering System support and resources designed to foster a spiritually vital and effective workplace for the leadership, associates, physicians, board members and volunteers throughout the System. Mission Integration involves conceptualizing, developing, promoting and implementing a full continuum of leadership and development activities in the following areas: Catholic identity and sponsorship; ethics (business, clinical and social); spirituality and ministry; care of the poor and community benefit; leadership formation; heritage; and legacy. Mission and Ethics also provides ethical and theological reflection, analysis, research, consultation and education for assisting trustees, senior leaders, managers, clinicians and ethics committees in fulfilling their responsibilities for ethical decision making and discernment, and for the ethical integrity and Catholic identity of Ascension, its subsidiaries and its health ministries. Services include ethics leadership and support to health ministries; policy development and review; ethical analysis and review of management and service contracts, merger agreements, and other forms of partnerships to ensure consistency with the ethical and
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religious directives and Catholic teaching; clinical and organizational ethics consultation; continuing development of ethics education programs; and resources for general use.
Formation. Ascension has developed a variety of formation programs rooted in theology and spirituality that support its vision to expand the role of the laity to ensure a Catholic health care ministry of the future. The various programs offer opportunities for formation related to spirituality in the workplace, Catholic health care ministry leadership via a two-year program for selected leaders, and ongoing executive formation for all leaders. Formation programs have also been developed for board members, physicians and management associates. These programs are designed to form leaders to have an understanding of and commitment to the foundations of the ministry.
Advocacy Ministry-wide Function. The advocacy Ministry-wide Function serves as a national coordinated public policy and grassroots advocacy firm for Ascension and includes a coordinated and collaborative approach to agenda setting and strategy execution. It positions Ascension as a transformative leader in healthcare by developing consistent public policy content demonstrating Ascension’s commitment to health system transformation and Healthcare That Leaves No One Behind.
Marketing and Communications Ministry-wide Function. The Marketing and Communications Ministry-wide Function communicates Ascension’s strategic and operational messages to both internal and external communities, including patients and prospective patients, employees, news media, community members, the financial community, regulatory and public affairs entities, medical and hospital industry professionals, and religious sponsors. A wide variety of marketing and communications vehicles are employed, including television and print advertising, social and digital media content, print and radio advertising, and website content development. The Marketing and Communications function seeks to enhance the ministry’s leadership position in the industry by supporting accomplishment of the System’s objectives.
Clinical Ministry-wide Function. The Clinical Ministry-wide Function is primarily focused on improving quality across the System and enabling a learning organization, continuing the tradition of “everyone teaches, everyone learns.” By standardizing quality metrics and sharing performance, Clinical enables the lessons learned from top performers in the System to be rapidly spread. This reorganization and design work allows Ascension to extend and expand existing work in delivering cost-effective, standardized, quality care. It will identify and establish the data and analytic infrastructure to support this work, enabling Ascension to realize new and ongoing savings. Clinical care delivery continues to be the responsibility of the local Ministry Market, but clinical priority and goal setting will be cascaded down from the System level. Local Ministry Markets may supplement System-wide goals with additional priorities. The Clinical Ministry-wide Function includes the Ascension Clinical Research Institute (ACRI), a new Ascension entity designed to leverage the size and footprint of Ascension to advance the Ascension Quadruple Aim – delivering exceptional health outcomes, an exceptional experience for the people Ascension serves and an exceptional experience for providers, at an affordable cost; to position Ascension for increased public policy influence; to create a cost-effective infrastructure to enable a learning organization; and to build and strengthen local market initiatives.
Corporate Responsibility. The System Office manages and provides oversight of the Ascension Corporate Responsibility Program (“CRP”), including the development and maintenance of a System- wide standard of conduct, hotline service, educational materials, annual risk assessment process, and auditing tools. System-wide CRP standards and procedures are promulgated through the CRP Manual, which includes a CRP effectiveness tool that is the foundation of an annual assessment of health ministry compliance with such standards. Significant compliance investigations at the health ministries are also monitored by the System Office on an ongoing basis.
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Finance Ministry-wide Function. Finance staff provides financial oversight and stewardship in the interests of senior management, governance, sponsors and the financial community, and the communities in which the System operates. Finance staff provides consolidation, review, analysis and reporting of financial information in a timely manner, and fosters consistent and accurate financial accounting and reporting through the development, maintenance, and use of the Ascension Accounting & Reporting Manual. Finance staff provides analysis support and advice with respect to financial statements, annual budgets, financial plans and capital projects and provides financing and cash and investment management services. The Finance staff maintains accounting records of the System Office and several trust funds.
Finance-Treasury. Finance-Treasury staff provides administration of a comprehensive cash management program that concentrates operating cash into a centralized investment pool, processes accounts payable transactions and leads bank rationalization associated with the Symphony initiative. Finance-Treasury staff provides oversight for the centralized debt management program, and is also responsible for providing financing for approved projects with a common cost of capital or blended interest rate.
Internal Audit. Ascension, through its 10% ownership interest in CHAN Healthcare Auditors (“CHAN”), a subsidiary of Crowe Horwath, currently provides internal audit solutions for the health ministries. Services performed by CHAN employees include audit, coding/compliance, information technology and risk assessment. CHAN auditors maintain a permanent on-site presence in 29 tax-exempt health care networks across the nation, operating in more than 600 hospitals and health care facilities.
Legal Ministry-wide Function. The Legal Ministry-wide Function has adopted a law firm model to serve Ascension, its Direct Subsidiaries and its Ministry Markets. It operates with a single reporting structure and consistent access to resources that improve quality, consistency and efficiency. Legal provides legal counsel and support to the Board of Directors, the Board of Trustees and management. Among other services, the Legal Ministry-wide Function staff across the System provide counsel in connection with major litigation, conflicts of interest, executive compensation, governance, tax exemption and IRS Form 990 compliance and support to the subsidiaries including (a) management of major transactions involving the subsidiaries; (b) oversight of major litigation; (c) revision and development of System policies and procedures to provide guidance on issues such as email and document retention, joint ventures, and major construction projects; (d) educational web conferences on new and revised regulatory requirements; and (e) revision and implementation of model bylaws for the subsidiaries.
Human Resources Ministry-wide Function. The HR Ministry-wide Function is shared services organization designed to deliver best-in-class services that ensure the healthiest and most inspired associates as Ascension realizes its Model Community ambition and continues its work together as One Integrated Ministry. HR provides leadership in the areas of benefit services including the administration of a variety of benefit plans providing life disability and health care coverage to employees System-wide. Additional services include supporting all functional activities of the System retirement program. In addition, HR is developing Centers of Expertise for Talent Acquisition and Onboarding, Learning and Development, Associate Rewards, Talent Stewardship and Organizational Effectiveness, including measuring employee engagement through comprehensive employee survey techniques.
Information Technology. Ascension Health-IS, Inc., d/b/a Ascension Information Services (AIS), a Missouri non-profit corporation in which Ascension is the sole corporate member, provides technology solutions for all of Ascension and assists in the selection, implementation, operation and improvement of the cost effectiveness of clinical and administrative information technologies. Ascension Information Services operates numerous platforms from every major vendor in the health care industry
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and provides consulting support to Ascension’s Healthcare and Solutions divisions as they develop information technologies in response to the changing health care environment.
Strategy Ministry-wide Function. The Strategy Ministry-wide Function serves as a strategic thought leader and collaborative business partner for all of Ascension in identifying growth opportunities, developing strategies, aligning initiatives, and driving execution to fulfill Ascension’s Mission, advance the Strategic Direction, clarify strategic priorities and extend the influence of the ministry.
Risk Management. The System Office manages the commercially insured and self-insured risk programs, ensuring effective program design and placement, regulatory compliance, and centralized administration. Risk Management staff provide education and guidance to the subsidiaries in the areas of workers’ compensation and disability management, associate safety, patient safety and proactive claims management.
Operations Resource Group. The Operations Resource Group (“ORG”) is an internal consulting team that assists the health ministries to achieve the level of performance necessary to realize the Strategic Direction. The ORG is composed of internal operational, financial, supply chain and clinical consultants that encourage a disciplined approach and offer subject matter expertise designed to improve performance. The ORG facilitates the changes necessary to improve operations while actively involving managers, physicians and staff in the process. The approach incorporates external and internal benchmarks and industry best practices. Simulation modeling and process mapping techniques are incorporated where appropriate. The ORG coaches and mentors physicians, management and staff; realistic change opportunities are identified and quantified; and action steps are developed. The ORG supports the implementation process. Tools are introduced that allow continuous monitoring of improvements. The ORG shares the experiences, lessons learned, and best practices among the health ministries.
Facilities Resource Group. The Facilities Resource Group (“FRG”) is charged with improving the master planning, development, approval and implementation processes that enable capital projects to progress. A particular emphasis is on reducing initial construction costs through the application of design standards and project procedures and shortening the “time-to-market” for projects. FRG’s ultimate goal is to improve the clinical and operational outcomes of new facility projects.
The Joint Commission Support. The System Office provides support services around regulatory compliance with The Joint Commission and CMS standards. This includes educational programs; conference calls; annual survey coordination and reports of survey findings/trends to senior leadership; individual facility consultations, including on-site consultations as required; and knowledge sharing through the Ascension intranet.
Common Financial Practices
As discussed herein under the caption “Affiliated Organizations,” Ascension operates under a credit group concept (both senior and subordinate), utilizing centralized debt compliance monitoring and unified debt management. Ascension also utilizes common accounting practices under a single accounting and reporting manual and uses the shared internal audit resources of CHAN. Through the Ascension Ministry Service Center, Ascension has streamlined and centralized certain key financial and operational processes including a common general ledger, supply chain and human resources management systems.
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A single corporate compliance program, financial planning model, budget process and capital allocation process are in place. Daily cash management is also under common administration as is pooled investment management.
Affiliated Organizations
Ascension has many subsidiary and affiliate organizations, some of which are not part of the Credit Group, including:
AH Holdings, LLC (d/b/a Ascension Holdings). Ascension Holdings, a wholly owned subsidiary of Ascension, is the member of Medxcel Facilities Management, whose role is to consolidate, standardize and optimize the Facilities Management, Safety and Emergency Management functions within Ascension. Effective May 1, 2016, Ascension and investment management firm TowerBrook Capital Partners created a new, independent partnership vehicle that owns TriMedx LLC and several related subsidiaries. TriMedx analyzes current health care equipment service practices to reduce equipment maintenance expense and improve quality. As part of the transaction, Ascension has entered into a new long-term customer contract with TriMedx for the provision of clinical engineering and other healthcare technology asset management services at Ascension’s sites of care. In connection with the transaction, Ascension received a cash payment and each Ascension and TowerBrook Capital Partners received a 49.5% interest in the newly created entity. The remaining 1% interest in the new entity was offered to and is held by certain key members of TriMedx’s management team. Ascension Holdings is also the member of Ascension Holdings International, Inc. (“AHI”). AHI was formed on June 22, 2016 with the aim to take a strategic approach to international markets. This approach is intended to be met by diversifying Ascension’s financial platform in support of its Mission; gaining broad exposure and early access to the growing environment of innovative ideas and thinking from other parts of the world; and better preparing ministry leaders for leadership in an increasingly interconnected and interdependent world.
Ascension Health Global Mission (d/b/a Ascension Global Mission). Ascension Global Mission, formerly known as Seton Institute, was formed as a Missouri nonprofit corporation on January 29, 2003. Ascension is the sole corporate member. Ascension Global Mission’s purposes and functions are to facilitate the partnering of American hospitals, corporations, churches and schools with similar institutions in developing countries; to achieve health and wholeness for all people in the world; to extend the message of justice and human dignity to people everywhere; to advocate for people who are poor throughout the world; and to assist Catholic religious women abroad to build healthier communities by securing materials and financial support, technical assistance and human resources that are not available in those countries.
Ascension Health – IS, Inc. (d/b/a Ascension Information Services). Ascension Information Services (“AIS”) was formed as a nonprofit corporation in 2005, and is a Senior Obligated Group Member. Ascension is its sole corporate member. AIS was formed to provide information technology infrastructure and software application support services to all member entities of the System.
Ascension Ventures, LLC, AV Holding Company, LLC, Ascension Ventures II, LLC, Ascension Ventures III, LLC, Ascension Ventures IV, LLC (together “Ascension Ventures” or “AV”), and CHV II, LP, CHV III, LP, and CHV IV, LP. Ascension Ventures is a wholly owned strategic health care venture fund manager focused on the medical device, technology and health care service sectors, with total committed capital of $785 million to invest in early to late-stage health care companies. AV’s role is to construct and manage a strategic portfolio of investments that deliver a venture investment return to its limited partners. AV seeks to invest in companies whose offerings improve clinical outcomes, reduce costs, and/or enhance the experience of patients, families, and caregivers.
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The first strategic venture capital fund of AV is wholly owned by Ascension and has $125 million under management. CHV II, LP, CHV III, LP, and CHV IV, LP, are strategic venture capital funds organized as Delaware limited partnerships. All four funds invest in health care related companies with similar investment strategies. Ascension Ventures II, LLC, Ascension Ventures III, LLC, and Ascension Ventures IV, LLC, are wholly owned subsidiaries of AV Holding Company, LLC, which is a wholly owned subsidiary of Ascension, and are the general partners of the respective CHV partnerships. CHV II, LP, has $200 million in committed capital from Ascension Alpha Fund, Catholic Health Initiatives, Trinity Health, Dignity Health, and Franciscan Alliance. CHV III, LP, has $225 million in committed capital from Adventist Health System, Ascension, Catholic Health Initiatives, Trinity Health, Decatur Memorial Hospital, Dignity Health, Mercy (St. Louis) and Intermountain Healthcare. CHV IV, LP, held a final closing with $255 million in committed capital from 13 limited partners on November 23, 2016. All CHV III, LP partners, with the exception of Dignity Health and Trinity Health, participated in CHV IV and the following new limited partners joined: The Carle Foundation, Inova Health System, Novant Health, OhioHealth, OSF Healthcare System, CentraCare Health, and Children’s Medical Center of Dallas.
Ascension Health Senior Care (d/b/a Ascension Senior Living). In July 2014, Ascension began to consolidate its network of senior care facilities and programs into a national senior services organization with its own dedicated leadership team. This reorganization brings benefits of consolidation, standardization and streamlined decision-making to senior services, including improved clinical, operational and financial performance. Ascension Senior Living (a Senior Obligated Group Member) is a separate, not-for-profit subsidiary of Ascension’s Healthcare Division. Under this structure, Ascension Senior Living is a significant not-for-profit provider in the United States, with 5,025 independent living, assisted living, long-term-care/skilled-nursing beds, and 581 Program of All-Inclusive Care for the Elderly enrollees. In connection with this reorganization, certain entities which previously had not been part of any obligated group have been added to the Credit Group.
Ascension Health At Home, LLC (d/b/a Ascension At Home). In September 2014, Ascension formed a joint venture, Ascension Health at Home, LLC, with an existing provider of home health services, the objective of which is to better position the organization for the transition to population health management, and to enhance the level of care and breadth of service delivered to patients and their families. As of July 30, 2016, Ascension has completed primarily all of its transfers of home health and hospice service lines and related assets from certain members of the Credit Group to the joint venture, which is not a member of the Credit Group. Ascension does not believe that this will have a material adverse effect on the financial position of the Credit Group.
Clinical Holdings Corporation (d/b/a Ascension Clinical Holdings). Ascension Clinical Holdings works to improve care and control health care costs. One area of concentration is helping physicians better manage the administrative side of their practices through standardized solutions that allow physicians to spend more time with patients. To advance this work, in September 2013 Ascension Clinical Holdings announced the formation of Ascension Physician Services, a new division to streamline, standardize and consolidate physician practice operations across the Ascension physician enterprise. This includes creation of a common revenue cycle service center serving all practices of the Ascension physician enterprise, and a common physician practice management system. Effective July 1, 2015, Ascension became the sole shareholder of Ascension Clinical Holdings, and Ascension’s interest has recently been assigned to Ascension’s Healthcare Division.
Consulting Network, LLC. For the purpose of preserving institutional knowledge and ensuring continuity as executives retire, Ascension has formed a new limited liability company called Consulting Network, LLC, a wholly owned subsidiary of Ascension intended to provide consulting services to Ascension subsidiaries and possibly other healthcare organizations. From time to time, Consulting
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Network, LLC will contract with former Ascension executives and possibly others to provide consulting services on an as-needed basis. This will greatly improve Ascension’s ability to call upon experienced leaders as situations require and enable the organization to retain significant institutional knowledge and experience.
Ascension Health Ministry Service Center, LLC (d/b/a Ascension Ministry Service Center). The Ascension Ministry Service Center (“MSC”) delivers services in the areas of Hire to Retire (HR), Procure to Pay (Supply Chain), and Record to Report (Finance) to all Ascension entities live on the Symphony system. The MSC serves nearly 145,000 associates across the System. A total of 75 Service Level Targets (“SLTs”) are committed to Ascension clients.
Ascension Care Management, LLC (“Ascension Care Management”). Ascension Care Management was formed as a direct subsidiary of Ascension to support and advance the insurance, risk management, accountable care and population health initiatives of Ascension and its health ministries. The accountable care and population health initiatives are performed through Ascension Care Management’s wholly owned subsidiary, Ascension Care Management Health Partners, Inc. and its affiliates (“ACM Health Partners”). ACM Health Partners participates in the Medicare Shared Savings Program and provides population health management services for employers and payors through Accountable Care Organizations in several states, and also manages four on-site clinics in California and Texas.
In addition, Ascension Risk Services, LLC (“Ascension Risk Services”) is a Missouri limited liability company whose sole corporate member is now Ascension Care Management. Ascension Risk Services helps Ascension Care Management and Ascension manage its diverse risks across the full continuum of care as well as expand its insurance offerings to other health care organizations and aligned (non-employed) providers. Ascension Risk Services’ programs expand beyond the traditional hospital and physician professional and general liability and other property and casualty risks to employee benefit related risks, regulatory risks, and provider financial risks, which are becoming more common with the advent of accountable care organizations. Ascension Risk Services utilizes complex risk financing vehicles, including two captive insurance companies with both first-party and third-party risk.
Ascension Health Insurance, Ltd. (“AHIL”) was formed in 1986 as a captive insurance company, domiciled in the Cayman Islands. Ascension Risk Services is its sole corporate member. AHIL provides primary and excess insurance to Members of the Credit Group and affiliated organizations. Sunflower Assurance, Inc. (“Sunflower”) which was acquired when Via Christi Health joined Ascension, is also a captive insurance company domiciled in the Cayman Islands. Sunflower provides reinsurance to ProAssurance for Certitude, Ascension’s branded Physician Medical Malpractice Program. Ascension Risk Services is also Sunflower’s sole corporate member.
Additionally, Ascension Care Management Holdings Limited is a Michigan-based corporation that provides life, accident and health related insurance policies on a group basis and provides benefits processing, payments, managed care and other services through several of its wholly-owned affiliates. Ascension Care Management Holdings, Limited is a wholly owned subsidiary of Ascension Care Management Insurance Holdings, which is a wholly owned subsidiary of Ascension Care Management, LLC.
Ascension Investment Management, LLC. Ascension Investment Management, LLC, a Missouri nonprofit corporation (“AIM”), was formed in 2013 and became operational on January 1, 2014 as the successor-in-interest to Catholic Healthcare Investment Management Company (“CHIMCO”). CHIMCO was structured as a non-profit corporation and a wholly owned subsidiary of Ascension that performed the same functions as AIM prior to 2014. AIM is a federally registered investment adviser.
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AIM is a wholly owned subsidiary of Ascension whose purpose is to provide investment advisory services to Ascension and its related entities, as well as to other clients. AIM offers expertise in the areas of asset allocation, manager selection and risk management and strives to provide clients with benefits such as increased returns, flexible investment choices, investment asset class diversification, access to quality managers, administrative ease, cost economies and socially responsible investment choices. Additionally, AIM manages the Alpha Fund, a Delaware limited liability company, in which assets of Ascension are invested. The majority of Ascension’s long term operating funds are invested in the Alpha Fund.
Ascension Health Resource and Supply Management Group, LLC (d/b/a The Resource Group). The Resource Group, a wholly owned subsidiary of Ascension provides a sourcing, procurement and operations model that continuously implements sustainable non-labor expense reductions in collaboration with the subsidiaries, physicians and associates, while ensuring that a high level of quality is maintained and accepted for end users.
In March 2012, The Resource Group received status as a Group Purchasing Organization (“GPO”) after receiving a favorable opinion by the Office of the Inspector General. A GPO represents a number of organizations, acting as the contracting agent for all its participants, leveraging purchasing volume to stimulate competitive prices and effective utilization for products and services. As a wholly owned GPO, The Resource Group negotiates and manages contracts for its participants, which include the health ministries and other health care entities, hospitals and health systems, with the goal of effectively managing all participants’ expenses while supporting quality patient care and the Strategic Direction.
Ascension SmartHealth Solutions. Ascension SmartHealth Solutions, a direct subsidiary of Ascension introduced in February 2016, will partner with Ascension Care Management and Ascension Medical Group to deliver exceptional health and wellness benefit services to Ascension’s 150,000 associates and their dependents. Additionally, Ascension SmartHealth Solutions will apply all Ascension has learned to offer benefit services to small- and mid-sized self-insured employers around the country while promoting the use of Ascension providers and other Ascension services.
Ascension Medical Group. Ascension Medical Group, a wholly owned limited liability company of Ascension’s Healthcare Division, was formed to create a national physician enterprise within Ascension that is intended to be the catalyst for Ascension’s transformation from fee-for-service to fee- for-value and to manage the health of populations instead of focusing on delivering “sick” care. Management believes that regional clinically integrated system of care requires collaboration among private practice physicians, employed physicians, other caregivers and health systems. Ascension’s physician-led national provider organization is viewed by management as a critical component focused on ideal patient outcomes, an ideal patient and provider experience, at the lowest possible cost.
Insurance
Professional and General Liability Insurance. Credit Group Members are self-insured through a grantor trust and AHIL, with the exception of Mission and Ministry, Inc., which is insured commercially. For self-insured Credit Group Members, the trust and AHIL provide professional and general liability coverage on a claims-reported basis. AHIL provides coverage with a self-insured retention of $10 million per medical incident/occurrence with no aggregate. The grantor trust provides funding for claims within the $10 million self-insured retention. AHIL retains an additional $5 million per occurrence and $5 million annual aggregate for professional liability claims in a Buffer policy. An additional $225 million of Integrated Risk/Umbrella Liability is written through AHIL. The excess coverage is reinsured by commercial carriers. Self-insured entities in the states of Indiana and Wisconsin are provided professional liability coverage on an occurrence basis with limits in compliance with
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participation in the Patient Compensation Funds (“PCF”), PCF are state funds providing excess limits of coverage over the primary limits of insurance that must be in place by an insured in order to qualify for the PCF. Fronting arrangements are utilized for Credit Group Members in Kansas, Wisconsin and Pennsylvania that are not qualified self-insurers.
AHIL offers primary professional and general liability coverage for affiliates of Ascension. Professional liability and general liability coverage is on a claims-reported basis, with limits up to $1 million per medical incident/occurrence and $3 million in the annual aggregate. Ascension’s second captive insurance company, Sunflower Assurance, Inc. (“Sunflower”) which was acquired when Via Christi Health joined Ascension, provides reinsurance to ProAssurance for Certitude, Ascension’s branded Physician Medical Malpractice Program. Certitude offers physician professional liability coverage through insurance or reinsurance arrangements to non-employed physicians practicing at Ascension’s Healthcare Division’s various facilities. The primary limits range from $100,000 to $1 million per claim with various aggregate limits.
Workers’ Compensation Insurance. A grantor trust for workers’ compensation claims is maintained for Credit Group Members. The trust’s self-insured retention limit is $1.5 million per occurrence with no annual aggregates unless required by state law. For those entities not qualified for self-insurance, Ascension utilizes high-deductible or retrospectively rated commercial insurance programs. Excess insurance is purchased commercially up to the statutory limits.
Other Insurance Coverages. Commercial policies are maintained for property, directors’ and officers’ liability, employment practices liability, automobile, privacy and network security and other miscellaneous coverages in amounts consistent with levels generally carried by similar health care entities, and are in compliance with applicable state requirements.
Employees
As of June 30, 2016, Ascension and its subsidiaries employed, in the aggregate, approximately 160,000 employees, accounting for approximately 134,000 full-time equivalents. From time to time, the health ministries of Ascension will undertake certain actions to adjust their staffing levels to be consistent with the volume trends that are being experienced.
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LIST OF MEMBERS OF THE ASCENSION CREDIT GROUP AS OF THE DATE HEREOF
Credit Group Representative and Obligated Group Member
• Ascension Health Alliance (d/b/a “Ascension”) – St. Louis, Missouri
Obligated Group Members
Alabama
• St. Vincent’s Birmingham – Birmingham, Alabama • St. Vincent’s East – Birmingham, Alabama • St. Vincent’s Health System – Birmingham, Alabama • Gulf Coast Health System – Mobile, Alabama • Providence Hospital – Mobile, Alabama • St. Vincent’s Blount – Oneonta, Alabama
Arkansas
• Daughters of Charity Services of Arkansas – Gould, Arkansas
Connecticut
• St. Vincent’s Health Services Corporation – Bridgeport, Connecticut • St. Vincent’s Medical Center – Bridgeport, Connecticut • St. Vincent’s Special Needs Center, Inc. – Trumbull, Connecticut
District of Columbia
• Providence Hospital – Washington, D.C.
Florida
• St. Catherine Laboure Manor, Inc. – Jacksonville, Florida • St. Vincent’s Medical Center, Inc. – Jacksonville, Florida • St. Vincent’s Medical Center – Clay County, Inc. – Jacksonville, Florida • St. Vincent’s Health System, Inc. – Jacksonville, Florida • St. Luke’s – St. Vincent’s HealthCare, Inc. – Jacksonville, Florida • Sacred Heart Health System, Inc. – Pensacola, Florida
Indiana
• St. Vincent Anderson Regional Hospital, Inc. d/b/a St. Vincent Anderson – Anderson, Indiana • St. Vincent Dunn Hospital, Inc. – Bedford, Indiana • St. Mary’s Warrick Hospital, Inc. d/b/a St. Vincent Warrick – Boonville, Indiana • St. Vincent Clay Hospital, Inc. – Brazil, Indiana • St. Vincent Carmel Hospital, Inc. – Carmel, Indiana • St. Vincent Madison County Health System, Inc. – Elwood, Indiana • Mission and Ministry, Inc. – Evansville, Indiana • St. Mary’s Health, Inc. d/b/a St. Vincent Evansville – Evansville, Indiana • St. Vincent Fishers Hospital, Inc. – Fishers, Indiana • St. Vincent Health, Inc. – Indianapolis, Indiana • St. Vincent Hospital and Health Care Center, Inc. – Indianapolis, Indiana • Central Indiana Health System Cardiac Services, Inc. – Indianapolis, Indiana
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• St. Vincent Seton Specialty Hospital, Inc. – Indianapolis, Indiana • St. Vincent Health, Wellness and Preventive Care Institute, Inc. – Indianapolis, Indiana • St. Joseph Hospital & Health Center, Inc. – Kokomo, Indiana • St. Vincent Jennings Hospital, Inc. – North Vernon, Indiana • St. Vincent Salem Hospital, Inc. – Salem, Indiana • St. Vincent Williamsport Hospital, Inc. – Williamsport, Indiana • St. Vincent Randolph Hospital, Inc. – Winchester, Indiana
Kansas
• Via Christi Health, Inc. – Wichita, Kansas • Via Christi Hospitals Wichita, Inc. – Wichita, Kansas • Via Christi Hospital Wichita St. Teresa, Inc. – Wichita, Kansas • Via Christi Hospital Pittsburg, Inc. – Pittsburg, Kansas • Via Christi Rehabilitation Hospital, Inc. – Wichita, Kansas • Via Christi Villages, Inc. – Wichita, Kansas • Via Christi Healthcare Outreach Program for Elders, Inc. (HOPE) – Wichita, Kansas • Cornerstone Assisted Living, Inc. – Wichita, Kansas • Via Christi Village McLean, Inc. – Wichita, Kansas • Via Christi Village Georgetown, Inc. – Wichita, Kansas • Via Christi Village Hays, Inc. – Hays, Kansas • Via Christi Village Manhattan, Inc. – Manhattan, Kansas • Via Christi Village Pittsburg, Inc. – Pittsburg, Kansas
Louisiana
• Daughters of Charity Services of New Orleans – New Orleans, Louisiana
Maryland
• St. Agnes HealthCare, Inc. – Baltimore, Maryland • St. Joseph’s Ministries, Inc. – Emmitsburg, Maryland
Michigan
• St. Mary’s of Michigan – Saginaw, Michigan • Brighton Center for Recovery – Brighton, Michigan • Providence-Providence Park Hospital – Southfield, Michigan • Seton Healthcare Corporation of Southeast Michigan – Southfield, Michigan • St. John Providence – Warren, Michigan • Eastwood Community Clinics – Detroit, Michigan • St. John Hospital and Medical Center – Detroit, Michigan • St. John River District Hospital – East China, Michigan • St. John Macomb – Oakland Hospital – Detroit, Michigan • Borgess Health Alliance, Inc. – Kalamazoo, Michigan • Borgess Medical Center – Kalamazoo, Michigan • Ascension Medical Group ProMed – Kalamazoo, Michigan • Borgess Nursing Home, Inc. – Kalamazoo, Michigan • Genesys Health System – Grand Blanc, Michigan • Genesys Ambulatory Health Services, Inc. – Grand Blanc, Michigan • Genesys Regional Medical Center – Grand Blanc, Michigan • Standish Community Hospital, Inc. – Saginaw, Michigan • St. Mary’s – St. Joseph Health System – Saginaw, Michigan • Saint Mary’s Health – Saginaw, Michigan
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• St. Joseph Health System – Tawas City, Michigan • Crittenton Hospital Medical Center – Rochester Hills, Michigan • Ascension Michigan – Warren, Michigan
Missouri
• Ascension Health – St. Louis, Missouri • Daughters of Charity Foundation – St. Louis, Missouri • Ascension Health Senior Care – St. Louis, Missouri • Carondelet Health – Kansas City, Missouri • Seton Center, Inc. – Kansas City, Missouri • Ascension Health-IS, Inc. – St. Louis, Missouri • Carondelet Long Term Care Facilities, Inc. – Kansas City, Missouri
Oklahoma
• Via Christi Village Ponca City, Inc. – Ponca City, Oklahoma
Tennessee
• Saint Thomas Health – Nashville, Tennessee • Saint Thomas West Hospital – Nashville, Tennessee • Saint Thomas Midtown Hospital – Nashville, Tennessee • Saint Thomas Hickman Hospital – Centerville, Tennessee • Baptist Health Care Affiliates, Inc. – Nashville, Tennessee • Saint Thomas Rutherford Hospital – Murfreesboro, Tennessee • Saint Thomas DeKalb Hospital, LLC – Smithville, Tennessee • Saint Thomas Highlands Hospital, LLC – Sparta, Tennessee • Saint Thomas River Park Hospital, LLC – McMinnville, Tennessee • Saint Thomas Stones River Hospital, LLC – Woodbury, Tennessee
Texas
• Seton Family of Hospitals – Austin, Texas • Ascension Texas – Austin, Texas • The Seton Cove – Austin, Texas • Daughters of Charity Services of San Antonio – San Antonio, Texas • Providence Health Services of Waco – Waco, Texas • Providence Health Alliance – Waco, Texas
Washington
• Our Lady of Lourdes Hospital at Pasco – Pasco, Washington
Wisconsin
• Columbia St. Mary’s, Inc. – Milwaukee, Wisconsin • Columbia St. Mary’s Hospital Ozaukee, Inc. – Mequon, Wisconsin • Columbia St. Mary’s Hospital Milwaukee, Inc. – Milwaukee, Wisconsin • Sacred Heart Rehabilitation Institute, Inc. – Milwaukee, Wisconsin • Wheaton Franciscan Healthcare – Southeast Wisconsin, Inc. – Glendale, Wisconsin • Wheaton Franciscan, Inc. – Milwaukee, Wisconsin • Wheaton Franciscan Healthcare – St. Francis, Inc. – Milwaukee, Wisconsin • Wheaton Franciscan Healthcare – All Saints, Inc. – Racine, Wisconsin
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• Wheaton Franciscan Healthcare – Franklin, Inc. – Franklin, Wisconsin • Ministry Health Care, Inc.– Milwaukee, Wisconsin • Saint Michael’s Hospital of Stevens Point, Inc.– Stevens Point, Wisconsin • Sacred Heart-Saint Mary’s Hospitals, Inc.– Rhinelander, Wisconsin • Good Samaritan Health Center, Inc. – Merrill Wisconsin • Saint Clare’s Hospital of Weston, Inc.– Weston, Wisconsin • St. Elizabeth Hospital, Inc.– Appleton, Wisconsin • Mercy Medical Center of Oshkosh, Inc.– Oshkosh, Wisconsin • Calumet Medical Center, Inc.– Chilton, Wisconsin • Our Lady of Victory Hospital, Inc.– Stanley, Wisconsin • Eagle River Memorial Hospital, Incorporated– Eagle River, Wisconsin • The Howard Young Medical Center, Inc.– Woodruff, Wisconsin
Senior Designated Affiliates
Alabama
• Seton Property Corporation of North Alabama – Birmingham, Alabama • Providence Building Corporation, Inc. – Mobile, Alabama
Indiana
• St. Mary’s Building Corporation – Evansville, Indiana • Ascension Health Ministry Service Center, LLC – Indianapolis, Indiana
Missouri
• Ascension Health Resource and Supply Management Group, LLC – St. Louis, Missouri
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Senior Limited Designated Affiliates
Liability to Senior Obligated Group as of the Date Hereof New York (Dollars in Thousands) • Our Lady of Lourdes Memorial Hospital, Inc. – Binghamton, New York $41,074 • St. Mary’s Healthcare – Amsterdam, New York 8,332
A-50 APPENDIX B
GLOBAL CLEARANCE PROCEDURES
The Series 2016A Additional Bonds initially will be registered in the name of Cede & Co. as registered owner and nominee for DTC, which will act as securities depository for the Series 2016A Additional Bonds. Purchases of the Series 2016A Additional Bonds will be in book-entry form only. Clearstream and Euroclear may hold omnibus positions on behalf of their participants through customers’ securities accounts in Clearstream’s and/or Euroclear’s names on the books of their respective U.S. Depositories, which, in turn, hold such positions in customers’ securities accounts in the U.S. Depositories’ names on the books of DTC. Citibank, N.A. acts as the U.S. Depository for Clearstream and JPMorgan Chase Bank acts as the U.S. Depository for Euroclear.
Clearstream
Clearstream Banking, société anonyme, 42 Avenue J.F. Kennedy, L-1855 Luxembourg (“Clearstream, Luxembourg”) is successor in name to Cedel Bank, S.A. Clearstream, Luxembourg is a wholly-owned subsidiary of Clearstream International S.A. On 1 January 1995, Clearstream, Luxembourg was granted a banking license in Luxembourg.
Clearstream International S.A., which is domiciled in Luxembourg, is as from June 2009, 51% owned by Clearstream Holding AG and 49% owned by Deutsche Borse AG (“DBAG”).
Clearstream Holding AG is domiciled in Germany and wholly owned by DBAG.
DBAG is a publicly held company organized under German law and traded on the Frankfurt Stock Exchange.
Clearstream, Luxembourg holds securities for its customers and facilitates the clearance and settlement of securities transactions between Clearstream, Luxembourg customers through electronic book-entry changes in accounts of Clearstream, Luxembourg customers, thereby eliminating the need for physical movement of certificates. Clearstream, Luxembourg provides to its customers, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream, Luxembourg also deals with domestic securities markets in many countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is subject to regulation by the Commission de Surveillance du Secteur Financier (“CSSF”), which supervises Luxembourg banks. Since 12 February 2001, Clearstream, Luxembourg has also been supervised by the Central Bank of Luxembourg according to the Settlement Finality Directive Implementation of 12 January 2001, following the official notification to the regulators of the Clearstream, Luxembourg’s role as a payment system provider operating a securities settlement system. Clearstream, Luxembourg’s customers are world-wide financial institutions including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to Clearstream, Luxembourg is available to other institutions that clear through or maintain a custodial relationship with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has established an electronic bridge with Euroclear Bank S.A./N.V. as the Operator of the Euroclear System (the “Euroclear Operator”) in Brussels to facilitate settlement of trades between Clearstream, Luxembourg and the Euroclear Operator.
Euroclear
Euroclear Bank S.A./N.V. (“Euroclear Bank”) holds securities and book-entry interests in securities for participating organizations and facilitates the clearance and settlement of securities transactions between Participants, as defined in the Terms and Conditions Governing Use of Euroclear as amended from time to time (the “Terms and Conditions”), and between Euroclear Participants and Participants of certain other securities intermediaries through electronic book-entry changes in accounts of such Participants or other securities intermediaries. Euroclear Bank provides Euroclear Participants, among other things, with safekeeping,
B-1 administration, clearance and settlement, securities lending and borrowing, and related services. Euroclear Participants are investment banks, securities brokers and dealers, banks, central banks, supranationals, custodians, investment managers, corporations, trust companies and certain other organizations. Certain of the managers or underwriters for this offering, or other financial entities involved in this offering, may be Euroclear Participants. Non-Participants in the Euroclear System may hold and transfer book-entry interests in the securities through accounts with a Participant in the Euroclear System or any other securities intermediary that holds a book-entry interest in the securities through one or more securities intermediaries standing between such other securities intermediary and Euroclear Bank.
Clearance and Settlement. Although Euroclear Bank has agreed to the procedures provided below in order to facilitate transfers of securities among Participants in the Euroclear System, and between Euroclear Participants and Participants of other intermediaries, it is under no obligation to perform or continue to perform such procedures and such procedures may be modified or discontinued at any time.
Initial Distribution. Investors electing to acquire securities through an account with Euroclear Bank or some other securities intermediary must follow the settlement procedures of such an intermediary with respect to the settlement of new issues of securities. Securities to be acquired against payment through an account with Euroclear Bank will be credited to the securities clearance accounts of the respective Euroclear Participants in the securities processing cycle for the business day following the settlement date for value as of the settlement date, if against payment.
Secondary Market. Investors electing to acquire, hold or transfer securities through an account with Euroclear Bank or some other securities intermediary must follow the settlement procedures of such an intermediary with respect to the settlement of secondary market transactions in securities. Euroclear Bank will not monitor or enforce any transfer restrictions with respect to the securities offered herein.
Custody. Investors who are Participants in the Euroclear System may acquire, hold or transfer interests in the securities by book-entry to accounts with Euroclear Bank. Investors who are not Participants in the Euroclear System may acquire, hold or transfer interests in the securities by book-entry to accounts with a securities intermediary who holds a book-entry interest in the securities through accounts with Euroclear Bank.
Custody Risk. Investors that acquire, hold and transfer interests in the securities by book-entry through accounts with Euroclear Bank or any other securities intermediary are subject to the laws and contractual provisions governing their relationship with their intermediary, as well as the laws and contractual provisions governing the relationship between such an intermediary and each other intermediary, if any, standing between themselves and the individual securities.
Euroclear Bank has advised as follows:
Under Belgian law, investors that are credited with securities on the records of Euroclear Bank have a co- property right in the fungible pool of interests in securities on deposit with Euroclear Bank in an amount equal to the amount of interests in securities credited to their accounts. In the event of the insolvency of Euroclear Bank, Euroclear Participants would have a right under Belgian law to the return of the amount and type of interests in securities credited to their accounts with Euroclear Bank. If Euroclear Bank did not have a sufficient amount of interests in securities on deposit of a particular type to cover the claims of all Participants credited with such interests in securities on Euroclear Bank’s records, all Participants having an amount of interests in securities of such type credited to their accounts with Euroclear Bank would have the right under Belgian law to the return of their pro-rata share of the amount of interests in securities actually on deposit.
Under Belgian law, Euroclear Bank is required to pass on the benefits of ownership in any interests in securities on deposit with it (such as dividends, voting rights and other entitlements) to any person credited with such interests in securities on its records.
Initial Settlement; Distributions; Actions on Behalf of the Owners. All of the Series 2016A Additional Bonds will initially be registered in the name of Cede & Co., the nominee of DTC. Clearstream and Euroclear may
B-2 hold omnibus positions on behalf of their participants through customers’ securities accounts in Clearstream’s and/or Euroclear’s names on the books of their respective U.S. Depository, which, in turn, holds such positions in customers’ securities accounts in its U.S. Depository’s name on the books of DTC. Citibank, N.A. acts as depository for Clearstream and JPMorgan Chase Bank acts as depository for Euroclear (the “U.S. Depositories”). Holders of the Series 2016A Additional Bonds may hold their Series 2016A Additional Bonds through DTC (in the United States) or Clearstream or Euroclear (in Europe) if they are participants of such systems, or directly through organizations that are participants in such systems. Investors electing to hold their Bonds through Euroclear or Clearstream accounts will follow the settlement procedures applicable to conventional EuroBonds in registered form. Securities will be credited to the securities custody accounts of Euroclear and Clearstream holders on the business day following the settlement date against payment for value on the settlement date.
Distributions with respect to the Series 2016A Additional Bonds held beneficially through Clearstream will be credited to the cash accounts of Clearstream customers in accordance with its rules and procedures, to the extent receive by its U.S. Depository. Distributions with respect to the Series 2016A Additional Bonds held beneficially through Euroclear will be credited to the cash accounts of Euroclear Participants in accordance with the Terms and Conditions, to the extent received by its U.S. Depository. Such distributions will be subject to tax reporting in accordance with relevant United States tax laws and regulations.
Clearstream or the Euroclear Operator, as the case may be, will take any other action permitted to be taken by an owner of the Series 2016A Additional Bonds on behalf of a Clearstream customer or Euroclear Participant only in accordance with the relevant rules and procedures and subject to the U.S. Depository’s ability to effect such actions on its behalf through DTC.
Procedures May Change. Although DTC, Clearstream and Euroclear have agreed to these procedures in order to facilitate transfers of securities among DTC and its Participants, Clearstream and Euroclear, they are under no obligation to perform or continue to perform these procedures and these procedures may be discontinued and may be changed at any time by any of them.
Secondary Market Trading. Secondary market trading between Participants (other than U.S. Depositories) will be settled using the procedures applicable to U.S. corporate debt obligations in same-day funds. Secondary market trading between Euroclear Participants and/or Clearstream customers will be settled using the procedures applicable to conventional EuroBonds in same-day funds. When securities are to be transferred from the account of a Participant (other than U.S. Depositories) to the account of a Euroclear Participant or a Clearstream customer, the purchaser must send instructions to the applicable U.S. Depository one business day before the settlement date. Euroclear or Clearstream, as the case may be, will instruct its U.S. Depository to receive securities against payment. Its U.S. Depository will then make payment to the Participant’s account against delivery of the securities. After settlement has been completed, the securities will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the Euroclear Participant’s or Clearstream customers’ accounts. Credit for the securities will appear on the next day (European time) and cash debit will be back-valued to, and the interest on the Series 2016A Additional Bonds will accrue from the value date (which would be the preceding day when settlement occurs in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the Euroclear or Clearstream cash debit will be valued instead as of the actual settlement date.
Euroclear Participants and Clearstream customers will need to make available to the respective clearing systems the funds necessary to process same-day funds settlement. The most direct means of doing so is to pre- position funds for settlement, either from cash on hand or existing lines of credit, as they would for any settlement occurring within Euroclear or Clearstream. Under this approach, they may take on credit exposure to Euroclear or Clearstream until the securities are credited to their accounts one day later. As an alternative, if Euroclear or Clearstream has extended a line of credit to them, participants/customers can elect not to pre-position funds and allow that credit line to be drawn upon to finance settlement. Under this procedure, Euroclear Participants or Clearstream customers purchasing securities would incur overdraft charges for one day, assuming they cleared the overdraft when the securities were credited to their accounts. However, interest on the securities would accrue from the value date. Therefore, in many cases, the investment income on securities earned during that one day period may substantially reduce or offset the amount of such overdraft charges, although this result will depend on each participant’s/customer’s particular cost of funds. Because the settlement is taking place during New York business hours, Participants can employ their usual procedures for sending securities to the applicable U.S. Depository for the
B-3 benefit of Euroclear Participants or Clearstream customers. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the participant, a cross-market transaction will settle no differently from a trade between two participants.
Due to time zone differences in their favor, Euroclear Participants and Clearstream customers may employ their customary procedure for transactions in which securities are to be transferred by the respective clearing system, through the applicable U.S. Depository to another participant’s. In these cases, Euroclear will instruct its U.S. Depository to credit the securities to the participant’s account against payment. The payment will then be reflected in the account of the Euroclear Participant or Clearstream customer the following business day, and receipt of the cash proceeds in the Euroclear Participant’s or Clearstream customers’ accounts will be back valued to the value date (which would be the preceding day, when settlement occurs in New York). If the Euroclear Participant or Clearstream customer has a line of credit with its respective clearing system and elects to draw on such line of credit in anticipation of receipt of the sale proceeds in its account, the back-valuation may substantially reduce or offset any overdraft charges incurred over that one day period.
If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the Euroclear Participant’s or Clearstream customer’s accounts would instead be valued as of the actual settlement date.
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Ascension • Taxable Bonds, Series 2016A