This Preliminary Official Statement and the information contained herein are subject to completion and amendment. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these Bonds in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. NEW ISSUE—BOOKENTRYONLY about November__,2016. expected thattheBondsinbook-entry formwillbeavailablefordeliverythroughthefacilities ofDTCinNewYork,Yorkonor for the Underwriters by Hawkins Delafield & WoodLLPand for the Corporation byParksBauer Sime Winkler & Fernety LLP. It is of Orrick,Herrington&Sutcliffe LLP,Portland,Oregon,BondCounseltotheAuthority.Certain legalmatterswillbepassedupon information essentialtothemakingofaninformedinvestment decision. the security or terms of this bond issue. Investors are instructed to read the entire Official Statement to obtain TAXATION ORTOMAKEANYAPPROPRIATIONFORTHEIR PAYMENT.THEAUTHORITYHASNOTAXINGPOWER. OF OREGON,CITYSALEM,OREGONORANYPOLITICAL SUBDIVISIONTHEREOFTOLEVYORPLEDGEANYFORMOF BONDS. THEISSUANCEOFBONDSSHALLNOTDIRECTLY ORINDIRECTLYCONTINGENTLYOBLIGATETHESTATE THE AUTHORITY,ISPLEDGEDTOPAYMENTOF PRINCIPALOFORTHEPREMIUM,IFANY,INTERESTON POWER OF THE STATE OF OREGON, CITY OF SALEM,OREGON OR OF ANY POLITICAL SUBDIVISION THEREOF, INCLUDING UNDER THELOANAGREEMENTANDBONDINDENTURE, ANDNEITHERTHEFAITHCREDITNORTAXING PURCHASE PRICEOFTHEBONDS,ORPREMIUM INTERESTTHEREON,EXCEPTFROMTHEFUNDSPROVIDED OF OREGON,CITYSALEM,OREGONNORTHEAUTHORITY SHALLBEOBLIGATEDTOPAYTHEPRINCIPALOR THAN THE AUTHORITY, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR. NONE OF THE STATE AND CREDITOFTHESTATEOREGON,CITYSALEM,OREGONORANYSUCHPOLITICALSUBDIVISION, OTHER OREGON, THECITYOFSALEM,OREGONORANYPOLITICALSUBDIVISIONTHEREOFAPLEDGE FAITH Indenture. See“SECURITYFORTHEBONDS—TheMasterIndenture”herein. member oftheObligatedGroup. sufficient topayprincipalof,premium,ifany,andinterestontheBondswhendue.TheCorporationiscurrentlyonly Group (collectively,the“ObligatedGroup”)jointlyandseverallyareobligatedtomakepaymentsonObligationNo.26inan amount supplemented fromtimeto(the“MasterIndenture”),whereundertheCorporationandanyfuturemembersof Obligated respect totheBondsunderAmendedandRestatedMasterTrustIndenture,datedasofNovember1,2016,amended and made bySalemHealth(the“Corporation”)undertheLoanAgreementandfromcertainfundsheldBondIndenture. under theprovisionsofBondIndentureandLoanAgreement,asdescribedherein,arepayablefromRepayments Bonds aresubjecttooptional,mandatoryandextraordinaryoptionalredemptionpriormaturityasdescribed herein. (“DTC”), thesecuritiesdepositoryforBonds.SeeAPPENDIXG—“DTCANDTHEBOOK-ENTRYSYSTEM”herein. as thebook-entrysystemisinplace,bemadetoCede&Co.,registeredownerandnomineeforTheDepositoryTrust Company totheregisteredownerthereofasofapplicableRecordDates,hereindefined,whichpaymentsshall,long May 15, 2017, payable byU.S.BankNationalAssociation,asbondtrustee(the“BondTrustee”),oneachMay15andNovember15,commencing (the “Bonds”)arebeingissuedasfullyregisteredbondsindenominationsof$5,000oranyintegralmultiplethereof.Interest willbe * Preliminary, subjecttochange. ‡ Foranexplanation oftheRatings,see“RATINGS”herein. Dated: DateofIssuance or receiptofintereston,theBonds.See“TAXMATTERS.” expresses noopinionregardinganyothertaxconsequencesrelatingtotheownershipordispositionof,amount,accrual included inadjustedcurrentearningscalculatingfederalcorporatealternativeminimumtaxableincome.BondCounsel federal individualorcorporatealternativeminimumtaxes,althoughBondCounselobservesthatsuchinterestontheBondsis income taxes.InthefurtheropinionofBondCounsel,interestonBondsisnotaspecificpreferenceitemforpurposes income tax purposes under section 103 of the Internal Revenue Codeof 1986 and is exempt from State of Oregon personal and compliancewithcertaincovenants,interestontheBonds(asdefinedbelow)isexcludedfromgrossincomeforfederal laws, regulations,rulingsandcourtdecisions,assuming,amongothermatters,theaccuracyofcertainrepresentations In theopinionofOrrick,Herrington&SutcliffeLLP,BondCounseltoAuthority,baseduponananalysisexisting The Bondsareofferedwhen, as andifissuedreceivedbytheUnderwriters,subject to receiptoftheapprovingopinion This cover pagecontainscertain information for quick referenceonly. It is not intendedtobe a summary of THE BONDSARENOTANDSHALLBEDEEMEDTOCONSTITUTEADEBTORLIABILITYOFSTATE OF By purchaseoftheBonds,BeneficialOwnersBondsaredeemedtohaveconsentedMaster The obligationoftheCorporationtomakesuchpaymentsisevidencedandsecuredbyissuanceObligationNo.26 with The Bonds are limited obligations of the Hospital Facility Authority of the City of Salem, Oregon (the “Authority”), secured The sourcesofpaymentof,andsecurityfor,theBondsaremorefullydescribedinthisOfficialStatement. The The HospitalFacilityAuthorityoftheCitySalem,OregonRevenueRefundingBonds(SalemHealthProjects)Series2016A

Citigroup PRELIMINARY OFFICIAL STATEMENT OCTOBER 17, 2016 HOSPITAL FACILITY AUTHORITY OF

THE CITY OF SALEM, OREGON Revenue RefundingBonds (Salem HealthProjects) $194,870,000* Series 2016A Due: May15,asshownontheinsidecoverpage BofA Merrill Lynch Ratings

A+ S&PGlobal ‡ A+Fitch

BOND MATURITY SCHEDULE∗

$194,870,000* HOSPITAL FACILITY AUTHORITY OF THE CITY OF SALEM, OREGON

Revenue Refunding Bonds (Salem Health Projects) Series 2016A

Maturity (May 15) Principal Amount* Interest Rate Yield CUSIP 794458† 2017 $ 4,305,000 2018 4,960,000 2019 5,110,000 2020 1,840,000 2021 1,945,000 2022 2,045,000 2023 2,165,000 2024 2,260,000 2025 2,380,000 2026 2,500,000 2027 2,635,000 2028 2,780,000 2029 2,920,000 2030 3,070,000 2031 3,230,000 2032 3,405,000 2033 3,575,000 2034 3,725,000 2035 3,885,000 2036 10,075,000 2037 10,475,000

$45,825,000* __._% Term Bonds Due May 15, 2041

Priced to Yield __.___% CUSIP† 794458 ___

$69,760,000* __.__% Term Bonds Due May 15, 2046

Priced to Yield __.___% CUSIP† 794458___

∗ Preliminary, subject to change. † CUSIP® is a registered trademark of the American Bankers Association. CUSIP Global Services (“CGS”) is managed on behalf of the American Bankers Association by S&P Capital IQ. Copyright© 2016 CUSIP Global Services. All rights reserved. CUSIP® data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for the CGS database. CUSIP® numbers are provided for convenience of reference only. None of the Corporation, the Underwriters or their agents or counsel assume responsibility for the accuracy of such numbers.

REGARDING THIS OFFICIAL STATEMENT This Official Statement does not constitute an offering or a reoffering of any security other than the offering of the Bonds identified on the front cover. No dealer, broker salesman or other person has been authorized by the Authority, the Corporation or Citigroup Global Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (together the “Underwriters”) to give any information or to make any representations, other than those contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. Estimates and opinions are included and should not be interpreted as statements of fact. Summaries of documents do not purport to be complete statements of their provisions. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale hereunder implies that there has been no change in the matters described herein since the date hereof. This Official Statement does not constitute an offer to sell or the solicitation of any offer to buy, nor shall there be a sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. All information set forth herein has been obtained from the Corporation, DTC and other sources which are believed to be reliable by the Underwriters and is not to be construed as a representation by the Authority or the Underwriters.

Neither the Authority, its counsel nor any of its officials, agents, employees or representatives have reviewed or approved any information in this Official Statement or investigated the statements or representations contained herein. Neither the Authority, its counsel nor any of its officials, agents, employees or representatives makes any representation as to the completeness, sufficiency and truthfulness of the statements set forth in this Official Statement. Representatives of the Authority and any other person executing the Bonds are not subject to personal liability by reason of the issuance or offering of the Bonds.

The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with and as part of their responsibilities to investors under the federal securities law as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

For purposes of compliance with Rule 15c2-12 of the United States Securities and Exchange Commission, as amended, and in effect on the date hereof, this Preliminary Official Statement constitutes an official statement of the Corporation that has been deemed final by the Corporation as of its date except for the omission of no more than the information permitted by Rule 15c2-12

IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITERS MAY OVER ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF SUCH BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE BONDS MAY BE OFFERED AND SOLD TO CERTAIN DEALERS (INCLUDING DEALERS DEPOSITING THE BONDS INTO INVESTMENT ACCOUNTS) AND TO OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES SET FORTH ON THE COVER PAGE OF THIS OFFICIAL STATEMENT. AFTER THE BONDS ARE RELEASED FOR SALE TO THE PUBLIC, THE PUBLIC OFFERING PRICES AND OTHER SELLING TERMS MAY FROM TIME TO TIME BE VARIED BY THE UNDERWRITERS.

______

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS OFFICIAL STATEMENT

Certain statements included or incorporated by reference in this Official Statement constitute “forward- looking statements.” Such statements generally are identifiable by the terminology used, such as “plan,” “expect,” “estimate,” “budget” or other similar words. Such forward-looking statements include but are not limited to certain statements contained in the information under the caption “BONDHOLDERS’ RISKS” in the forepart of this Official Statement and the statements contained under the caption “Management’s Discussion and Analysis of Recent Financial Performance” in APPENDIX A— “INFORMATION CONCERNING SALEM HEALTH—FINANCIAL INFORMATION.”

The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Corporation does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

TABLE OF CONTENTS

INTRODUCTORY STATEMENT ...... 1 Oregon Medicaid Programs ...... 35 Purpose of this Official Statement ...... 1 Regulatory Environment ...... 36 Salem Health ...... 1 Business Relationships and Other Security for the Bonds ...... 2 Business Matters ...... 47 PLAN OF FINANCING ...... 3 Limitations on Availability of General ...... 3 Remedies ...... 53 Plan of Refunding ...... 3 Tax-Exempt Status and Other Tax ESTIMATED SOURCES AND USES OF Matters ...... 54 FUNDS ...... 4 Other Risk Factors ...... 58 THE BONDS ...... 4 Oregon Certificate of Need General ...... 5 Program ...... 59 Redemption of the Bonds ...... 5 Marketability of the Bonds ...... 59 SECURITY AND SOURCE OF Bond Ratings ...... 60 PAYMENT FOR THE BONDS ...... 7 Risks Related to Outstanding General ...... 7 Variable Rate Obligations ...... 60 The Master Indenture ...... 8 Investments ...... 60 Outstanding Indebtedness ...... 9 Hedging Transactions...... 61 Limited Obligations ...... 10 Pension and Benefit Funds...... 61 ANNUAL DEBT SERVICE Amendments to Master Indenture, REQUIREMENTS ...... 11 Indenture and Loan BONDHOLDERS’ RISKS ...... 12 Agreement...... 61 General ...... 12 ENFORCEABILITY OF REMEDIES ...... 61 General Economic Conditions; Bad Limitations on Enforceability of the Debt, Indigent Care and Master Indenture and the Investment Performance...... 13 Obligations ...... 61 Effect of Disruption in the Credit THE AUTHORITY ...... 6 3 Market ...... 13 CONTINUING DISCLOSURE ...... 64 Federal Budget Matters ...... 14 ABSENCE OF MATERIAL LITIGATION ...... 65 Health Care Reform ...... 15 The Corporation ...... 65 Nonprofit Health Care The Authority ...... 65 Environment ...... 21 TAX MATTERS ...... 65 Patient Service Revenues ...... 24 LEGALITY ...... 67 Medicare Program ...... 25 UNDERWRITING ...... 6 7 Medicaid Program ...... 31 INDEPENDENT AUDITORS ...... 68 State Children’s Health Insurance FINANCIAL ADVISOR ...... 68 Program ...... 33 THE TRUSTEE ...... 69 Private Health Plans and Managed RATINGS ...... 69 Care ...... 33 MISCELLANEOUS ...... 69 Rate Pressure from Insurers and Purchasers...... 34

APPENDIX A – Information Concerning Salem Health APPENDIX B – Audited Consolidated Financial Statement for the Years Ended September 30, 2015 and 2014 APPENDIX C – Audited Consolidated Financial Statement for the Nine-Month Period Ended June 30, 2016 and the Year Ended September 30, 2015 APPENDIX D – Summary of Principal Documents APPENDIX E – Form of Bond Counsel Opinion APPENDIX F – Form of Continuing Disclosure Agreement APPENDIX G – DTC and the Book-Entry System

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OFFICIAL STATEMENT

Relating to

$194,870,000* HOSPITAL FACILITY AUTHORITY OF THE CITY OF SALEM, OREGON Revenue Refunding Bonds (Salem Health Projects) Series 2016A

INTRODUCTORY STATEMENT

The following introductory statement is subject in all respects to the more complete information set forth elsewhere in this Official Statement. The descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive and are qualified in their entirety by reference to each document. All capitalized terms used in this Official Statement and not otherwise defined herein or in APPENDIX D have the same meaning as in the Master Indenture or the Bond Indenture (each as defined below). See APPENDIX D—“SUMMARY OF PRINCIPAL DOCUMENTS—Definitions of Certain Terms.”

Purpose of this Official Statement

This Official Statement, including the cover page and the appendices hereto, is provided to furnish information in connection with the issuance of $194,870,000* aggregate principal amount of Hospital Facility Authority of the City of Salem, Oregon Revenue Refunding Bonds (Salem Health Projects), Series 2016A (the “Bonds”).

The Bonds are being issued pursuant to and are secured by a Bond Indenture (the “Bond Indenture”), dated as of November 1, 2016, between the Hospital Facility Authority of the City of Salem, Oregon (the “Authority”) and U.S. Bank National Association, as bond trustee (the “Bond Trustee”). The Authority will loan the proceeds of the Bonds to Salem Health, an Oregon nonprofit corporation (the “Corporation”), pursuant to a Loan Agreement, dated as of November 1, 2016 (the “Loan Agreement”), between the Authority and the Corporation.

Salem Health

The Corporation is an Oregon nonprofit corporation, and is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended (the “Code”), as an organization described in Section 501(c)(3) of the Code. The Corporation, operates a health care delivery and service system in Salem, Oregon and the mid-Willamette Valley of Oregon. The Corporation was formerly known as Salem Hospital. See APPENDIX A—“INFORMATION CONCERNING SALEM HEALTH.” The Corporation is the sole member of the “Obligated Group” created under the Master Indenture (each as defined below).

* Preliminary, subject to change.

Security for the Bonds

The Bonds are payable from payments made by the Corporation under the Loan Agreement (the “Loan Repayments”), from payments made by the Obligated Group on Obligation No. 26 with respect to the Bonds and from certain funds held under the Bond Indenture.

The Authority is not obligated to pay the principal of or interest on the Bonds except from payments received from the Corporation and from certain funds created under the Bond Indenture, and neither the faith and credit nor the taxing power of the State, City of Salem, Oregon, or any other political subdivision thereof is pledged to the payment of the principal of and interest on the Bonds. The Bonds are not a debt of the State, City of Salem, Oregon, or any other political subdivision of the State, nor are they liable for the payment thereof. The Authority has no taxing power.

The Corporation, any future Members of the Obligated Group named therein and U.S. Bank National Association, as master trustee (the “Master Trustee”), will enter into the Amended and Restated Master Trust Indenture, dated as of November 1, 2016, as amended and supplemented (the “Master Indenture”). By purchase of the Bonds the Beneficial Owners of the Bonds are deemed to have consented to the Master Indenture. See “SECURITY FOR THE BONDS—The Master Indenture” herein.

To secure the obligation of the Corporation to make the payments under the Loan Agreement, the Corporation, on behalf of itself and any future Members of the Obligated Group (as defined in the Master Indenture), will deliver to the Bond Trustee Obligation No. 26 with respect to the Bonds, pursuant to the Master Indenture, as supplemented and amended by the Supplemental Master Trust Indenture No. 1 dated as of November 1, 2016 (the “Supplement No. 1”), between the Corporation, on behalf of itself and any future Members of the Obligated Group, and the Master Trustee. Pursuant to Supplement No. 1, the Members of the Obligated Group agreed to make payments on Obligation No. 26 in amounts sufficient to pay, when due, the principal of and premium, if any, and interest on the Bonds. Each Member of the Obligated Group is jointly and severally obligated to make payments on all Obligations issued under the Master Indenture, including Obligation No. 26 entitles the Bond Trustee, as the holder thereof, to the benefit of the covenants, restrictions and other obligations imposed upon the Obligated Group under the Master Indenture.

In addition, under the Master Indenture, the Corporation, as the Obligated Group Representative, may by resolution designate “Designated Affiliates” from time to time and may rescind any such designation at any time. The Corporation has not designated any entities to be Designated Affiliates. For information regarding the Master Indenture, see “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS—The Master Indenture” herein and APPENDIX D—“SUMMARY OF PRINCIPAL DOCUMENTS—The Master Indenture.”

Included in this Official Statement and the Appendices hereto are descriptions of the Corporation, the Bonds, the Bond Indenture, the Loan Agreement, the Master Indenture, Supplement No. 1 and Obligation No. 26. All references herein to the Bond Indenture, the Loan Agreement, the Master Indenture, Supplement No. 1 and Obligation No. 26 are qualified in their entirety by reference to such documents, and the description herein of the Bonds is qualified in its entirety by reference to the terms thereof and the information regarding the Bonds included in the Bond Indenture. The agreements of the Authority with the Holders of the Bonds are fully set forth in the Bond Indenture, and neither any advertisement of the Bonds nor this Official Statement is to be construed as constituting an agreement with the Holders of the Bonds. Insofar as any statements made in this Official Statement involve matters of opinion, regardless of whether expressly so stated, they are intended merely as such and not as representations of fact. The information and expressions of opinion herein speak only as of their date and are subject to change.

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PLAN OF FINANCING

General

Series 2016 Bonds. The Corporation intends to use the proceeds of the Bonds to (i) refund and redeem the Series 2006A Bonds (defined below); (ii) refund, defease and redeem the Series 2008A Bonds (defined below); (iii) refund and redeem the Series 2013 Bonds (defined below); and (iv) pay fees and expenses related to the Series 2016 Bonds (as defined herein) (collectively the “Project”). See “—Plan of Refunding” and “ESTIMATED SOURCES AND USES OF FUNDS” below.

Collectively, the Series 2006A Bonds, the Series 2008A Bonds and the Series 2013 Bonds to be refunded are referred to as the “Refunded Bonds.”

Plan of Refunding

Series 2006A Bonds. The Authority previously issued its Revenue Bonds (Salem Hospital Project), Series 2006A (the “Series 2006A Bonds”), pursuant to a Bond Trust Indenture, dated as of November 1, 2006, between the Authority and U.S. Bank National Association, as trustee. To effect debt service savings, subject to market conditions, the Corporation intends to use a portion of the proceeds of the Bonds to refund all or a portion of the outstanding 2006A Bonds shown below on November 1, 2016 (the “Redemption Date”).

Principal Interest Redemption CUSIP Number Maturity Date Amount Rate Date (794458) 08/15/2027 $ 36,540,000 5.00% 11/1/2016 CJ6 08/15/2030 15,745,000 4.50 11/1/2016 CK3 08/15/2036 57,790,000 5.00 11/1/2016 CL1

Series 2008A Bonds. The Authority previously issued its Revenue Bonds (Salem Hospital Project), Series 2008A (the “Series 2008A Bonds”), pursuant to a Bond Indenture, dated as of October 1, 2008, between the Authority and U.S. Bank National Association, as trustee. To effect debt service savings, subject to market conditions, the Corporation intends to use a portion of the proceeds of the Bonds to refund all or a portion of the outstanding 2008A Bonds shown below on August 15, 2018 (the “Redemption Date”).

Principal Interest Redemption CUSIP Number Maturity Date Amount Rate Date (794458) 08/15/2017 $ 6,800,000 5.25% 8/15/2017 CV9 08/15/2018 7,900,000 5.25 8/15/2018 CW7 08/15/2023 21,790,000 5.75 8/15/2018 CX5

Series 2013 Bonds. The Authority previously issued its Revenue Bonds (Salem Hospital Project) Series 2013A and Series 2013B (collectively, the “Series 2013 Bonds”), each pursuant to a Bond Indenture, dated as of June 1, 2013, between the Authority and U.S. Bank National Association, as trustee. The Corporation intends to use a portion of the proceeds of the Bonds to refund all or a portion of the outstanding 2013 Bonds shown below on November 1, 2016 (the “Redemption Date”).

Principal Redemption Maturity Date Amount Date 2013A 8/15/2036 $33,725,000 11/1/2016 2013B 8/15/2036 33,725,000 11/1/2016

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A portion of the proceeds of the Bonds are to be used to pay interest on the Refunded Bonds and to refund the Refunded Bonds on the Redemption Date, at a redemption price equal to 100% of the principal amount of the Refunded Bonds to be redeemed, plus accrued interest, if any, to the Redemption Date. For this purpose, the Corporation intends to establish an escrow deposit account (the “Escrow Fund”) with U.S. Bank National Association, as escrow agent for the Series 2008A Bonds to be refunded. The Corporation expects to purchase direct obligations of the United States or obligations, the principal of and interest on which are fully and unconditionally guaranteed by the United States, for deposit into the Escrow Fund together with cash or cash equivalents, if necessary, in an amount sufficient to provide for the redemption of the Series 2008A Bonds. See “ESTIMATED SOURCES AND USES OF FUNDS” below.

Verification. Causey Demgen & Moore P.C., a firm of independent public accountants (the “Verification Agent”), will deliver to the Corporation, on or before the settlement date of the Bonds, its verification report indicating that it has verified, in accordance with attestation standards established by the American Institute of Certified Public Accountants, the mathematical accuracy of (a) the mathematical computations of the adequacy of the cash and the maturing principal of and interest on the U.S. government obligations to be deposited into the Escrow Fund, to pay, when due, the maturing principal of and interest on the Refunded Bonds and (b) the mathematical computations of yield used by Bond Counsel to support its opinion that interest on the Bonds will be excluded from gross income for federal income tax purposes.

The verification performed by the Verification Agent will be solely based upon data, information and documents provided to the Verification Agent by the Corporation and its representatives. The Verification Agent has restricted its procedures to recalculating the computations provided by the Corporation and its representatives and has not evaluated or examined the assumptions or information used in the computations.

ESTIMATED SOURCES AND USES OF FUNDS

The total estimated sources and uses of funds, net of accrued interest, for the Bonds required for purposes described under “PLAN OF FINANCING” are as follows (amounts are rounded off to the nearest dollar):

Series 2016A Bonds Sources of Funds Principal Amount $ Refunded Bonds Debt Service Reserve Funds [Plus/Less]: Net Original Issue [Premium/Discount] TOTAL SOURCES OF FUNDS $

Uses of Funds Deposit to Escrow Deposit Account Costs of Issuance* TOTAL USES OF FUNDS $

* Includes underwriters’ discount, fees and reimbursable expenses of bond counsel, counsel to the Obligated Group, counsel to the underwriters, counsel to the Authority, the auditor, the financial advisor, the Bond Trustee, printing costs, rating agencies’ fees and other fees and expenses.

THE BONDS

The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds for the complete text thereof and to the Bond Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference.

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General

The Bonds will be issued initially only as fully registered Bonds without coupons in the denominations of $5,000 or any integral multiple thereof. The Bonds shall be dated the date of their delivery, and shall mature on May 15 in the years and amounts and bear interest at the rates per annum shown on the inside cover hereof. Interest shall be paid by check mailed on the Interest Payment Date by first class mail, postage prepaid, to the registered Owner at its address as it appears on the Bond Trustee’s registration books, except that the Bond Trustee will, at the request of any registered owner of $1,000,000 or more in aggregate principal amount of Bonds, make payment of interest on such Bonds by wire transfer to the account within the United States designated by such owner to the Bond Trustee in writing prior to the applicable Record Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Bondholder on such Record Date and shall be paid to the person in whose name the Bond is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Bond Trustee, notice whereof being given by first class mail to the Bondholders not less than 10 days prior to such Special Record Date. Interest shall be calculated on the basis of a three hundred sixty (360) day year of twelve (12) thirty (30) day months.

The Bonds are registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of The Depository Trust Company (“DTC”), as nominee of DTC. DTC acts as securities depository for the Bonds. See APPENDIX G— “DTC AND THE BOOK-ENTRY SYSTEM.” Except as described in APPENDIX G— “DTC AND THE BOOK-ENTRY SYSTEM,” Beneficial Owners (as defined in APPENDIX G) of the Bonds will not receive or have the right to receive physical delivery of certificates representing their ownership interests in the Bonds. For so long as any purchaser is the Beneficial Owner of a Bond, such purchaser must maintain an account with a broker or dealer who is or acts through a Direct Participant (as defined in APPENDIX G) to receive payment of the principal and purchase price of and interest and premium on such Bond.

So long as the Bonds are held in the book-entry system, the principal of and interest and premium on the Bonds will be paid through the facilities of DTC (or a successor securities depository). Otherwise, the principal of or premium on the Bonds is payable upon presentation and surrender thereof at the corporate trust office of the Bond Trustee, and interest on the Bonds is payable by check mailed on each Interest Payment Date to the Holders of the Bonds at the close of business on the Record Date in respect of such Interest Payment Date at the registered addresses of Holders as shall appear on the registration books of the Bond Trustee. In the case of any Holder of Bonds in an aggregate principal amount in excess of $1,000,000 as shown on the registration books of the Bond Trustee who, prior to the Record Date next preceding any Interest Payment Date, shall have provided the Bond Trustee with wire transfer instructions, interest payable on such Bonds shall be paid in accordance with the wire transfer instructions provided by the Holder of such Bond and at the Holder’s risk and expense.

Redemption of the Bonds*

Optional Redemption. The Bonds maturing on and after May 15, 20___* are subject to optional redemption by the Authority, acting at the written direction of the Corporation, prior to maturity on May 15, 20___*, and on any date thereafter in whole or in part (and if in part, in such order of maturity as the Corporation shall specify in writing to the Bond Trustee), any such redemption to be at a price equal to 100% of the principal amount to be redeemed plus unpaid interest accruing thereon to the date fixed for redemption.

* Preliminary, subject to change.

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Mandatory Redemption. The Bonds maturing on May 15, 20___* are subject to mandatory redemption, in part, by lot or in such other manner as may be selected by the Bond Trustee, at the principal amount thereof plus accrued interest to the date fixed for redemption, in the amounts and on the dates set forth below:

Mandatory Redemption Date Principal Amount (May 15) to be Redeemed $

† Final Maturity.

The Bonds maturing on May 15, 20___* are subject to mandatory redemption, in part, by lot or in such other manner as may be selected by the Bond Trustee, at the principal amount thereof plus accrued interest to the date fixed for redemption, in the amounts and on the dates set forth below:

Mandatory Redemption Date Principal Amount (May 15) to be Redeemed $

†

† Final Maturity.

Extraordinary Redemption. The Bonds are subject to extraordinary optional redemption prior to maturity at the request of the Corporation, in whole or in part on any date as soon as practicable following receipt by the Bond Trustee of the proceeds of, and to the extent of, amounts paid in respect of the extraordinary optional redemption of Obligation No. 26 (or any Obligation substituted therefor) derived from net proceeds of insurance or condemnation awards, if any portion of the Property, Plant and Equipment of the Obligated Group or of the Designated Affiliates (1) shall have sustained loss or damage, or (2) shall have been condemned, or (3) shall have sustained insured loss of title, in each such case resulting in receipt of net proceeds of insurance or a condemnation award in an amount greater than or equal to 5% of the aggregate book value of Property, Plant and Equipment of the Obligated Group or of the Designated Affiliates at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the redemption date.

Partial Redemption of Bonds. Redemption of Bonds shall occur only in Authorized Denominations. Upon surrender of any Bond redeemed in part only, the Authority shall execute and the Bond Trustee shall authenticate and deliver to the registered owner thereof, at the expense of the Corporation, a new Bond or Bonds of authorized denominations and of the same maturity, equal in aggregate principal amount to the unredeemed portion of the Bond surrendered.

Selection of Bonds for Redemption. Whenever less than all of the Bonds are subject to redemption, the Bond Indenture provides that the Bond Trustee shall select the Bonds to be redeemed, from all Bonds subject to redemption or such given portion thereof not previously called for redemption, by lot in any manner which the Bond Trustee in its sole discretion shall deem appropriate and fair.

* Preliminary, subject to change.

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Notice of Redemption. Unless waived by any Holder of Bonds to be redeemed, official notice of any such redemption shall be given, by Electronic Means, by the Bond Trustee on behalf of the Authority at least twenty (20) but not more than sixty (60) days prior to the date fixed for redemption (except in the case of an extraordinary optional redemption, in which case such notice shall be given at least five (5) days and not more than fifteen (15) days prior to the date fixed for redemption) to the respective Holders of Bonds to be redeemed at the addresses appearing on the registration books maintained by the Bond Trustee. Neither failure to receive any notice nor any defect in such notice so given shall affect the sufficiency of the proceedings for the redemption of such Bonds.

Conditional Notice. In the case of notice of any optional or extraordinary optional redemption, such notice will state that if, for any reason, funds are not available to the Bond Trustee on the date fixed for redemption in an amount sufficient to pay the redemption price of the Bonds described in such notice as being called for redemption on such date, then such optional redemption will be automatically cancelled and the Bonds will continue to remain Outstanding from and after the date fixed for their redemption, and as soon as practical following the date fixed for redemption, the Bond Trustee will give written notice of such cancellation to the registered owners of the Bonds and to all registered securities depositories to whom notice of such optional redemption had previously been given. The cancellation of an optional redemption and the failure to pay the Redemption Price of the Bonds called for an optional redemption that has been so cancelled will not constitute a default or an Event of Default under the Bond Indenture or under the Loan Agreement.

So long as the book-entry system is in effect, the Bond Trustee will send each notice of redemption to Cede & Co., as nominee of DTC, and not to the Beneficial Owners. So long as DTC or its nominee is the sole registered owner of the Bonds under the book-entry system, any failure on the part of DTC or a Direct Participant or Indirect Participant to notify the Beneficial Owner so affected will not affect the validity of the redemption.

Purchase in Lieu of Redemption. Each Holder or Beneficial Owner of the Bonds, by purchase and acceptance of any Bond, irrevocably grants to the Corporation the option to purchase such Bond at any time such Bond is subject to optional redemption as described in the Bond Indenture. Such Bond is to be purchased at a purchase price equal to the then applicable redemption price of such Bond. The Corporation shall direct the Bond Trustee to provide notice of mandatory purchase, such notice to be provided, as and to the extent applicable, in accordance with the provisions described above under the subheading “—Notice of Redemption” and to select Bonds subject to mandatory purchase in the same manner as Bonds called for redemption pursuant to the Bond Indenture. On the date fixed for purchase of any Bond in lieu of redemption as described in this subheading, the Corporation shall pay the purchase price of such Bond to the Bond Trustee in immediately available funds, and the Bond Trustee shall pay the same to the Holders of the Bonds being purchased against delivery thereof. No purchase of any Bond in lieu of redemption as described in this subheading shall operate to extinguish the indebtedness of the Corporation evidenced by such Bond. No Holder or Beneficial Owner may elect to retain a Bond subject to mandatory purchase in lieu of redemption. The Corporation may exercise its option to purchase Bonds, in whole or in part, in accordance with the Bond Indenture.

SECURITY AND SOURCE OF PAYMENT FOR THE BONDS

General

In the Loan Agreement, the Corporation agrees to make the Loan Repayments, which payments, in the aggregate, will be in an amount sufficient for the payment in full of all amounts payable with respect to the Bonds, including the total interest payable on the Bonds to the date of maturity of such Bonds or earlier redemption, the principal amount and purchase price of such Bonds, any redemption premiums, and certain

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other fees and expenses (the “Additional Payments”), less any amounts available for such payment as provided in the Bond Indenture. The Bonds are otherwise payable from payments made with respect to Obligation No. 26, proceeds of the Bonds, investment earnings on proceeds of the Bonds and amounts on deposit under the Bond Indenture (except those amounts held in the Rebate Fund) and proceeds of insurance or condemnation awards, each in the manner and to the extent set forth in the Bond Indenture.

As security for its obligation to make the Loan Repayments, the Corporation, on behalf of itself and the Obligated Group, concurrently with the issuance of the Bonds will issue its Obligation No. 26 with respect to the Bonds to the Bond Trustee, pursuant to which the Members of the Obligated Group agree to make payments to the Bond Trustee in amounts sufficient to pay, when due, the principal and purchase price of and premium, if any, and interest on the Bonds. See “—The Master Indenture” below.

The Master Indenture

The Corporation will enter into the Master Indenture with the Master Trustee in connection with the issuance of the Bonds. By purchase of the Bonds the Beneficial Owners of the Bonds are deemed to have consented to the Master Indenture.

Obligated Group Members. The Corporation is currently the only Member of the Obligated Group under the Master Indenture. Under certain conditions of the Master Indenture and subject to the provisions of Supplement No. 1, for so long as Obligation No. 26 or any of the Bonds are Outstanding, additional Members may be added to the Obligated Group from time to time after the issuance of the Bonds and made jointly and severally liable with respect to Obligation No. 26 and all other Obligations outstanding under the Master Indenture. Additionally, in accordance with the Master Indenture and subject to the provisions of Supplement No. 1, for so long as Obligation No. 26 or any of the Bonds are Outstanding, Members (other than the Corporation) may withdraw from the Obligated Group from time to time. See APPENDIX D— “SUMMARY OF PRINCIPAL DOCUMENTS—The Master Indenture—Parties Becoming Members of the Obligated Group” and “—Withdrawal from the Obligated Group.”

Obligations. Under the Master Indenture, the Corporation and any other future Member of the Obligated Group are authorized (with the approval of the Corporation, as Obligated Group Representative) to incur, pursuant to a supplement to the Master Indenture, for itself and on behalf of the other Members of the Obligated Group, Obligations to evidence or secure Indebtedness (or other obligations of a Member not constituting Indebtedness) or for other lawful purposes. The Corporation and any other future Members of the Obligated Group are jointly and severally liable with respect to the payment of each Obligation, including Obligation No. 26, incurred under the Master Indenture.

Substitution of Obligations. Under certain circumstances set forth in the Master Indenture and without the prior written consent of the holders of the Outstanding Bonds may be replaced with a substitute obligation issued under a replacement master trust indenture. See APPENDIX D—“SUMMARY OF PRINCIPAL DOCUMENTS—The Master Indenture—Substitution of Obligations.”

Certain Master Indenture Covenants. The Master Indenture imposes certain limited covenants upon the Members of the Obligated Group for the benefit of the holders of Obligations (including Obligation No. 26), including those covenants described below, as well as, without limitation, (i) the control, selection and termination of Designated Affiliates, (ii) maintenance of corporate existence and its Property, Plant and Equipment, (iii) payment of taxes, assessments, charges and Indebtedness, (iv) limitations on the creation of Liens by Members of the Obligated Group, (v) limitations on the incurrence of Indebtedness, (vi) limitations on consolidation, merger, sale or conveyance involving Members of the Obligated Group, and (vii) entry into and withdrawal from the Obligated Group. See APPENDIX D— “SUMMARY OF PRINCIPAL DOCUMENTS—The Master Indenture.”

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Gross Receivables Pledge. To secure its obligation to make Required Payments under the Master Indenture and its other obligations, agreements and covenants to be performed and observed thereunder, each Obligated Group Member grants to the Master Trustee security interests in the Gross Receivables to the extent the same may be pledged and a security interest granted therein under the UCC. The Master Trustee’s security interest in the Gross Receivables shall be perfected, to the extent that such security interest may be so perfected, by the filing of financing statements which comply with the requirements of the UCC. Upon written request from the Obligated Group Representative, the Master Trustee agrees to take all procedural steps necessary to effect the subordination of its security interest in the Gross Receivables granted in the Master Indenture to security interests constituting Permitted Liens. “Gross Receivables” is defined in the Master Indenture to mean all of the accounts, chattel paper, instruments and general intangibles (all as defined in the UCC) of each Member of the Credit Group, as are now in existence or as may be hereafter acquired and the proceeds thereof; excluding, however, (i) all Restricted Moneys and (ii) all accounts or general intangibles consisting of or arising from patents and royalties. See APPENDIX D—“SUMMARY OF PRINCIPAL DOCUMENTS—The Master Indenture—Gross Receivables Pledge.”

Income Available for Debt Service. Each Obligated Group Member agrees to manage its business such that in each Fiscal Year the combined or consolidated Income Available for Debt Service for the Credit Group will not be less than 1.10 times the Annual Debt Service calculated at the end of each Fiscal Year, commencing with the first full Fiscal Year following the execution of the Master Indenture. “Income Available for Debt Service” and “Annual Debt Service” have the meanings defined in APPENDIX D— “SUMMARY OF PRINCIPAL DOCUMENTS—Definitions of Certain Terms.”

If for any two consecutive Fiscal Years the Income Available for Debt Service is not sufficient to satisfy the requirements described in the preceding paragraph, the Obligated Group Representative covenants in the Master Indenture to retain a Consultant to make recommendations to increase Income Available for Debt Service the following Fiscal Year to the level required or, if in the opinion of the Consultant the attainment of such level is impracticable, to the highest level attainable. Each Obligated Group Member agrees to consider any recommendations of the Consultant and shall be obligated to implement such recommendations to the extent such recommendations are feasible. If a report of a Consultant is delivered to the Master Trustee that states that Governmental Restrictions have been imposed which make it impossible for the Income Available for Debt Service to satisfy the requirement of the Master Indenture, then the required amount of Income Available for Debt Service shall be reduced to the maximum coverage permitted by such Governmental Restrictions.

Nothing in the Master Indenture shall be construed as prohibiting any Credit Group Member from providing indigent care at reduced or no cost to the extent required to maintain the status of such entity as a Tax-Exempt Organization or to meet the statutory missions of or otherwise comply with the statutory obligations of such entity. Notwithstanding anything in the Master Indenture to the contrary, so long as the Obligated Group Representative and each Obligated Group Member complies with the provisions described in the second paragraph under this subheading, failure to meet the requirements described in the first paragraph under this subheading shall not result in an Event of Default. See APPENDIX D—“SUMMARY OF PRINCIPAL DOCUMENTS—The Master Indenture—Income Available for Debt Service.”

Outstanding Indebtedness

Certain outstanding Obligations (the “Existing Master Indenture Obligations”) were issued under the Original Master Trust Indenture, dated as of November 1, 2004, as amended and supplemented (the “Original Master Indenture”). Upon issuance of the Bonds, the Existing Master Indenture Obligations will remain outstanding and be subject to the terms of the Master Indenture.

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Subject to the issuance of the Bonds and the refunding, redemption and defeasance of the Refunded Bonds, as described under “PLAN OF FINANCING—Plan of Refunding,” the “Aggregate Principal Amount” of Existing Master Indenture Outstanding under the Master Indenture is expected be $269,870,000*. For purposes of determining the amount of Obligations that will be Outstanding under the Master Indenture, “Aggregate Principal Amount” means, when used with respect to Obligations, the principal amount of such Obligation, or, in the case of a Financial Products Agreement, the notional amount, or, in the case of any other Obligation which does not represent or secure Indebtedness, the aggregate amount of Master Indenture Obligation Payments.

Limited Obligations

The Authority shall not be obligated to pay the principal or purchase price of or interest on the Bonds except from payments received from the Corporation and from certain funds created under the Bond Indenture, and neither the faith and credit nor the taxing power of the State, City of Salem, Oregon, or any other political subdivision thereof is pledged to the payment of the principal of and interest on the Bonds. The Bonds are not a debt of the State, City of Salem, Oregon, or any other political subdivision of the State, nor are they liable for the payment thereof. The Authority has no taxing power.

* Preliminary, subject to change.

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ANNUAL DEBT SERVICE REQUIREMENTS*

The following table sets forth, for each fiscal year ending June 30, the amounts required in each such year for the payment of principal at maturity or by mandatory redemption for the Bonds; for the payment of interest on the Bonds; for total debt service on the Bonds; for total debt service on the Outstanding obligations of the Corporation, assuming the defeasance of the Refunded Bonds, and for total combined debt service. All numbers are rounded to the nearest whole dollar.

Series 2016 Bonds Fiscal Year Total Debt Service Ending on Outstanding Total Combined June 30 Principal∗ Interest Total Debt Service Obligations(1) Debt Service(1) 2017 $ 4,305,000 $ $ $ 1,765,629 $ 2018 4,960,000 2,655,750 2019 5,110,000 2,655,750 2020 1,840,000 6,129,954 2021 1,945,000 6,115,580 2022 2,045,000 6,110,335 2023 2,165,000 6,096,205 2024 2,260,000 6,105,539 2025 2,380,000 6,098,887 2026 2,500,000 6,097,390 2027 2,635,000 6,087,163 2028 2,780,000 6,074,088 2029 2,920,000 6,072,808 2030 3,070,000 6,072,250 2031 3,230,000 6,063,269 2032 3,405,000 6,049,220 2033 3,575,000 6,050,121 2034 3,725,000 6,046,783 2035 3,885,000 6,035,507 2036 10,075,000 - 2037 10,475,000 - 2038 10,790,000 - 2039 11,225,000 - 2040 11,670,000 - 2041 12,140,000 - 2042 12,625,000 - 2043 13,255,000 - 2044 13,920,000 - 2045 14,615,000 - 2046 15,345,000 - $194,870,000 $104,382,229 (1) As described above, includes debt service payments on the Outstanding obligations of the Corporation. Includes outstanding Series 2008B Bonds, which are assumed to bear interest at the associated swap rate of 3.541%. Assumes redemption or defeasance of the Refunded Bonds as described above under “PLAN OF FINANCING–Plan of Refunding.”

* Preliminary, subject to change.

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BONDHOLDERS’ RISKS

The purchase of the Bonds involves investment risks that are discussed throughout this Official Statement. Prospective purchasers of the Bonds should evaluate all of the information presented in this Official Statement. This section on Bondholders’ Risks focuses primarily on the general risk factors associated with hospitals or hospital operations generally and on other risk factors; whereas Appendix A and Appendix B describe the operations and financial condition of the Corporation and the Obligated Group, specifically. These should be read together. Set forth below is a limited discussion of certain of the risks affecting the Obligated Group Members and the ability of the Obligated Group Members to provide for payment of the Bonds. Investors should recognize that the discussion below does not cover all such risks, that payment provisions and regulations and restrictions change frequently and that additional material payment limitations and regulations and restrictions may be created, implemented or expanded while the Bonds are outstanding. The following discussion is not meant to be an exhaustive list of the risks associated with the purchase of any Bonds and does not necessarily reflect the relative importance of the various risks. Potential investors are advised to consider the following special factors along with all other information described elsewhere or incorporated by reference in this Official Statement, including the Appendices hereto, in evaluating the Bonds. The operations and financial condition of the Corporation and of the Obligated Group may be affected by factors other than those described below. No assurance can be given as to the nature of such factors or the potential effects thereof upon the Corporation and the Obligated Group.

General

Except as noted under “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS,” the Bonds are payable solely from the Revenues, including payments to be made pursuant to the Loan Agreement and under Obligation No. 26. No representation or assurance can be made that revenues will be realized by the Corporation or by the Members of the Obligated Group in the amounts necessary to make payments pursuant to the Loan Agreement or under Obligation No. 26 or be sufficient to pay when due the principal of, premium, if any, and interest on the Bonds. The risk factors discussed below, among others, should be considered in evaluating the Corporation’s ability to make payments in amounts sufficient to make such payments on the Bonds.

The Corporation is subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental agencies and by private agencies that administer Medicare, Medicaid and other payors. The Corporation is also subject to actions by, among others, the National Labor Relations Board, accrediting agencies, the Centers for Medicare and Medicaid Services (“CMS”) of the U.S. Department of Health and Human Services (“DHHS”), the Oregon Department of Human Services (“DHS”), the Attorney General of the State of Oregon and other federal, state and local government and private-sector agencies. The future financial condition of the Corporation could be adversely affected by, among other things, changes in the method, timing, and amount of payments to the Corporation by governmental and nongovernmental payors, the financial viability of these payors, increased competition from other health care entities, the costs associated with responding to governmental audits, inquiries and investigations, demand for health care, other forms of care or treatment, changes in the methods by which employers purchase health care for employees, capability of management, changes in the structure of how health care is delivered and paid for (e.g., accountable care organizations, value based purchasing, bundled payments and other health care reform payment mechanisms, including a “single-payor” system), future changes in the economy, demographic changes, availability of physicians, nurses and other health care professionals, and malpractice claims and other litigation. These factors and others may adversely affect payment by the Corporation and the Obligated Group under the Loan Agreement and Obligation No. 26 and, consequently, on the Bonds. It is not expected that there will be any debt service reserve fund servicing

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the Bonds nor, unless and until an Event of Default under the Master Indenture occurs, will there be any requirement that Gross Revenues be deposited with the Master Trustee.

These and other risks may adversely affect the Corporation and the Obligated Group and jeopardize its ability to generate revenues and make payments under Obligation No. 26 issued pursuant to the Master Indenture when due. There can be no assurance that the financial condition of the Corporation and/or the utilization of the Corporation facilities will not be adversely affected by any of these circumstances. Wherever in this discussion of risks reference is made to the Corporation, the risks described may also be applicable to future Members of the Obligated Group.

General Economic Conditions; Bad Debt, Indigent Care and Investment Performance.

Health care providers are economically influenced by the environment in which they operate. Any national, regional or local economic difficulties may constrain corporate and personal spending, limit the availability of credit and increase the national debt and any federal and state government deficits. To the extent that employers reduce their workforces, unemployment rates are high, employers reduce their budgets for employee health care coverage or private and public insurers seek to reduce payments to health care providers or curb utilization of health care services, health care providers may experience decreases in insured patient volume, decreases in demands for services and reductions in payments for services. In addition, to the extent that state, county or city governments are unable to provide a safety net of medical services, pressure is applied to local health care providers to increase free care. Furthermore, economic downturns and lower funding of Medicare and state Medicaid and other state health care programs may increase the number of patients who are unable to pay for their medical and hospital services care. Economic downturns put increased stresses on state budgets, which could potentially result in reductions in Medicaid payment rates or Medicaid eligibility standards, and delays of payment of amounts due under Medicaid and other state or local payment programs. These conditions may give rise to increases in health care providers’ uncollectible accounts, or “bad debts,” uninsured discounts and charity care and, consequently, to reductions in operating income. Declines in investment portfolio values may reduce or eliminate non-operating revenues. Investment losses (even if unrealized) may trigger debt covenants to be violated and may jeopardize hospitals’ economic security. Losses in pension and other postretirement benefit funds may result in increased funding requirements for hospitals and health systems. Potential failure of lenders, insurers or vendors may negatively impact the results of operations and the overall financial condition of health care providers. Philanthropic support may also decrease or be delayed.

Effect of Disruption in the Credit Market

The disruption of the credit and financial markets in the years since 2007 produced volatility in the securities markets, significant losses in investment portfolios, increased business failures and consumer and business bankruptcies. In response to that disruption, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Financial Reform Act”) was enacted and approved by President Obama on July 21, 2010. The Financial Reform Act included broad changes to the previously existing financial regulatory structure, including the creation of new federal agencies to identify and respond to risks to the financial stability of the United States. Additional legislation was adopted and is pending or under consideration by Congress and regulatory action was or is being considered by various Federal agencies and the Federal Reserve Board and foreign governments, which are intended to increase the regulation of domestic and global credit markets. The effects of the Financial Reform Act and of these legislative, regulatory and other governmental actions, if implemented, are unclear.

The health care sector was materially adversely affected by these developments and may be materially adversely affected by adverse economic conditions in the future. The consequences of these developments have generally included realized and unrealized investment portfolio losses, reduced

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investment income, limitations on access to the credit markets, difficulties in extending existing or obtaining new liquidity facilities, difficulties in rolling maturing commercial paper and remarketing revenue bonds subject to tender, requiring the expenditure of internal liquidity to fund principal payments on commercial paper or tenders of revenue bonds, expenditure of funds to restructure debt capital and increased borrowing costs. During the past several years there have been increased stresses on state budgets, which could potentially result in reductions in Medicaid payment rates or Medicaid eligibility standards, and delays of payment of amounts due under Medicaid and other state or local payment programs.

Federal Budget Matters

American Recovery and Reinvestment Act of 2009. In February 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA includes several provisions that are intended to provide financial relief to the health care sector, including a requirement that states promptly reimburse health care providers, and a subsidy to the recently unemployed for health insurance premium costs. ARRA also established a framework for the implementation of a nationally- based health information technology program, including incentive payments which commenced in 2011 to eligible health care providers to encourage implementation of health information technology and electronic health records. For more information on this program, see “—Regulatory Environment—The HITECH Act” below.

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. The Super Committee failed to act within the time specified in the BCA and, as a result, the BCA mandated that a 2% reduction in Medicare spending, among other reductions, would be triggered to take effect on January 2, 2013. However, as a result of the enactment of the American Taxpayer Relief Act of 2012, automatic spending cuts (in an amount necessary to achieve $1.2 trillion in savings between federal fiscal years 2013 and 2021, commonly referred to as “sequestration”) were not triggered on January 1, 2013.

The American Taxpayer Relief Act of 2012 (“ATRA”) postponed this scheduled reduction until March 1, 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 in documentation and coding that have increased Medicare inpatient prospective payment system (“IPPS”) payments but that do not represent real increases in the intensity of services provided to patients. In the final IPPS regulations for federal fiscal year 2014, CMS stated that it will phase in this recoupment over time, and implemented 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%. In the final IPPS rule for federal fiscal year 2017, CMS made a 1.5% recoupment adjustment for federal fiscal year 2017.

In December 2013, the Bipartisan Budget Act of 2013 (“BBA 2013”) was enacted, which, among other actions, restructured Medicaid disproportionate share payments (“DSH payments”) reductions by delaying the fiscal year 2014 DSH payment cuts until fiscal year 2016, but increasing the overall level of reductions and extending cuts through fiscal year 2023. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), further delays the DSH payment cuts until fiscal year 2018, while extending cuts through fiscal year 2025.

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BBA 2013 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, the President signed into law the Bipartisan Budget Act of 2015 (“BBA 2015”), increasing the discretionary spending caps imposed by the BCA for fiscal years 2016 and 2017 and authorizing $80 billion in increased spending over the two years. BBA 2015 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.

Absent further Congressional action, these automatic spending cuts will become permanent. Because Congress may make changes to the budget in the future, it is impossible to predict the impact any spending cuts may have upon the Obligated Group. Similarly, it is impossible to predict whether any automatic reductions to Medicare may be triggered in lieu of other spending cuts that may be proposed by Congress. To the extent Medicare and/or Medicaid spending is reduced under either scenario, this may have a material adverse effect upon the financial condition of the Obligated Group. Ultimately, these reductions or alternatives could have a disproportionate impact on hospital providers and could have a material adverse effect on the financial condition of the Obligated Group.

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.

Management of the Corporation is unable to determine at this time what impact any future failure to increase the federal debt limit may have on the operations and financial condition of the Corporation, 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 of Congress to increase the federal debt limit.

Health Care Reform

Federal Health Care Reform. The Patient Protection and Affordable Care Act, as was subsequently amended by the Health Care and Education Reconciliation Act of 2010 (collectively referred to as the “ACA”) was enacted in March 2010. The constitutionality of the ACA has been challenged in courts around the country. In June 2012, the U.S. Supreme Court upheld most provisions of the ACA, including an “individual mandate” (which began in 2014, generally requiring individuals to have a certain amount of health insurance coverage or pay a penalty), while limiting the power of the federal government to penalize states for refusing to expand Medicaid. In June 2015, the U.S. Supreme Court in its decision in King v. Burwell upheld Treasury Regulation 26 C.F.R. §1.36B-2(a)(1), issued under the ACA, stating that health insurance exchange purchasers can receive tax-credit subsidies, regardless of whether the purchase is made through a federal or state-operated exchange. The ultimate outcomes of legislative efforts to repeal, substantially amend, eliminate or reduce funding for the ACA are unknown as are the outcomes of legal challenges to the ACA. While these attempts have not been successful, the results of the Presidential and Congressional elections in 2016 could affect the outcome of future efforts. The effect of any major modification or repeal of the ACA on the financial condition of the Obligated Group cannot be predicted with certainty, but could be materially adverse. In addition to the prospect for legislative repeal or revision, a hostile administration could impose substantial change upon the ACA through administrative action, including revised regulation and other Executive Branch action and inaction.

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The ACA addresses almost all aspects of hospital and provider operations and health care delivery, and has changed and is changing how health care services are covered, delivered and reimbursed. These changes have and are expected to continue to result in new payment models with the risk of lower health care provider 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 have and are expected to receive reduced payments for care, millions of previously uninsured Americans have gained or are expected to gain health insurance coverage. “Health insurance exchanges” could fundamentally alter the health insurance market and negatively impact health care providers by, for example, 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.

As a result of the ACA, substantial changes have occurred and are anticipated to occur in the United States health care system. The ACA is impacting 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. Some of the provisions of the ACA took effect immediately or within a few months of final approval, while others were or will be phased in over time. Because of the complexity of the ACA generally, additional legislation may be considered and enacted over time. The ACA has also required, and will continue to require, the promulgation of substantial regulations with significant effects on the health care industry and third-party payors. Thus, the health care industry is the subject of significant new statutory and regulatory requirements and, consequently, to structural and operational changes and challenges for a substantial period of time. The full ramifications of the ACA may also become apparent only over time and 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, while others have been upheld after being challenged, and future actions and challenges may further change its impact. 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 may have both positive and negative effects, directly and indirectly, on the nation’s hospitals and other health care providers, including the Corporation. For example, the 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 continue to result in lower levels of bad debt and increased utilization or profitable shifts in utilization patterns for hospitals. However, the extent to which Medicaid expansion, which is now optional on a state by state basis, is either not pursued or results in a shifting of significant numbers of commercially-insured individuals to Medicaid, or health insurance options on exchanges are limited or unaffordable, as well as the cost containment measures and pilot programs that the ACA requires, may offset these benefits. A negative impact to the hospital industry overall will likely continue from scheduled cumulative reductions in Medicare payments. The legislation’s cost-cutting provisions to the Medicare program include reduction in Medicare market basket updates to hospital reimbursement rates under the IPPS, additional reductions to or elimination of Medicare reimbursement for certain patient readmissions and hospital-acquired conditions, as well as anticipated reductions in rates paid to Medicare managed care plans that may ultimately be passed on to providers. Industry experts also expect that government cost reduction actions may be followed by private insurers and payors. Because a large percentage of the gross patient revenues of the Corporation for each of its fiscal Years Ended June 30, 2016 and 2015 were from Medicare spending the reductions may have a material impact, and could offset any positive effects of the ACA. See also “—Patient Service Revenues—Medicare and Medicaid Programs” below.

Health care providers could be further subjected to decreased reimbursement as a result of implementation of recommendations of the Independent Payment Advisory Board (the “IPAB”) established

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by the ACA. Beginning January 15, 2019, if the Medicare growth rate exceeds the target, the IPAB is directed to make recommendations for cost reduction for implementation by DHHS, and those recommended reductions will be automatically implemented unless Congress adopts alternative legislation that meets equivalent savings targets. Hospitals are largely exempted from recommendations from the IPAB until 2020. The IPAB was to begin submitting its annual recommendations no later than January 15, 2014. However, President Obama has yet to appoint the members of the IPAB. Additionally, the Chief Actuary of CMS has concluded that the projected Medicare per capita growth rate has not yet exceeded the target growth rate and there will be no need for IPAB activity at least through federal fiscal year 2016. In June 2015, the House of Representatives voted to repeal the IPAB, although the Senate has not yet approved the legislation. On the other hand, the fiscal year 2017 federal budget aims to strengthen the IPAB.

Beginning in 2014, the ACA created state “health insurance exchanges” in which health insurance can be purchased by certain groups and segments of the population, 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. Healthcare.gov, the health care exchange website created by the federal government under the provisions of the ACA, is designed to allow residents of states, which opted not to create their own state exchanges or to enter into a partnership with the federal government to purchase health insurance or qualify for Medicaid coverage.

Additionally, 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 Corporation. 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 so new, 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 Corporation, and upon the operations, results of operations and financial condition of the Corporation, cannot be predicted.

Additionally, the administration delayed the effective date of certain aspects of the ACA and in November 2015, BBA 2015 repealed a provision of the ACA that would require employers that offer one or more health benefit plans and have more than 200 full-time employees to automatically enroll new full- time employees in a health plan. Similarly, delaying the ACA adjusted community rating provisions for grandfathered small group plans temporarily stabilizes renewal rates for many small employers with young, healthy employees in many markets. When this delay expires, many of these small employers are expected to receive significant rate increases as they are moved toward an average “community” rate.

High deductible insurance plans have become more common in recent years, and the ACA has encouraged an increase in high deductible insurance plans as the health care exchanges include a variety of plans, several of which offer lower monthly premiums in return for higher deductibles. Many plans offered on the exchanges have high 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. This factor may increase bad debt expense for hospitals and providers.

The ACA will likely affect some health care organizations differently from others, depending, in part, on how each organization adapts to the legislation’s emphasis on directing more federal health care

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dollars to integrated provider organizations and providers with demonstrable achievements in quality care. Commencing October 1, 2012, the ACA established a value-based purchasing system for hospitals under the Medicare program, which was designed to provide incentive payments to hospitals that are contingent on satisfaction of specified performance measures related to common and high-cost medical conditions, such as cardiac, surgical and pneumonia care.

The ACA establishes the Medicare Savings Program (“MSSP”) and also establishes a mechanism by which the government develops and tests various demonstration programs and pilot projects and other voluntary and mandatory programs to evaluate and encourage new provider delivery models and payment structures, including “accountable care organizations” (“ACOs”) and bundled provider payments. The outcomes of these demonstration projects and programs, including their effect on payments to providers and financial performance, cannot be predicted.

On January 26, 2015, 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 ACOs or bundled payment arrangements, by the end of 2016, increasing to 50% by 2018. In addition, DHHS set a goal of tying 85% of all traditional Medicare fee-for-service payments to quality or value by 2016, increasing to 90% by 2018. HHS announced in March 2016 that it had already met its 30% alternative payment arrangements goal. CMS has also implemented a mandatory bundled payment demonstration for certain joint replacement procedures in selected urban areas, including Portland, Oregon. Proposed rulemaking for additional mandatory bundled payment models was announced in July 2016 for three additional clinical conditions. Private insurers are also developing bundled payment programs. While bundled payments offer opportunities to provide better coordinated care and to save costs, they also entail financial risk if the episode is not well managed. This transition of Medicare payment from volume to quality and value will place increasing risk on providers and could have a significant negative impact upon the economic performance of the Obligated Group. The outcomes of these projects and programs, including the likelihood of being made permanent or expanded or their effect on health care organizations’ revenues or financial performance, cannot be predicted.

As mentioned above, the ACA established the MSSP program that seeks to promote accountability and coordination of care through the creation of ACOs. The program allows 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 and, depending on their participation status, may share in a portion of any losses suffered 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. The ACO and MSSP final rules were published in November 2011 and June 2015; however, the regulations are complex and it remains unclear whether the qualification requirements will be a formidable barrier to entry. In particular, because the federal ACO regulations do not preempt state law, providers in any state participating as a federal ACO must be organized and operated in compliance with such state’s existing statutes and regulations. In January 2016, CMS issued a proposed rule that aims to revise the benchmark rebasing calculations for ACOs. While these revised benchmark rebasing calculations may be particularly attractive for high performing ACOs, the delayed onset of these revised benchmark calculations (e.g., the revised methodology would not apply for the earliest ACOs until the start of their third participation agreement in 2019) leaves the MSSP ACO landscape somewhat uncertain. Also, the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) issued a joint statement of antitrust enforcement policy in October 2011 as applied to ACOs; CMS and the OIG issued a final rule in October 2015 on certain waivers of the Anti-Kickback Statute, Stark Law and the Civil Monetary Penalties Law for ACOs; and the IRS issued a notice and fact sheet in October 2011 addressing

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the impact on tax-exempt organizations participating in ACOs; however, there may remain regulatory risks for participating hospitals, as well as financial and operational risks. It is possible 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 uncertain whether the savings will be adequate to recoup the initial investment. CMS is also developing and implementing more advanced ACO payment models, such as the Next Generation ACO Model, which require ACOs to assume greater risk for attributed beneficiaries. Providers participating in MSSP and other ACO payment models developed by CMS may not be able to recoup their investments and may suffer further losses if they are not able to meet quality targets and sufficiently control the cost of care for their attributed beneficiaries. In addition, private insurers and self-insured employers are beginning to establish similar incentives for providers, requiring changes in infrastructure and organization. The potential impacts of these initiatives and the regulation for ACOs are unknown and continually evolving, but introduce greater risk and complexity to health care finance and operations.

The ACA is projected to expand access to Medicaid and the scope of services covered thereunder. With respect to access, Medicaid is expected to cover all individuals with incomes of less than 133% of the federal poverty level. The ACA currently gives states the option to expand Medicaid eligibility to non- elderly, non-pregnant individuals who are not otherwise eligible for Medicare, if they have incomes of less than 133% of the federal poverty level. To assist states with the cost of covering such newly eligible individuals, the federal government agreed to pay 100% of the new cost for a limited number of years. Thereafter, the cost share is expected to decrease to 90% by 2020, which decrease will occur in phases. In the event a state chooses not to participate in the expanded Medicaid program, the net effect of the reforms in the ACA could be significantly reduced. Additionally, Medicaid reimbursement rates differ by state and the effect of expanded Medicaid enrollment must be determined on a state-by-state basis. The State of Oregon chose to expand Medicaid under the ACA. See “Patient Service Revenues—The Medicaid Program” below.

The ACA establishes criteria for Qualified Health Plans (“QHPs”) that may participate in the state run exchanges. A QHP must meet certain minimum essential coverage requirements. Minimum essential coverage requirements may be offered at one of four levels of coverage: bronze, silver, gold or platinum. Each QHP must agree to offer at least one plan at the silver or gold level. The ACA sets forth the minimum coverage offered under each plan level and limits the variations in premiums that may be charged for exchange coverage on the basis of age and tobacco use. A QHP must also be certified by each exchange through which the plan is offered, must be licensed in each state where it offers insurance, and the QHP must limit cost sharing with the insured. Under the ACA, individuals with family income under 400% of the Federal Poverty Level are eligible for subsidized premiums, deductibles and co-pays for coverage purchased on the exchange. Initially, only individuals and small employers will be able to access coverage through the exchanges. By 2017, large employers will also be able to use the exchanges to provide employer-based coverage to their employees. Although existing health insurance plans may continue to offer coverage in the individual and employer group markets, coverage will not satisfy an individual’s mandate unless the plan meets the ACA’s qualified health plan requirements.

At this time, it is not possible to project what effect the exchanges will have on competition in the insurance markets, the cost of coverage for employers, reimbursement rates for hospitals and physicians or the number of uninsured patients that the Obligated Group will still need to treat. Several large health insurers, including Aetna, United, Blue Cross Blue Shield, and Humana, have pulled some of their products out of certain exchanges, citing larger than expected losses on those insurance products. In addition, of the 23 health insurance cooperatives that were operational at the start of the ACA’s first open enrollment period in the fall of 2013, only 11 were still operational as of September 2016. The co-op failures are also due to sicker and costlier patients as well as benefits that were too generous and premiums that were too low.

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DHHS issued new regulations in May of 2016 to help the remaining co ops maintain financial viability. However, it is unclear whether the new regulations will provide the financial stability needed.

The ACA contains amendments to existing criminal, civil and administrative anti-fraud statutes and increases in 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” herein.

With respect to charity care, the ACA contains many features from previous tax exempt reform proposals, including a set of sweeping changes applicable to charitable hospitals exempt under Section 501(c)(3) of the Code. The ACA: (i) imposes new eligibility requirements for 501(c)(3) hospitals, coupled with an excise tax for failures to meet certain of those requirements; (ii) requires mandatory IRS review of the hospitals’ entitlement to exemption; (iii) sets forth new reporting requirements, including information related to community health needs assessments and audited financial statements; (iv) requires hospitals to adopt and publicize a financial assistance policy, limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients, and control the billing and collection processes; and (v) imposes further reporting requirements on the Secretary of the Treasury regarding charity care levels. Failure to satisfy these conditions may result in the imposition of fines and the loss of tax exempt status.

The content and implementation of the ACA has been, and remains, highly controversial. Several attempts to amend and repeal provisions of the ACA have been made since its passage. In June 2012, the Supreme Court upheld most provisions of the ACA, while limiting the power of the federal government to penalize states for refusing to expand Medicaid, and in June 2015, the Supreme Court issued a decision in King v. Burwell, ruling that health insurance subsidies under the ACA would be available in all states, including those with a federally-facilitated health insurance exchange.

State Health Care Reform. Oregon has a long history of health care reform and innovation in its Medicaid program. In 2009, the Oregon Legislative Assembly enacted legislation that established the Oregon Health Policy Board (the “Board”), a nine-member citizen panel appointed by the Governor to oversee the development and implementation of health care policy in Oregon. The Board was charged with carrying out these duties through the Oregon Health Authority and with the development of a plan to provide and fund access to affordable health care for all Oregonians by 2015, which is called the Action Plan for Health. The Board is to establish statewide health care quality standards, clinical standards, and cost containment mechanisms to reduce health care costs. A number of state governmental agencies have been placed within the Board’s jurisdiction. The Board is also working on a number of health care reform initiatives including the establishment and operation of a statewide physician orders for life sustaining treatment registry, the creation of a council to promote the use of electronic health records and data exchange, the establishment of a health care workforce database, and the development of evidence-based health care guidelines for use by health care providers, consumers, and purchasers of health care in Oregon.

After the enactment of the ACA, former Governor Kitzhaber established the Health System Transformation Team (“HSST”). The HSST is chartered by the Board and was charged with providing assistance to the Board in developing a plan to improve the health delivery system for Oregon Health Plan and Medicaid clients. Generally speaking, the plan focuses on coordinated mental, physical, behavioral and oral health to focus on prevention, and improve care.

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In the 2011 Legislative Session, former Governor Kitzhaber and the Legislative Assembly enacted legislation (“HB 3650”) establishing the Oregon Integrated and Coordinated Health Care Delivery System to replace managed care systems for recipients of medical assistance by January 1, 2014. The legislation requires the Oregon Health Authority to seek federal approval to allow enrollment of individuals who are dually eligible for Medicare and Medicaid into coordinated care organizations (“CCOs”) and requires authority to establish alternate payment methodologies for coordinated care organizations. CCOs were developed to improve health, improve health care and lower costs by transforming the delivery of health care. HB 3650 required the Legislative Assembly to give final approval of the implementation plan for CCOs during the February 2012 Session, and in the February 2012 Session, the Legislative Assembly enacted Senate Bill 1580 to approve the business plan for implementation of CCOs. CCOs are responsible for the delivery of physical, mental, addiction, oral and other health care to Medicaid beneficiaries and given flexibility and incentives for delivering care that keeps people healthier, including preventive services and team-based care for chronic illnesses.

The State received a waiver from CMS for the period of 2012 to 2017 (the “2012 Waiver”) that allows it to receive a federal Medicaid match for certain health care services that are currently funded from the general fund. In connection with the 2012 Waiver, in December 2012, the State reached an agreement with CMS on Special Terms and Conditions of the July Section 1115 Medicaid Demonstration, including an Accountability Plan and Expenditure Trend Review. This agreement outlines methods, measurements and accountability for the State’s plan to improve health and lower costs for people served by the Oregon Health Plan/Medicaid. On July 20, 2016 and August 14, 2016, the State submitted a request to renew its Section 1115 Demonstration Waiver with CMS for the period of 2017 – 2022. See “—Oregon Medicaid Programs” below.

Federal government action on the Section 1115 Demonstration Waiver request, legislation or regulation on any of the above or related topics could have a negative impact on the Corporation and, in turn, its ability to make payments under the Obligations issued pursuant to the Master Indenture.

Nonprofit Health Care Environment

The tax-exempt status of hospitals and health care organizations is the subject of increasing regulatory and legislative threats. As nonprofit tax-exempt organizations, Members of the Obligated Group are subject to federal, state and local laws, regulations, rulings and court decisions relating to their organization and operation, including their operation for charitable purposes. At the same time, the Members of the Obligated Group conduct large-scale complex business transactions and are often the 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, health care organization. Hospitals or other health care providers may be forced to forego otherwise favorable opportunities for certain joint ventures, recruitment and other arrangements in order to maintain their tax-exempt status.

The operations and practices of nonprofit, tax-exempt health care organizations 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 health care organizations may not confer community benefits that justify the benefit received from their 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

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general, the Internal Revenue Service (“IRS”), state and local tax authorities, 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 the Corporation.

Congressional Hearings. Senate and House committees have conducted several nationwide investigations of hospital billing and collection practices, charity care and community benefits, 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. See “— IRS Examination of Compensation Practices and Community Benefit” below. It is uncertain whether any of these committees will pursue further investigations or whether Congress will adopt legislative changes negatively impacting tax-exempt organizations generally or tax-exempt hospitals in particular. See “Tax-Exempt Status and Other Tax Matters—Maintenance of the Tax-Exempt Status of the Corporation” below.

IRS Bond Examinations. IRS officials have indicated that more resources will be invested in audits of tax-exempt bonds in the charitable organization sector with specific review of private use. The IRS included a schedule to the Form 990 return (Schedule K), effective for the 2009 tax year and thereafter, to address what the IRS believed to be significant noncompliance with recordkeeping and record retention requirements for tax-exempt bonds. 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 bond-financed facilities.

IRS Examination of Compensation Practices. 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 indicated that the IRS (1) will continue to heavily scrutinize executive compensation arrangements, practices and procedures of tax-exempt hospitals and other tax-exempt organizations, and (2) in certain circumstances, may conduct further investigations or impose fines on tax- exempt organizations. The IRS has also undertaken a community benefit initiative directed at hospitals. A recent IRS report on this initiative determined that a lack of uniformity in definitions of community benefit used by reporting hospitals, including those regarding uncompensated care and various types of community benefit, made it difficult for the IRS to assess whether any particular hospital is in compliance with current law. The revised Form 990 includes a new schedule, Schedule H, which hospitals and health systems must use to report their community benefit activities, including the cost of providing charity care and other tax- exemption related information. Proposals have also been made within Congressional committees 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. See “Tax-Exempt Status and Other Tax Matters—Maintenance of the Tax-Exempt Status of the Corporation” below.

IRS Scrutiny of Employee Classification. The IRS is aggressively pursuing businesses, including nonprofit tax-exempt organizations, which misclassify their employees as independent contractors. A number of employers incorrectly treat their workers (or a class or group of workers) as independent contractors or other nonemployees to reduce their employment tax withholding burden. An IRS audit of employee classification can result in employment tax liability for the employers, as well as interest and penalties on the amounts owed. Whether a worker is performing services as an employee or as an independent contractor depends on facts and circumstances and generally is determined under various common law tests, like whether the service recipient has the right to direct and control the worker regarding how he or she performs the services. The IRS is offering a Voluntary Classification Settlement program that provides partial relief from federal employment taxes owed for employers that agree to prospectively treat workers as employees and not independent contractors.

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Litigation Relating to Billing and Collection Practices. Lawsuits have been filed in federal and state courts alleging, among other things, that hospitals have failed to fulfill their obligations to provide charity care to uninsured patients and have overcharged uninsured patients. Other cases have alleged that charging patients more for services furnished in a hospital-based setting is a wrongful or deceptive practice. Many of these cases have since been dismissed by the courts. Some hospitals and health systems have entered into substantial settlements.

Class Actions. Hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, 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 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 charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices, excessive financial margins and operations that closely resemble for-profit businesses. Several of these disputes have been determined in favor of the taxing authorities or have resulted in settlements. In 2015, Oregon established a legislative workgroup to examine and propose future legislation to overhaul the property tax exemption procedures for all charitable entities, including hospitals and nonprofit health care organizations. The Corporation closely monitors these disputes, challenges and matters related to the tax exemption afforded to any material real property of the Corporation. There can be no assurance that these types of challenges will not occur in the future.

Indigent Care. Public and nonprofit health care providers often treat large numbers of indigent patients who are unable to pay in full for their medical care. 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 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.

Increasing Consumer Choice and Action by Purchasers of Hospital Services and Consumers. Hospitals and other health care providers face increased pressure to be transparent and provide information about cost and quality of services, which may lead to a loss of business as consumers and others make choices about where to receive health care services based upon cost and quality data accumulated by a variety of sources. In Oregon, the 2015 passage of a price transparency bill (SB 900) has resulted in the publication of median prices paid for hospital procedures on a state-run website.

Major purchasers of health care services also could take action to restrain hospital or other provider 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 health care organizations’ revenues may be negatively impacted. In addition, consumers and consumer advocates are increasing pressure for hospitals

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and other health care providers to be transparent and provide information about costs and quality of services that may affect future consumer choices about where to receive health care services.

Future Nonprofit Legislation. Legislative proposals which could have an adverse effect on the Obligated Group include: (i) any changes in the taxation of nonprofit corporations or in the scope of their exemption from income or property taxes; (ii) limitations on the amount or availability of tax-exempt financing for corporations recognized as tax exempt under section 501(c)(3) of the Code; (iii) regulatory limitations affecting the Obligated Group’s ability to undertake capital projects or develop new services; (iv) a requirement that nonprofit health care institutions pay real estate property tax on the same basis as for-profit entities; (v) mandating certain levels of free or substantially reduced care that must be provided to low income uninsured and underinsured populations; and (vi) placing ceilings on executive compensation of nonprofit corporations.

Legislative bodies have considered proposed legislation on the charity care standards that nonprofit, charitable hospitals must meet to maintain their tax-exempt status and legislation mandating nonprofit, charitable hospitals to have an open-door policy toward Medicare and Medicaid patients as well as to offer, in a non-discriminatory manner, qualified charity care and community benefits. Excise tax penalties on nonprofit, charitable hospitals that violate these charity care and community benefit requirements could be imposed or their tax-exempt status could be revoked. As described above, because of the complexity of health reform generally, additional legislation is likely to be considered and enacted over time beyond the ACA. The scope and effect of legislation, if any, which may be adopted at the federal or state levels with respect to charity care of nonprofit hospitals cannot be predicted. The effect on the nonprofit health care sector or the Obligated Group of any such legislation, if enacted, cannot be determined at this time.

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 health care organizations, including the Corporation. The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on hospitals and health care providers, including the Corporation, and in turn, its ability to make payments under the Loan Agreement and on Obligation No. 26.

Patient Service Revenues

Net patient revenues realized by the Corporation are derived from a variety of sources and vary among the individual facilities owned and services provided by the Corporation. Certain facilities may realize substantially more revenues from private payment programs than do others.

A substantial portion of the Corporation’s net in-patient and out-patient service revenues is derived from third-party payors that pay for the services provided to patients covered by the third-party payors. 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 the Corporation in amounts that may not reflect the direct and indirect costs of providing services to patients.

The Corporation’s financial performance has been and could in the future be adversely affected by the financial position, insolvency or bankruptcy of or other delay in receipt of payments from third-party payors that provide coverage for services to their patients.

Health care providers have been and continue to be affected significantly by changes made in the last several years in federal and state health care laws and regulations, particularly those pertaining to

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Medicare and Medicaid. The purpose of much of this statutory and regulatory activity has been to reduce the rate of increase in health care costs, particularly costs paid under the Medicare and Medicaid programs.

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 beneficiaries who are 65 years of age or older or who are blind, disabled or qualify for the End Stage Renal Disease Program. Medicare Part A covers inpatient hospital services, skilled nursing care and some home health care, and Medicare Part B covers physician services and some supplies. Medicaid is designed to pay providers for care given to the medically indigent and others who receive federal aid. Medicaid is funded by federal and state appropriations and is administered by the various states.

Approximately 43.6% and 21.6% of the gross patient revenue prior to bad debt expenses and excluding premium revenue, of the Corporation for the nine-month period ended June 30, 2016 were derived from the Medicare program (including managed care) and Medicaid programs, respectively. See APPENDIX A – “INFORMATION CONCERNING SALEM HEALTH – FINANCIAL INFORMATION – Sources of Revenue.”

Medicare Program

Medicare is a federal governmental health insurance system under which physicians, hospitals and other health care providers or suppliers are reimbursed or paid directly for services provided to eligible elderly persons, disabled persons and persons with end-stage renal disease. Medicare is administered by the CMS of the federal Department of Health and Human Services. CMS delegates to the states the process for certifying hospitals to which CMS will make payments. To achieve and maintain Medicare certification, health care providers, including hospitals, must meet CMS’s “Conditions of Participation” on an ongoing basis, as determined by the state in which the provider is located and/or ongoing compliance with standards of a chosen accreditation program, such as The Joint Commission, Det Norske Veritas or the Health Care Facilities Accreditation Program. The requirements for Medicare certification are subject to change, and hospitals may be required to effect changes from time to time in their facilities, equipment, personnel, billing procedures, policies and services. Failure to comply with certification and accreditation requirements could result in a loss of eligibility to participate in the Medicare program. A loss of participation in the Medicare program could have a material negative effect on the financial condition and results of operations of one or more of the Members of the Obligated Group.

The Corporation depends significantly on Medicare as a source of revenue. Because of this dependence, changes in the Medicare program may have a material effect on the Corporation. 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, including the ability of the federal government to continue to fund the Medicare program and changes to the way the federal government reimburses hospitals for services. The Medicare program reimburses hospitals based on a fixed schedule of rates based on categories of treatments or conditions. These rates change over time and there is no assurance that these rates will cover the actual costs of providing services to Medicare patients. Further, it is anticipated there will be reductions in rates paid to Medicare managed care plans that may ultimately be passed on to providers. The ACA institutes multiple mechanisms for reducing the costs of the Medicare program and thus reimbursements paid to hospitals, including the following:

Market Basket Reductions. Commencing upon enactment of the ACA and through September 30, 2019, the annual Medicare market basket updates for hospital have been, and will be, reduced. The

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market basked adjustments for inpatient hospital care have averaged approximately 2% to 4% annually in recent years. The ACA calls for reductions in the annual market baskets updates ranging from 0.10% to 0.75% each year through federal fiscal year 2019.

Market Productivity Adjustments. Since federal fiscal year 2012, the market basket updates for hospitals became subject to productivity adjustments as well. The federal fiscal year 2017 productivity adjustment for inpatient reimbursement is -0.3%. The reductions in market basket updates and the productivity adjustments have had, and will continue to have, a disproportionately negative effect upon those providers that are relatively more dependent upon Medicare than other providers. Additionally, the reductions in market basket updates were effective prior to the periods during which insurance coverage and the insured consumer base began to expand, which may have an interim negative effect on revenues. The combination of reductions to the market basket updates and the imposition of the productivity adjustments may result in reductions in Medicare payment per discharge on a year-to-year basis.

Value-Based Purchasing. Medicare inpatient payments to hospitals are now 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 a pool of money collected from all hospital providers, as a result of the reduction of hospital inpatient care payment by 1% in federal fiscal year 2013, progressing to 2% by federal fiscal year 2017. The reduction is set at 1.75% for federal fiscal year 2016. This reduction may be offset by incentive payments that commenced in federal fiscal year 2013 for hospitals that meet or exceed quality standards. In each federal fiscal year, the total amount collected from these reductions will be pooled and used to fund payments to reward hospitals that meet certain quality performance standards established by DHHS. These pool payments are expected to decrease as uninsured consumers transition to the ranks of health care exchanges and become insured.

Hospital Acquired Conditions Penalty. Beginning in federal fiscal year 2015, 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 certain medical conditions are being reduced based on the dollar value of that hospital’s percentage of excess preventable Medicare readmissions within 30 days of discharge, for those medical conditions. The current maximum penalty is 3%. CMS recently expanded the list of conditions subject to the readmission rate penalty.

Medicare Disproportionate Share Payments. The ACA provided that, beginning in federal fiscal year 2014, hospitals receiving supplemental Disproportionate Share (“DSH”) payments from Medicare (i.e., those hospitals that care for a disproportionate share of low-income Medicare beneficiaries) were slated to have their DSH payments reduced significantly. This reduction potentially will be offset by new, additional payments based on the volume of uninsured and uncompensated care provided by each such hospital, and is anticipated to be offset by a higher proportion of covered patients as other provisions of the ACA go into effect.

In September 2013, CMS issued a final rule confirming its methodology, which accounted for statewide reductions in uninsured and uncompensated care, and reduced Medicaid DSH allotments to each state. Under this final rule, the federal share of Medicaid DSH payments was reduced by $500 million in fiscal year 2014 and $600 million in fiscal year 2015 (and additional amounts through 2020). However, BBA 2013 delayed the fiscal year 2014 cuts until fiscal year 2016, but increased the overall level of reductions and extended cuts through fiscal year 2023. The Protecting Access to Medicare Act of 2014 further delayed the Medicaid DSH payment reductions until federal fiscal year 2017, but increased the level

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of such reductions and extended them through federal fiscal year 2024. The Medicare Access and CHIP Reauthorization Act of 2015 further delays the DSH payment cuts until fiscal year 2018, while extending cuts through fiscal year 2025. There can be no assurance that DSH funding will not be further decreased beyond projected reductions or eliminated entirely. See also “—Private Health Plans and Managed Care” and “—Disproportionate Share Payments” below.

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

In addition to components of the ACA described above, ATRA also negatively affected hospital Medicare reimbursement. Specifically, ATRA reduced Medicare reimbursement for hospitals by $10.5 billion, in the form of a coding and documentation adjustment to inpatient reimbursement payment rates, to help offset the $30 billion cost of deferring a 27% reduction in Medicare physician payments that would otherwise have gone into effect as well as the cost of extending for one year several CMS payment policies that would otherwise have expired.

Electronic Health Information Systems Medicare and Medicaid Incentive Payments and Payment Reductions. Components of the 2009 federal stimulus package, ARRA, provide 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. See also “—Regulatory Environment—The HITECH Act” below.

Hospital Inpatient Reimbursement. A substantial portion of the Medicare revenues of the Members of the Obligated Group is anticipated to be derived from payments made for services rendered to Medicare beneficiaries under a hospital inpatient prospective payment system (“IPPS”). Under IPPS, for each covered hospitalization Medicare pays a predetermined base operating payment and a separate predetermined base payment for capital-related costs. Each hospitalization of a Medicare beneficiary is classified into one of several hundred 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. For example, new Medicare IPPS payment rates that take effect October 1, 2016 are expected to decrease payments to hospitals by an average of 1%, with change rates varying from a negative 4.9% to a positive 2.9%. There is no guarantee that IPPS 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 “—Patient Service Revenues,” “—Medicare and Medicaid Programs” and “—Market Basket Reductions” 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” rule specifies that hospital stays spanning two or more midnights after the beneficiary is properly and formally admitted as an inpatient will be presumed to be “reasonable and necessary” for purposes of inpatient reimbursement. CMS adopted the policy due to growing concern with the overuse of the “observation” status at hospitals; CMS found that Medicare beneficiaries were spending extended periods of time in observation units without being admitted as inpatients. With some exceptions, stays not expected to extend past two midnights should not be admitted and instead be billed as outpatient. In April 2015, CMS announced it would delay enforcement of the “Two-Midnight” rule until September 30, 2015 and in August 2015, CMS announced it would again delay enforcement of the “Two-Midnight” rule until the end of 2015.

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Effective October 1, 2015, responsibility for enforcement of the “Two-Midnight” rule shifted from Medicare administrative contractors to quality improvement organizations (“QIO”), and recovery audit contractors will only conduct reviews for providers that have been referred by the related QIO. The Outpatient PPS Final Rule, issued in November 2015 and effective January 1, 2016, revised the Two- Midnight rule to allow an exception for Medicare Part A payment on a case-by-case basis for inpatient admissions that do not satisfy the two-midnight benchmark if documentation in the medical records supports that the patient required inpatient care. CMS has announced that it will not continue to impose an inpatient payment cut to hospitals under the “Two-Midnight” rule starting in 2017 following ongoing industry criticism and a legal challenge. In the IPPS final rule released on August 2, 2016, CMS removed the inpatient payment cuts under the “Two Midnight” rule for fiscal year 2017 and onward and provided a temporary increase of 0.6% payment in fiscal year 2017 to help offset the fiscal year 2014-2016 cuts under the “Two-Midnight” rule. The “Two-Midnight” rule has had an adverse financial impact for hospitals.

Inpatient rehabilitation facilities and units (“IRFs”) and inpatient psychiatric facilities and units (“IPFs”) have been excluded from the DRG-based PPS established for general inpatient acute care facilities. Both IPFs and IRFs are paid by Medicare under a separate generally higher-paying inpatient prospective payment system that is distinct from general inpatient PPS. The Social Security Act authorizes the Secretary of DHHS to determine which facilities are classified as IRFs. Such rehabilitation facilities and units are required to draw at least 60% of their inpatients from 13 specific rehabilitation diagnoses identified by CMS, in order to qualify for payment as an IRF. Effective October 1, 2014, CMS reduced the number of ICD-9 billing codes presumed to “count” toward meeting the 60% rule. There is no guarantee that the IRF payment will be adequate to cover the Obligated Group’s cost of furnishing care, or that a given IRF will continue to satisfy the 60% rule.

Recent Medicare Payment Advisory Commission (“MedPAC”) guidance has recommended site- neutral payment policies for certain services provided in the IRF setting. These policies reflect MedPAC’s position that Medicare should not pay more for care in one setting than in another if the care can safely and effectively be provided in a lower cost setting. Accordingly, MedPAC has proposed to reimburse certain IRF services at rates commensurate with payments made to skilled nursing facilities. To the extent adopted by CMS, these policies would have the potential to decrease Medicare revenues available to IRFs.

Hospital Outpatient Reimbursement. Hospitals are generally paid for outpatient services provided to Medicare beneficiaries under “Outpatient PPS,” which is based upon established categories of treatments or conditions known as ambulatory payment classifications (“APCs”). The payment rate established for each APC is based upon national median hospital costs (including operating and capital costs) adjusted for variations in labor costs across geographic areas. The actual cost of care, including capital costs, may be more or less than the reimbursements. CMS makes additional payment adjustments including: (i) outlier payments for services where the hospital’s costs exceed a threshold amount determined by CMS for that service and (ii) transitional pass-through payments for certain drugs and medical devices. Some hospital outpatient services (such as physical, speech and occupational therapy) are paid on the basis of the Medicare Physician Fee Schedule, instead of APCs. The ACA provides for a reduction to the market basket used to determine annual Outpatient PPS increases by an adjustment factor for 2010 through 2019 and by a productivity adjustment for 2012 and subsequent years. Application of the productivity adjustment can result in a market basket increase of less than zero, such that payments in a current year may be less than the prior year. There is no guarantee that APC rates, as they change from time to time, will cover actual costs of providing services to Medicare patients. Additionally, Congress or regulators in the future may impose additional limits or cutbacks in such payments or modify the method of calculating such payments.

Other Medicare Service Payments. Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, general outpatient services and home health services are based

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on regulatory formulas or predetermined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients.

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 Corporation’s facilities applicable to Medicare patient stays or will provide flexibility for hospitals to meet changing capital needs.

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

Effective January 1, 2016, the 2015 Outpatient Prospective Payment System Final Rule requires hospitals to use new modifiers for services provided to Medicare beneficiaries at off-campus hospital outpatient departments. The stated purpose of the new modifiers is to permit CMS to obtain information regarding the effect of the trend of the conversion of physician offices to off-campus hospital outpatient departments. A potential result of this information could be a future reduction in reimbursement for certain services provided at certain types of off-campus hospital outpatient departments. In any event, failure to use the modifiers correctly could jeopardize the provider-based status of associated off-campus locations.

CMS published a proposed rule implementing the site neutral provisions of BBA 2015 on July 6, 2016. Under the proposed rule, hospitals will have very limited ability to replace or expand their existing off-campus hospital outpatient departments or to expand the scope of services provided in such facilities. It is also unclear how hospitals will bill and receive payment for services subject to the site neutral rules after January 1, 2017. It is unclear when the proposed rule will be finalized and what will be the financial impact of the site neutral payment provisions.

For purposes of the BBA 2015, the Corporation “campus” will include the physical areas immediately adjacent to the Corporation’s main buildings and other areas not strictly contiguous to the main buildings but located within a 250-yard radius of the Corporation main buildings. There can be no assurance that future reimbursement payments to any such medical center off-campus hospital outpatient departments will be sufficient to cover the actual costs of such facilities.

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. Legislation has capped the number of residents recognized by Medicare for reimbursement purposes and has limited reimbursement for both direct and indirect medical education costs. The DHHS 2017 budget proposes to reduce Medicare indirect medical education payment by 10%.

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Medicare Bad Debt Reimbursement. Under Medicare, the costs attributable to the deductible and coinsurance amounts that 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 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.

Medicare Physician Payments. The sustainable growth rate (“SGR”) formula, a limit on the growth of Medicare payments for physician services, was enacted in 1997 and linked to changes in the U.S. Gross Domestic Product over a ten-year period. Each year since 2003, Congress provided temporary relief from scheduled “negative” updates that would have reduced physician payments. In April of 2015, Congress passed and the President signed the so-called “doc fix” in the form of the Medicare Access and CHIP Reauthorization Act of 2015. This law replaces the SGR formula with statutorily prescribed physician payment updates and provisions. As a result, payments under the Medicare Physician Fee Schedule for services furnished on or after April 1, 2015 will not be cut by 21%. Instead, current payment rates will increase annually by 0.5% through 2019. Thereafter, payment rates will be frozen at 2019 levels through 2025. In addition to the base payment methodology, physicians can earn Merit-based payments based on factors including compliance with meaningful use of electronic health records requirements and demonstration of quality-based medicine. While the payment cuts associated with the SGR formula have been eliminated, there is uncertainty regarding the impact of the Merit-based and Alternative Payment Models, and it is possible that future legislative action will be taken that would once again trigger physician payment reductions.

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

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Medicaid Program

Medicaid is a health insurance program for certain low-income and needy individuals that is funded jointly by the federal government and the states. Pursuant to broad federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration, and scope of services; sets the payment rates for services; and administers its own programs. Effective 2014, the ACA allows states to expand Medicaid to all individuals under the age of 65 with income less than 133% of the federal poverty limit. The State of Oregon has expanded Medicaid under the ACA.

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

Effect of Medicaid Payment Reductions. The ACA makes changes to Medicaid funding and substantially increases the potential number of Medicaid beneficiaries. 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 U.S. Supreme Court held that the federal government cannot withhold existing federal funds for states that refuse to expand Medicaid as required by the ACA. At present, 19 states have chosen not to expand Medicaid coverage. While management of the Corporation cannot predict the effect of these changes to the Medicaid program on operations, results from operations or financial condition of the Corporation, historically Medicaid has reimbursed at rates below the cost of care. Therefore, increases in the overall proportion of Medicaid patients pose a financial risk to the Corporation. It is uncertain to what extent this risk may be mitigated if the increased Medicaid utilization replaces previously uncompensated patients.

Medicare and Medicaid Audits. Hospitals that participate in the Medicare and Medicaid programs are subject from time to time to audits and other reviews and investigations relating to various aspects of their operations and billing practices, as well as to retroactive adjustments of reimbursements received from these programs. Medicare and Medicaid regulations also provide for withholding reimbursement 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.

Most Medicare and Medicaid audits involve the auditing of a random sample of patient services, from which any alleged overpayment is calculated and then statistically extrapolated to a larger universe of claims. Consequently, such audits typically result in alleged overpayments that are equal to many multiples of the value of the services actually audited, and can sometimes be measured in the millions of dollars. Such audits may be conducted by a variety of entities, including DHHS, OHA, DHS, DSHS, the Departments of Justice, state Attorney General Offices and private contractors of the state and federal health care programs, including Medicare carriers and intermediaries, Medicare and Medicaid Integrity Program contractors and recovery audit contractors. These multiple auditing efforts reflect increased governmental concern, enforcement and resources devoted to monitoring the Medicare and Medicaid Programs.

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

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Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify improper payments. These programs tend to result in retroactively reduced payment and higher administration costs to hospitals.

Authorized by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Medicare Integrity Program (“MIP”) was established to deter fraud and abuse in the Medicare program. Funded separately from the general administrative contractor program, the MIP allows CMS to enter into contracts with outside entities and insure the “integrity” of the Medicare program. These entities, include but are not limited to, 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 General (the “OIG”). ZPICs have the ability to compile claims data from multiple sources in order to analyze the complete claims histories of beneficiaries for inconsistencies.

The federal Medicaid Integrity Program was created by the Deficit Reduction Act in 2005. The Medicaid Integrity Program was the first federal program established to combat fraud and abuse in the state Medicaid programs. Congress determined a federal program was necessary due to the substantial variations in state Medicaid enforcement efforts. The Medicaid Integrity Program’s enforcement efforts support existing state Medicaid Fraud Control Units. Federal Medicaid Integrity Contractors are classified into Review MICs, Audit MICs and Educational MICs. Review MICs perform review audits generally to determine trends and patterns of aberrant Medicaid billing practices through data mining. Audit MICs perform post-payment reviews of individual providers through desk or field audits. The Educational MICs are responsible for developing and carrying out a variety of education activities to increase and improve Medicaid enforcement efforts by state government. Once a Medicaid overpayment is identified, the state has either 60 days, or one year if there is fraud, to repay the state’s share of federal financial participation to CMS. The state is then required to collect from the provider. If the provider wins on an appeal of the identified overpayment, the state is not permitted to reclaim its federal portion, so there is very little incentive for the states to settle such cases with the provider.

Medicare and Medicaid audits may result in reduced reimbursement or repayment obligations and may also delay Medicare or 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 violation of the FCA. It also added provisions respecting the timing of the obligation to identify, report and reimburse overpayments.

In February 2016, CMS issued a final rule addressing the requirement to report and return overpayments, with an emphasis for providers on developing robust compliance programs. In the final rule, CMS imposes a new “reasonable diligence” standard for identifying overpayments that must be reported and returned within 60 days, CMS clarifies that the 60-day timeframe for report and return begins when either reasonable diligence is completed (including determination of the overpayment amount) or on the day the person received credible information of a potential overpayment if the person failed to conduct reasonable diligence and the person in fact received an overpayment. In the final rule, CMS instructed that 6 years is the appropriate lookback period for identifying historical overpayments. The final rule also imposes an alternative duty to proactively determine whether overpayments have been made. The effect of these changes on existing programs and systems of the Members of the Obligated Group cannot be predicted.

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State Children’s Health Insurance Program

The State Children’s Health Insurance Program (“SCHIP”) is a federally funded insurance program for children whose families are financially ineligible for Medicaid, but cannot afford commercial health insurance. The CMS administers SCHIP, but each state creates its own program based upon minimum federal guidelines. SCHIP insurance is provided through private health plans contracting with the state. Each state must 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. Any such loss of funding or federal or state budget cuts to the program could have an adverse effect on provider revenues.

The ACA created an “enhanced” SCHIP federal matching rate available to states through the end of fiscal year 2015. Under MACRA, federal funding for SCHIP was extended through September 30, 2017. When such funding expires there can be no assurances that funding for an increase will be reestablished at either a state or federal level, or that professional and /or facility reimbursement rates will not subsequently be reduced in efforts to manage costs.

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 cost and utilization of 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. 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.

Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or, for institutional care, 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 may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections, and 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 health care 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.

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Often, managed care contracts are enforceable for a stated term, regardless of health care organizations losses and may require health care organizations to care for enrollees for a certain time period, regardless of whether the payor is able to pay the health care organization. Health care organizations 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.

There can be no assurance that the Corporation will maintain managed care contracts or obtain other similar contracts in the future. Failure to maintain contracts could have the effect of reducing a health care organization’s market share and net patient services revenues. Conversely, participation may result in lower net income if participating health care 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 hospital in a non-preferred or lower tier by a significant payor may result in a material loss of volume.

In addition to tiered provider networks, managed care plans are also implementing narrow provider networks in which only a select group of providers participate as in-network providers. Managed care plans often look at quality performance and cost in selecting providers to participate in their narrow networks. A provider’s exclusion from a narrow network may result in a material loss of volume. Managed care plans may offer lower reimbursement for providers in their narrow network(s) in exchange for additional volume expected from being one of a select group of network providers. This reimbursement may be insufficient to cover a network provider’s cost in providing the services. The new demands of dominant health plans and other shifts in the managed care industry may also reduce patient volume and revenue.

In addition, the current trend of consolidation in the health insurance industry is likely to increase the leverage of commercial insurers when negotiating rates with health care providers. Large health insurers that assume dominant positions in local markets threaten to increase health insurer concentration, reduce competition and decrease choice. If the Corporation were to terminate its agreement with any of the major managed care payers or not agree to terms proposed by such payers, or if the payers were to exit the regional marketplace in some or all of their product lines, it could have a significant material adverse impact on the financial condition of the Corporation.

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 choose 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.

Rate Pressure from Insurers and Purchasers.

Certain health care markets, including many communities in Oregon, are strongly influenced by large health insurers and, in some cases, by major purchasers of health services. In those areas, health insurers may have significant influence over the rates, utilization and competition of hospitals and other health care providers. Rate pressure imposed by health insurers or other major purchasers, including managed care payors, may have a material adverse impact on health care providers, particularly if major purchasers put increasing pressure on payors to restrain rate increases. Business failures by health insurers also could have a material adverse impact on contracted hospitals and other health care providers in the form of payment shortfalls or delays, and/or continuing obligations to care for managed care patients

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without receiving payment. In addition, disputes with non contracted payors are increasing and may result in an inability to collect billed charges from these payors.

Oregon Medicaid Programs

The State has established a system similar to Medicare+Choice programs under which coordinated health plans or providers could establish Medicaid HMOs and receive a capitated amount from the State to provide all needed health services for enrollees of the HMO. These HMOs traditionally contract with hospitals to pay predetermined rates for the services provided. Payment is similar to the Medicare DRG payment methodology or a per diem payment methodology.

Oregon has a longstanding federal waiver to use its Medicaid funding to operate the Oregon Health Plan, which is a managed care program. The Oregon Health Plan was created by legislation passed in 1989 and was designed to cover some additional individuals who previously could not qualify for Medicaid. The Oregon Health Plan includes a standard benefits package that enlarges the prior Medicaid benefits package by providing extra services such as dental services, routine physicals, and mammograms. The standard package under the Oregon Health Plan emphasizes prevention. The money saved by not covering services below a certain cutoff point on a prioritized list allows the State to extend Medicaid coverage to more of Oregon’s poor. Coverage of services could be reduced by the State of Oregon’s raising the cutoff point on the priority list.

In 2012, CMS approved Oregon’s revised Medicaid Demonstration waiver pursuant to which Oregon has established CCOs; approximately 90% of Oregon’s Medicaid eligible population are enrolled through the Oregon Health Plan. Oregon has entered into a revised Section 1115 waiver with CMS, and is receiving an additional $1.9 billion over five years through CMS’s Designated State Health Program to support the implementation of the CCO-based health delivery system. CCOs receive a global budget from the State of Oregon and provide the full care continuum of medical services (except skilled nursing facility services). For Medicaid beneficiaries who are not enrolled in CCOs and who receive hospital services, the State of Oregon employs a DRG-based payment system. Outpatient services for these beneficiaries are paid on a fee schedule basis. In Oregon, the Division of Medical Assistance Programs (“DMAP”) establishes these payment levels which are below the payments in the Medicare program. Accordingly, such payments may not cover the cost of providing such services.

A special tax on Oregon hospitals also affects reimbursement rates which impact the Corporation’s revenues. For several years Oregon has levied a provider tax on hospitals to garner additional federal Medicaid matching funds to help pay for additional Medicaid enrollees and enhance Medicaid reimbursement. The tax, which has gone through different legislative iterations, is set at 5.3% as of April 1, 2016, of hospital net revenues. The tax is designed to be cost neutral to hospitals, with the intention that additional Medicaid enrollees and reimbursement will offset the impact of the tax. Management of the Corporation is not able to calculate the net financial effect of the tax for the Corporation. This tax was recently extended through September 30, 2019, and it is unknown whether it will then be continued or amended.

The Oregon Medicaid program reimburses nursing facilities under one of two state-wide flat rate prospective payment rates. There are no geographic adjustments to these two rates. The lower rate covers most patients, while the higher rate covers complex medical cases which require additional nursing care. The facility component of Medicaid long term care services is not included in the health care transformation legislation.

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Changes to the Section 1115 Waiver, reductions in payments by Oregon’s Medicaid program, or loss of contracts for such programs, could materially adversely affect the financial condition of the Corporation.

Disproportionate Share Payments. The federal Medicare and the Oregon Medicaid programs each provide additional payment for hospitals that serve a disproportionate share of certain low-income patients with special needs. Some of the Corporation’s facilities qualify as a disproportionate share hospital and receives disproportionate share payments, but there can be no assurances that they will qualify for DSH payments in the future. The ACA substantially reduces federal DSH payments to account for the expected decline in the number of uninsured individuals and hospital uncompensated costs. The DSH replacement program’s funding level is currently linked to Oregon’s federal DSH allotment. It cannot be assured that the level and timing of health insurance coverage gains will reduce hospital uncompensated care costs so as to fully offset these authorized reductions to federal DSH funding. Nor can there be any assurance that DSH funding will not be further decreased beyond projected reductions or eliminated entirely.

State and Local Budgets. The ongoing financial challenges facing many states, including the State of Oregon, include, among other things, erosion of general fund tax revenues, falling real estate values, slowing economic growth, unfunded public employee retirement liabilities and future costs and higher unemployment, each of which may continue or worsen over the coming years. These factors have resulted in shortfalls between anticipated revenues and spending demands. The financial challenges facing states may negatively affect system hospitals in a number of ways, including but not limited to, elimination or reduction of state and local 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, and a greater number of individuals who qualify for Medicaid and reductions in Medicaid reimbursement rates. It cannot be predicted what actions will be taken in the current and future years by the Legislative Assembly and the Governor to address those financial problems, and actions will likely depend on national and state economic conditions and other factors that are uncertain at this time.

Regulatory Environment

Licensing, Surveys, Investigations and Accreditations. Health facilities 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 accreditation standards of The Joint Commission. 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 actions by the Corporation.

The Corporation 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 Corporation’s operations or financial condition. Nevertheless, actions in any of these areas could result in the loss of utilization or revenues, or the Corporation’s ability to operate all or a portion of its health care facilities and, consequently, could have a material and adverse effect on the Corporation.

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,

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safety and cost of health care services provided by hospitals and providers. The ACA initiated a shift in reimbursements from paying for volume to paying for value, based on various health outcome measures, reporting requirements and quality and efficiency metrics. Published rankings such as Medicare’s “Hospital Compare” quality ranking system, “score cards,” “pay for performance” and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals and the members of their medical staffs and to influence the behavior of consumers and providers such as the Corporation. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital or a physician negatively may adversely affect its reputation and financial condition.

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 an illegal inducement to utilize or refrain from utilizing a service or product.

Violations and alleged violations may be deliberate, but also frequently occur in circumstances where management is unaware of the conduct in question, as a result of mistake, or where the individual participants do not know that their conduct may violate the law. Violations may occur and be prosecuted in circumstances that do not have the traditional elements of fraud, and enforcement actions may extend to conduct that occurred in the past. Violations carry significant sanctions. The government periodically conducts widespread investigations covering categories of services or certain accounting or billing practices.

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 hospital from participation in the Medicare/Medicaid programs, civil monetary penalties, suspension of Medicare/Medicaid payments and imprisonment. Fraud and abuse cases may be prosecuted by one or more government entities and private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation.

Laws governing fraud and abuse may apply to a health care organization and to nearly all individuals and entities with which a health care organization does business. Fraud and abuse investigations, settlements, prosecutions and related publicity can have a material adverse effect on health care organizations. Aggressive investigation tactics, negative publicity and threatened penalties can be, and often are, used to force health care providers to enter into monetary settlements in exchange for releases of liability for past conduct. The settlements often require the provider to enter into some type of “corporate integrity” agreement, imposing prospective restrictions, mandated compliance requirements and/or reporting obligations. These negotiated settlements may have a materially adverse impact on hospital and other health care provider operations, financial condition, results of operations and reputation. Multi- million dollar fines and settlements for alleged misconduct, fraud or false claims are not uncommon in the health care industry. These risks are generally uninsured. Government enforcement and private whistleblower suits are increasing in the hospital and health care sector. Many hospital and other health care provider systems are likely to be adversely impacted. See “Enforcement Activity” below. Major elements of these often highly technical laws and regulations are generally summarized below.

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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.

False Claims Act. The federal False Claims Act (“FCA”) makes it illegal to knowingly submit or present a false, fictitious or fraudulent claim for payment or approval for payment for which the federal government provides, or reimburses, at least some portion of the requested money or property. Because the term “knowingly” is defined broadly under the law to include not only actual knowledge but also deliberate ignorance or reckless disregard of the facts, the FCA can be used to punish a wide range of conduct. The ACA amends the FCA by expanding the number of activities that are subject to civil monetary penalties to include, among other things, failure to report and return known overpayments within statutory time limits. FCA investigations and cases have become common in the health care field and may cover a range of activity from submission of intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Penalties under the FCA are severe and may include damages equal to three times the amount of the alleged false claims, as well as substantial civil monetary penalties. As a result, violation or alleged violation of the FCA frequently results in settlements that require multi-million dollar payments and costly 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 relators, or “whistleblowers,” can share in the damages recovered by the federal government. Because qui tam lawsuits are kept under seal while the federal government evaluates whether the United States will join the lawsuit, it is impossible to determine at this time whether any such actions are pending against the Corporation and no assurances can be made that such actions will not be filed in the future. The FCA has become one of the federal government’s primary weapons against health care fraud and suspected 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 and other health care providers.

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. The final rule which took effect on March 14, 2016 requires that providers report and return identified overpayments by the later of 60 days after identification, or the date the corresponding cost report is due, if applicable. If the overpayment is not so reported and returned, it becomes an “obligation” under the FCA. 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. There was initially great uncertainty in the industry as to when an overpayment is technically “identified” and the ability of a provider to determine the total amount of an overpayment and satisfy its repayment obligation within the required time period. The March 14, 2016 final rule clarified that an overpayment is considered to have been identified when the person has or should have, through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount of the overpayment. That final rule also established a six year lookback period, meaning overpayments must be reported and returned only if a person identifies the overpayment within six years of the date the overpayment was received.

In June 2016 the DOJ issued a rule that more than doubles civil monetary penalties under the FCA. These increases took effect on August 1, 2016 and apply to FCA violations after November 2, 2015.

In June 2016, the United States Supreme Court announced its decision in Universal Health Services, Inc. v. United States ex rel. Escobar, No. 15-7 (U.S. June 16, 2016). Prior to Escobar, lower courts had split on the issue of whether the FCA extended to so-called “implied certification” of compliance with laws, and whether such compliance was limited to express conditions of payment or extended to conditions of participation. The United States Supreme Court affirmed the theory of “implied certification” and rejected the distinction between conditions of payment and conditions of participation for these

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purposes, ruling that the relevant inquiry is whether the alleged noncompliance, if known to the government, would have in fact been material to the government’s determination as to whether to pay the claim. There is considerable uncertainty as to the application of the Escobar holding, but depending on how it is interpreted by the lower courts, it could result in an expanded scope of potential FCA liability for noncompliance with applicable laws, regulations and subregulatory guidance.

Anti-Kickback Statute. The federal “Anti-Kickback Statute” 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 of a patient (or to induce a referral) or the ordering or recommending of the purchase (or lease) of any item or service that is paid by any federal or state health care programs. The Anti-Kickback Statute potentially applies to many common health care transactions between persons and entities with which a hospital does business, including hospital-physician joint ventures, services agreements, medical director agreements, physician recruitment agreements, physician office leases, and other transactions. The Corporation participates in such arrangements in the ordinary course of business. The ACA amended the Anti-Kickback Statute to provide explicitly that a claim resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. Another amendment provides that an Anti-Kickback Statute violation may be established without proving that the defendant acted with specific intent to violate the Anti-Kickback Statute.

Violations or alleged violations of the Anti-Kickback Statute can result in settlements that require multi-million dollar payments and onerous corporate integrity agreements. The Anti-Kickback Statute can be prosecuted either criminally or civilly. A criminal violation may be prosecuted as a felony, subject to a fine of up to $250,000 for each act (which may be each item or each bill sent to a federal program), imprisonment and exclusion from the Medicare and Medicaid programs, any of which would have a significant detrimental effect on the financial stability of most hospitals. In addition, civil monetary penalties of $10,000 per item or service in noncompliance (which may be each item or each bill sent to a federal program) or an “assessment” of three times the amount claimed may be imposed. Increasingly, the federal government and qui tam relators are pursuing violations of the Anti-Kickback Statute under the FCA, based on the argument that claims resulting from an illegal kickback arrangement are also false claims for FCA purposes. See the discussion under the subheading “—False Claims Act” above. The IRS has taken the position that hospitals that are in violation of the Anti-Kickback Statute may also be subject to revocation of their tax-exempt status.

Stark Law. The federal “Stark Law” prohibits the referral 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 an exception applies. The Stark Law also prohibits a hospital furnishing the designated services from billing Medicare 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 Law violation. If certain substantive and technical requirements of an applicable Stark exception are not satisfied, many ordinary business practices and economically desirable arrangements between hospitals and physicians may constitute improper “financial relationships” within the meaning of the Stark Law, thus triggering the referral and billing prohibitions. Most providers of “designated health services” have some exposure to liability under the Stark Law. CMS has promulgated a series of regulations interpreting the Stark Law and Congress has occasionally amended the statute. The net result is an incredibly complex set of definitions, exceptions and rules that must be navigated in order to avoid running afoul of the Stark Law. Virtually all hospitals run a substantial risk of violating this statute.

Medicare may deny payment for all services performed based on a prohibited referral and a hospital that has billed for prohibited services is obligated to notify and refund the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons

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is found to violate the Stark Law, the hospital could be obligated to refund the payments received from Medicare for all of the heart surgeries performed at the hospital by all of the physicians in the group for the duration of the lease. As a result, even relatively minor, technical violations of the law may trigger substantial refund obligations.

Potential repayments to CMS, settlements, fines or exclusion for a Stark Law violation or alleged violation could have a material adverse impact on a hospital and other health care providers. Penalties for violation of the Stark Law include denial of payment, recoupment, refunds of amounts paid in violation of the law, exclusion from the Medicare or Medicaid program, and substantial civil monetary penalties (up to $15,000 per service, $100,000 for each arrangement or scheme intended to circumvent or to violate the statute, or $10,000 per day for false reporting or failure to report certain information required under the law). Increasingly, the federal government is prosecuting violations of the Stark Law under the FCA, based on the argument that Stark prohibits the submission of claims for services furnished pursuant to a tainted referral. See the discussion under the subheading “—False Claims Act” above. While the Stark Law focuses on Medicare, the Federal government has recently sought to expand the statute by attempting to recover the Federal portion of Medicaid claims that allegedly fall within the ambit of the referral and billing prohibitions.

CMS has established a voluntary self-disclosure program under which hospitals and other entities may report Stark Law violations and seek a reduction in potential refund obligations. The program is relatively new, but does appear to provide significant monetary relief to hospitals that discover inadvertent Stark Law violations and make a voluntary disclosure to the agency. However, the limited publicly available information with respect to the self-disclosure program and the short period it has been available make it difficult to predict how CMS will react to any specific voluntary disclosure of a Stark violation. The Obligated Group Members who bill the Medicare Program have the option of making self-disclosures under this program as appropriate from time to time. Any submission pursuant to the self-disclosure program does not waive or limit the ability of the OIG or DOJ to seek or prosecute violations of the Anti- Kickback Statute or impose civil monetary penalties.

State “Fraud” and “False Claims” Laws. Hospital providers also are subject to a variety of state laws related to false claims (similar to the federal FCA), anti-kickback (similar to the federal Anti-Kickback Statute), and physician referral (similar to the federal Stark Law). These prohibitions may vary in focus and scope from their federal counterparts and often have very limited regulatory guidance or enforcement history to help define their parameters. However, these state laws pose the possibility of material adverse impact for the same reasons as the federal statutes. See discussion under “False Claims Act,” “Anti- Kickback Statute” and “Stark Law” above.

Federal 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 improprieties 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 or other federal health care benefit programs. CMPL also prohibits: (a) a hospital from directly or indirectly paying a physician to limit or reduce medically necessary services to Medicare fee-for-service beneficiaries; or (b) a health care provider from offering 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. 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 the claim. It is sufficient that the provider “should have known” that the

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claim was false and 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.

Patient Records and Patient Confidentiality. HIPAA adds additional criminal sanctions for health care fraud and applies to all health care benefit programs, whether public or private. HIPAA also provides for punishment of a health care provider for knowingly and willfully embezzling, stealing, converting or intentionally misapplying any money, funds, or other assets of a health care benefit program. A health care provider convicted of health care fraud could be subject to mandatory exclusion from Medicare.

HIPAA authorized DHHS to promulgate privacy and security standards governing health individuals’ information when handled by covered entities, including hospitals. Additionally, other federal and state statutes impose additional privacy and security obligations on health care providers. Hospitals are required to implement comprehensive health information security measures. Use or disclosure of individually identifiable 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. As amended by the HITECH Act described below, HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly obtaining or using individually identifiable health information. Criminal penalties can range from: (1) up to $50,000 and up to one year imprisonment; (2) if committed under false pretense, then up to $100,000 and up to five years imprisonment; or (3) if committed with intent to sell, transfer, or use protected health information for commercial advantage, personal gain, or malicious harm, then up to $250,000 and up to ten years imprisonment.

International Classification of Diseases, 10th Revision Coding System. On October 1, 2015, the International Classification of Diseases, 10th Revision coding system (“ICD-10”) diagnostic code set went live. 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. ICD-10 is not without risk as staff had to be retrained, processes redesigned, and computer applications modified as the current available codes and digit size dramatically increased. Health care organizations were dependent on outside software vendors, clearinghouses and third-party billing services to develop products and services to allow timely, full and successful implementation of ICD-10. At this time, however, it is not possible to predict the effects of full ICD-10 implementation. With the recent implementation deadline, the full impact of the implementation of ICD-10 is evolving.

The HITECH Act. Provisions in the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of ARRA, increased the maximum civil monetary penalties for violations of HIPAA and granted enforcement authority of HIPAA to state attorneys general. The HITECH Act also (i) extended the reach of HIPAA beyond “covered entities” to include the direct regulation of “business associates,” (ii) imposed a breach notification requirement on HIPAA covered entities and business associates, (iii) further limited certain uses and disclosures of individually identifiable health information, and (iv) restricted covered entities’ marketing communications.

The breach notification obligation, in particular, may expose covered entities such as hospitals to heightened liability. Under HITECH, in the event of a data privacy breach, covered entities are required to notify affected individuals and the federal government. If 500 or more individuals are affected by the breach the federal government posts a description of the breach on its website. If more than 500 residents of a state or jurisdiction are affected, the covered entity also must notify local media. Although HIPAA

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does not provide for a private right of action, these reporting obligations increase the risk of government enforcement as well as class action lawsuits filed under state privacy or consumer protection laws, especially if large numbers of individuals are affected by a breach and can cause reputational harm.

The HITECH Act revises the civil monetary penalties associated with violations of HIPAA as well as provides state attorneys general with authority to enforce the HIPAA privacy and security regulations in some cases through a damages assessment of $110 per violation or an injunction against the violator. The revised civil monetary penalty provisions for DHHS establish a tiered system, ranging from a minimum of $100 per violation for an unknowing violation to $1,100 per violation for a violation due to reasonable cause, but not willful neglect. For a violation due to willful neglect, the penalty is a minimum of $11,002 or $55,010 per violation, depending on whether the violation was corrected within 30 days of the date the violator knew or should have known of the violation. Maximum penalties may reach $1,650,000 for violations of identical provisions. Penalties can significantly exceed $1,650,300 where there are violations of multiple provisions occurring over multiple years.

The HITECH Act revised the criminal penalties to provide for enforcement against any person who obtains or discloses protected health information without authorization, even if not a covered entity or business associate.

Pursuant to the HITECH Act, DHHS in its continuing enforcement of compliance with HIPAA, is performing periodic audits of health care providers, group health plans and their business associates to ensure that required policies under HIPAA and the HITECH Act are in place.

Finally, the HITECH Act provides that individuals harmed by violations will be able to recover a percentage of monetary penalties or a monetary settlement based upon methods to be established by DHHS for this private recovery, although DHHS has not yet issued rulemaking to effectuate this statutory provision.

The Office for Civil Rights (“OCR”) is the administrative office that is tasked with enforcing HIPAA. OCR has stated that it has now moved from education to enforcement in its implementation of the law. Recent settlements of HIPAA violations for breaches involving lost data have reached the millions of dollars. Any breach of HIPAA, regardless of intent or scope, may result in penalties or settlement amounts that are material to a covered health care provider or health plan.

On January 25, 2013, DHHS issued comprehensive modifications to the existing HIPAA regulations, commonly known as the “HIPAA Omnibus Rule,” to implement the requirements of the HITECH Act. The HIPAA Omnibus Rule became effective on March 26, 2013, and covered entities were required to be in compliance by September 23, 2013 (though certain requirements have a longer timeframe). Key aspects of the HIPAA Omnibus Rule include, but are not limited to: (i) a new standard for what constitutes a breach of protected health information, (ii) establishing four levels of culpability with respect to civil monetary penalties assessed for HIPAA violations, (iii) direct liability of business associates for certain violations of HIPAA, (iv) modifications to the rules governing research, (v) stricter requirements regarding non-exempt marketing practices, (vi) modification and re-distribution of notices of privacy practices, and (vii) stricter requirements regarding the protection of genetic information.

The HITECH Act also established programs under Medicare and Medicaid to provide incentive payments to certain eligible hospitals and health care professionals (“Eligible Providers”) that demonstrate the “meaningful use” of certified electronic health record (“CEHRT”). Eligible Providers demonstrate meaningful use of CEHRT by meeting and attesting to meaningful use objectives and associated measure specified by CMS for using CEHRT and by reporting on specified clinical quality measures. Incentive payments under the Medicare program sunset at the end of 2016. Pursuant to the HITECH Act, and

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commencing in 2015, Eligible Providers who have not satisfied the performance and reporting criteria for demonstrating meaningful use in the applicable meaningful use reporting year will have their Medicare payments reduced. The payment reduction starts at 1% and increases each year that an eligible hospital or professional fails to demonstrate meaningful use, to a maximum 5% payment reduction. CMS has engaged a contractor that conducts pre-payment and post-payment audits certain selected Eligible Providers that have submitted meaningful use attestations. An Eligible Provider that fails the audit will have an opportunity to appeal. Ultimately, Eligible Providers that elect not to appeal or fail on appeal will have to repay any incentive payments that they received through these programs or refund Medicare reimbursement that would have been reduced as part of the payment reductions.

MACRA ends the payment reductions for physicians who fail to demonstrate meaningful use after 2018. However, beginning in 2019, use of CEHRT will be a performance category under MACRA’s Merit- based Incentive Payment System (“MIPS”) for certain physicians and other health care professionals who do not meet MACRA’s thresholds for participation in certain alternative payment models designated by Medicare. A physician’s failure to use CEHRT consistent with MIPS’ requirements would lower the physician’s performance score under MIPS and could result in reduced Medicare reimbursement for professional services performed by the physician. On May 9, 2016, CMS published a proposed rule in the Federal Register to implement MIPS with numerous, complex requirements. A final rule is expected later in 2016. The need to implement technology, operational and other changes to address MIPS requirements for use of CEHRT may have a material adverse impact on the Obligated Group. Generally, MACRA did not change hospital participation in the Medicare EHR Incentive Program or participation for physicians in the Medicaid EHR incentive program.

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 prior to the HITECH Act, business associates 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. Covered entities have had to review and amend their business associate agreements in recent years in order to comply with these changing rules, which can be costly and administratively burdensome.

Other Privacy Requirements. Regulations espoused under 42 C.F.R. Part 2 also provide a heightened level of privacy of records associated with the provision of substance abuse counseling and treatment by covered alcohol and substance abuse treatment programs and greater protection for certain health information, such as mental health records. These rules are significantly more restrictive than the privacy provisions set forth in HIPAA. States may adopt privacy laws that are more restrictive than HIPAA but not less restrictive. These laws are either more detailed and/or more restrictive than HIPAA with respect to these particular types of treatment records.

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

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been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement and negative media attention. 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. In a health care organization, there can often be security incidents related to patient information, which stem from a variety of causes ranging from external or internal deliberate invasions by individuals or employees, to inadvertent loss or misdirection of paper or electronic records, to theft of hardware or software.

In a large hospital or health system, there can often be security incidents related to patient information, which stem from a variety of causes ranging from external or internal deliberate invasions by individuals or employees, to inadvertent loss or misdirection of paper or electronic records, to theft of hardware or software.

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. The Corporation has taken, and continues to take measures to protect its information technology system against such cyberattacks, but there can be no assurance that the Corporation 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 Corporation.

Payment Card Industry Security Standards. Health care providers have seen significant changes in the method, amount of transactions and dollar amount of patient payments. Health care providers recognize that financial data security is a paramount concern as is continuing to protect and secure patient information. Chip cards used at Europay, MasterCard and Visa (“EMV”) terminals protect against counterfeit transactions by replacing static data with dynamic data. Merchants are in the process of migrating to EMV chip card technology to improve the security of the card-present payments infrastructure. As a result, EMV is being introduced to health care providers.

Beginning October 1, 2015, the liability for card-present fraud shifts to whichever party is the least EMV-compliant in a fraudulent transaction. This means in practice that if a health care provider has not updated its system to accept chip cards and fraud occurs when a chip card is inserted into the terminal, the health care provider would be liable for the costs. It is not mandatory to begin using EMV compliant terminals on or after October 1, 2015 and there are no fines or other penalties, however, a health care provider that does not use EMV-compliant terminals may face much higher costs in the event of a large data breach. At this time, it is too early to predict the impact that this new technology will have on the Obligated Group.

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

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participation may be issued or other sanctions could potentially be imposed such as corrective action plans. If the corrective action plan is not accepted by CMS, or if it is not successfully implemented, the provider’s Medicare provider agreement could be terminated or other sanctions imposed.

Exclusions from Medicare or Medicaid Participation. The government may exclude a health care provider from Medicare/Medicaid program participation if such provider has been 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 or suspension could be a materially adverse event. In addition, exclusion of health care organization employees or independent contractors or their employees under Medicare or Medicaid may be another source of potential liability for hospitals or health systems based on services provided by those excluded individuals or entities.

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.

Patient Transfers. 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 $103,139 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. Failure of the Corporation to meet its responsibilities under the EMTALA could adversely affect the financial conditions of the Corporation.

Management is not aware of any pending or threatened claim, investigation, or enforcement action regarding patient transfers that, if determined adversely to the Corporation, would have material adverse consequences to the Corporation.

Environmental Laws and Regulations. The Corporation’s health care operations generate waste that must be disposed of in compliance with federal, state and local environmental and occupational health and safety laws and regulations. The Corporation’s operations, as well as the Corporation’s purchases and sales of facilities, also are subject to various other environmental laws, rules and regulations. These include but are not limited to: air and water discharge requirements; waste management requirements; hazardous material transportation requirements; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the facilities; requirements for training employees in the proper handling and management of hazardous materials and wastes, and specific regulatory requirements applicable to certain substances such as asbestos and radioactive isotopes.

Health facilities may be subject to requirements related to investigating and remedying hazardous substances located on their property, and hazardous substances that may have migrated off their property. Typical hospital operations include the handling, use, storage, transportation, disposal and discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, pharmaceuticals, 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

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result in damage to individuals, property or the environment; may interrupt operations and increase costs; may result in legal liability, damages, injunctions or fines; may include investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance.

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 the Corporation, would have material adverse consequences to the Corporation. The Corporation anticipates that compliance with such environmental laws and regulations will not materially affect the Corporation’s business, financial condition or results of operations.

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

Enforcement Activity. Enforcement activity against health care providers has increased, and enforcement authorities have adopted increasingly aggressive tactics. 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 or other health care regulatory violations by either the sheer size of the potential liability or withholding or threatening to withhold Medicare, Medicaid and similar payments. 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

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risks identified as being materially adverse to a health care organization could have materially adverse consequences to an organization taken as a whole.

Business Relationships and Other Business Matters

Physician Relations. The primary relationship between a hospital and physicians who practice in it is through the hospital’s organized professional staff. Professional staff bylaws, rules and policies establish the criteria and procedures by which a provider may have his or her privileges or membership curtailed, denied or revoked. Providers 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 professional staff may result in hospital liability to third parties.

Physician Contracting. The Corporation 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 Corporation’s success will be partially dependent upon its ability to continue to attract physicians to join the physician organizations and to participate in their networks and upon the ability of the physicians, including the employed physicians, to perform their obligations and deliver high quality patient care in a cost-effective manner. There can be no assurance that the Corporation will be able to attract and retain the requisite number of physicians, or that physicians will deliver high quality health care services. Without paneling a sufficient number and type of providers, the Corporation 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 Corporation’s business or operations.

Affiliations, Merger, Acquisition and Divestiture. Significant numbers of affiliations, mergers, acquisitions and divestitures have occurred in the health care industry recently. As part of its ongoing planning process, the Corporation has considered and will continue to consider the potential acquisition of operations or properties that may become affiliated with or become part of the Corporation in the future, as well as the potential disposition of certain existing operations or properties or potential merger with other systems. As a result, it is possible that the organizations and assets that make up the Corporation (or the Obligated Group) may change from time to time, subject to the provisions in the Master Indenture and other financing documents that apply to merger, sale, disposition or purchase of assets, or with respect to joining or withdrawing from the Obligated Group or the Corporation Credit Group and Substitution of Note.

In addition to relationships with other hospitals and physicians, the Corporation 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 Obligated Group Members. In addition, the Obligated Group Members 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 Corporation. Any initiative may involve significant capital commitments and/or capital or operating risk (including, potentially, insurance risk) in a business in which the Corporation may have less expertise than in hospital operations. There can

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be no assurance that these projects, if pursued, will not lead to material adverse consequences to the Obligated 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. Consolidation transactions among health care providers is an area in which investigation and enforcement activity by federal and state antitrust agencies is particularly frequent and vigorous. The application of the federal and state antitrust laws to health care is evolving (especially as the ACA and other coordination of care initiatives are implemented), and therefore not always clear. Currently, the most common areas of potential liability are joint action among providers with respect to payor contracting, medical staff credentialing disputes, and hospital mergers and acquisitions. From time to time, the Corporation and/or its affiliates may be involved with all of the types of activities described above, and the Corporation cannot 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. Investigations and proceedings arising from the application of federal and state antitrust laws can require the dedication of substantial resources by affected providers and can delay or impede proposed transactions even if ultimately it is determined that no violation of applicable law would occur as a result of the proposed transaction.

Integrated Delivery Systems. Health facilities and health care systems often own, control or have affiliations with physician groups and independent practice associations. 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 subsidies or other support from the related hospital or health system. 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.

These types of alliances are generally designed to respond to trends in the delivery of medicine to better integrate hospital and physician care, to increase physician availability to the community and/or to enhance the managed care capability of the affiliated hospitals and physicians. These goals may not be achieved, however, and an unsuccessful alliance may be costly and counterproductive to all of the above- stated goals. These types of alliances are likely to become increasingly important to the success of hospitals in the future 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

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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. The ability of hospitals or health systems to conduct integrated physician operations may be altered or eliminated in the future by legal or regulatory interpretation or changes, or by health care fraud enforcement. In addition, participating physicians may seek to maintain their independence for a variety of reasons, thus putting the hospital or health system’s investment at risk, and potentially reducing its managed care leverage and/or overall utilization. In October 2011, CMS, the Federal Trade Commission and the DOJ jointly issued guidance regarding waivers and safe harbors to enable providers to participate in the Medicare Shared Savings Program (see “Health Care Reform – Federal Health Care Reform” above). Although CMS issued the Shared Savings Program final rule in June 2015, there can be no assurance that such 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.

Health care providers, responding to health care reform and other industry pressures, are increasingly moving toward integrated delivery systems, managing the health of populations of individuals, patient-centered medical homes, bundled payments, and capitated insurance plans. These trends will require new infrastructures, including the appropriate mix of physician specialties, new administrative skills, close relationships between physicians and hospitals, insurance risk management, and new relationships between patients and providers. Provider organizations may be unsuccessful in assembling successful integrated networks, may not achieve savings sufficient to offset the substantial costs of creating and maintaining the necessary infrastructures to support such developments, could incur losses from assuming increased risk and could incur damage to reputations. 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.

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 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

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base and maintain market share. The physician-to-population ratios in certain parts of Oregon are below the national average, and the shortage of physicians could become a significant issue for hospitals and health care systems there.

Hospital Pricing. Inflation in hospital costs may evoke action by legislatures, payors or consumers. It is possible that legislative action at the state or national level may be taken with regard to the pricing of health care services.

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, telehealth providers, 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 which in some cases may enable them to pick only the most profitable service lines, and competition, in the future, may arise from new sources not currently anticipated or prevalent.

Specialty facilities or ventures that attract away an important segment of an existing hospital’s admitting specialists and/or services that generate a significant source of revenue may be particularly damaging. For example, some large hospitals may have significant dependence on heart surgery or orthopedic programs, as revenue streams from those programs may cover significant fixed overhead costs. If a significant component of such a hospital’s heart surgeons or orthopedists develop their own specialty hospital or surgery center (alone or in conjunction with a growing number of specialty hospital operators and promoters), taking with them their patient base, the hospital could experience a rapid and dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient days lost. It is also possible that the competing specialty hospital, as a for profit venture, would not accept indigent patients or other payers and government programs, leaving low pay patient populations in the full service hospital. In certain cases, such an event could be materially adverse to the hospital. A variety of proposals have been advanced recently to permanently prohibit such investments. Nonetheless, specialty hospitals continue to represent a significant competitive challenge for full service hospitals.

Likewise, freestanding ambulatory surgery centers may attract away significant commercial outpatient services traditionally performed at hospitals. Commercial outpatient services, currently among the most profitable 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 a for-profit business, may not accept indigent patients or low paying programs and would leave these populations to receive services in the hospital setting. Consequently, hospitals are vulnerable to competition from ambulatory surgery centers.

Such competition may increase if legislation or regulations are changed to allow for longer stays at ambulatory surgery centers. The Corporation actively monitors legislative matters in Oregon, and anticipates that changes in Oregon laws regulating ambulatory surgery centers could materially adversely affect the financial condition of the Corporation. Salem Health and Salem Clinic have entered into a nonbinding letter of intent to form a joint venture to own and operate an ambulatory surgery center. The goal of the parties is to open an ambulatory surgery center in late 2018. There is no assurance that the parties will successfully negotiate and execute a definitive agreement for the project.

Also, payors are increasingly entering into narrow network contracts that exclude from participation in the network all providers who are not in the narrow network. Payors also enter into exclusive contracts with certain providers from time to time. In addition, increasingly, providers are

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pursuing ownership interest in health insurance companies that may exclude non-owner providers from certain products. The net effect of these practices, singularly or in the aggregate, may be to foreclose the Corporation from a material portion of covered lives and could have a material adverse effect on the Corporation.

Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of the hospitals in the future or otherwise lead the way to new avenues of competition. 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.

Labor Relations and Collective Bargaining. Hospitals are large employers with a wide diversity of employees. Increasingly, employees and medical staff of research and health care operations are becoming unionized, and many of these organizations have collective bargaining agreements with one or more labor organizations. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in significant cost increases to hospitals. Employee and medical staff strikes or other adverse labor actions may have an adverse impact on operations, revenue and reputation. The Corporation has employees currently covered by collective bargaining agreements. SEE APPENDIX A— “INFORMATION CONCERNING SALEM HEALTH— EMPLOYEES.”

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, as well as the operability of such systems. Information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. There can be no assurance that 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” 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 Corporation 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 Corporation.

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Technical and Clinical Developments. New clinical techniques and technology, as well as new pharmaceutical and genetic developments and products, may alter the course of medical diagnosis and treatment in ways that are currently unanticipated, and that may dramatically change medical and hospital care. These could result in higher health care costs, reductions in patient populations, lower utilization of hospital service and/or new sources of competition for hospitals.

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, the amount of back taxes and penalties the Corporation might owe could be material.

Wage and Hour Class Actions and Litigation. Federal law and many states, including notably Oregon, 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, sometimes multi- state, class actions. For large employers such as hospitals and health systems, such class actions can involve multi-million dollar claims, judgments and/or settlements. A major class action decided or settled adversely to the Corporation could have a material adverse impact on its financial condition and results of operations.

Staffing. From time to time, the health care industry has suffered from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care 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. In addition, state budget cuts to university programs may impact the training available for nursing personnel and other health care professionals. Competition for physicians and other health care professionals, coupled with increased recruiting and retention costs, will increase hospital operating costs, possibly significantly, and growth may be constrained. This trend 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.

Employer Status. Hospitals are major employers with mixed technical and nontechnical workforces. Labor costs, including salaries, benefits and other liabilities associated with a workforce, have significant impacts on hospital operations and financial condition. Developments affecting hospitals as major employers include: (1) imposing higher minimum or living wages; (2) enhancing occupational health and safety standards; and (3) penalizing employers of undocumented immigrants. Legislation or regulation on any of the above or related topics could have a material adverse impact on the Obligated Group.

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 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

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punitive damages are often filed against health care providers. In most cases, insurance does not provide coverage for judgments for punitive damages.

Beginning in 2008, CMS refused to reimburse hospitals for medical costs arising from certain “never events,” which include specific preventable medical errors. Certain private insurers and HMOs 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 staff or peer review or the denial of staff or provider 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 the Corporation if determined or settled adversely.

There is no assurance that the Corporation 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 the Corporation or that such coverage will be available at a reasonable cost in the future.

Limitations on Availability of Remedies

The remedies available to the Bond Trustee on behalf of the beneficial owners of the Bonds upon the occurrence of an event of default under the Indenture or the Loan Agreement or available to the Master Trustee on behalf of the holders of the Obligations, including the Bond Trustee as holder of Obligation No. 26, upon the occurrence of an event of default under the Master Indenture, may not be readily available or may otherwise be limited. Certain remedies are dependent upon judicial actions which are often subject to discretion and delay. The various legal opinions to be delivered concurrently with the delivery of the Bonds will be qualified as to the enforceability of the Bonds, Obligation No. 26, the Bond Indenture, the Master Indenture, the Deed of Trust and related 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.

In the event of bankruptcy of any Member of the Obligated Group or the taking of any other action for the benefit of creditors against any Member of the Obligated Group, the rights and remedies of the Bond Trustee on behalf of the beneficial owners of the Bonds or of the Master Trustee would be limited by various laws affecting creditors’ rights. If any Member of the Obligated Group were to file a petition in bankruptcy, payments made by the Member of the Obligated Group during the 90-day (or perhaps 360-day) period immediately preceding the filing of such petition may be avoidable as preferential transfers to the extent such payments allow the recipients thereof to receive more than they would have received in the event of the Member of the Obligated Group’s liquidation. A bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Member of the Obligated Group 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 or the Master Trustee. If ordered by the bankruptcy court, property of the Member of the Obligated Group, including accounts receivable and proceeds thereof, could be pledged as security for additional Indebtedness of the Member of the Obligated Group. The exercise of rights of the Bond Trustee and the Master Trustee could be delayed during the pendency of any such proceeding.

A plan for the adjustment of debts of the Member of the Obligated Group in any such proceeding could include provisions modifying or altering the rights of creditors generally, or any class of creditors,

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secured or unsecured. If confirmed by a court, the plan would bind all creditors who had notice or knowledge of the plan and, with certain exceptions, discharge all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, including that the plan be feasible and that it be accepted by at least two thirds in dollar amount and more than one half in number of each class of claims impaired thereby. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors and does not discriminate unfairly.

There is no assurance that particular covenants in various legal documents, including covenants to preserve the exclusion of interest on the Bonds from gross income, would survive implementation of a reorganization plan. Accordingly, the Corporation, as debtor in possession, or a bankruptcy trustee could take actions that would adversely affect the tax-exempt status of the Bonds.

If additional Persons are added to the Obligated Group, the joint and several obligation of any additional Member of the Obligated Group other than the Corporation to make payments on the Obligations may not be enforceable to the extent that (1) the Obligations were issued for a purpose that is not consistent with the charitable purposes of such additional Member of the Obligated Group; (2) the payments would 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; (3) the payments would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by such additional Member of the Obligated Group; or (4) the payments would be made pursuant to a loan violating applicable usury laws. Due to the absence of clear legal precedent in this area, the extent to which the property of any Member of the Obligated Group other than the Corporation may be applied or transferred to satisfy the Indebtedness evidenced by the Obligations, including Obligation No. 26 is uncertain.

A court could determine that the payment obligations under the Obligations, including Obligation No. 26 of a Member of the Obligated Group other than the Corporation is a fraudulent transfer or conveyance if it finds that such other Member of the Obligated Group received less than reasonably equivalent value or fair consideration in return for incurring the payment obligation and (1) it was insolvent or rendered insolvent by reason of the incurrence of the payment obligation or (2) the incurrence of the payment obligation left it with an unreasonably small amount of capital to carry on its business. There is no clear precedent under federal and state laws as to the standards a court would use to make any of the foregoing findings.

Tax-Exempt Status and Other Tax Matters

Maintenance of the Tax-Exempt Status of Obligated Group Members. The tax-exempt status of the Bonds presently depends upon maintenance by each Obligated Group Member that receives or benefits from the proceeds of the Bonds (the “Benefiting Member”) of its status as an organization described in Section 501(c)(3) of the Code. The maintenance of such status is dependent on compliance with the statutory and regulatory requirements 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.

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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-exempt status. See “—Regulatory Environment—Anti-Kickback Law” above. As a result, tax-exempt hospitals, such as those of the Corporation, which have, and will continue to have, extensive transactions with physicians are subject to an increased degree of scrutiny and perhaps enforcement by the IRS.

The 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 once 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 that contains certain statutorily defined information 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.

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).

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 tax-exempt hospitals may increase the likelihood that Congress will require such hospitals to provide a minimum level of charity care in order to retain tax-exempt status and may increase IRS scrutiny of particular tax-exempt hospital organizations.

Members of the Obligated Group participate in a variety of transactions and joint ventures with physicians either directly or indirectly. Management believes that the transactions and joint ventures to which the Corporation is a party are consistent with the current requirements of the Code for it to maintain its tax-exempt status, but, as noted above, there is uncertainty as to the state of the law.

The IRS has periodically conducted audit and other enforcement activity 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 financing, partnerships and joint ventures, unrelated business income tax, retirement plans, employee benefits, employment taxes, political contributions and other matters.

If the IRS were to find that an Obligated Group Member has 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 organizations, it

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could do so in the future. Loss of tax-exempt status by even one Benefiting Member potentially could result in loss of tax exemption of the Bonds and any other tax-exempt debt of the Obligated Group Members and defaults in covenants regarding the Bonds and other related 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 Obligated Group Members. For these reasons, loss of tax exempt status of any Benefiting Member could have a material adverse effect on the financial condition and results of operations of the Obligated Group, taken as a whole.

In some cases, the IRS has imposed substantial monetary penalties on tax-exempt hospitals by entering into settlement agreements with such hospitals in lieu of revoking their tax-exempt status. In those cases, the IRS and exempt hospitals have entered into settlement agreements requiring the hospital to make substantial payments to the IRS. Given the size of the Corporation, the wide range of complex transactions entered into by the Corporation, and potential exemption risks, the Corporation could be at risk for incurring monetary and other liabilities or penalties imposed by the IRS.

In lieu of revocation of exempt status, the IRS may impose a penalty in the form of 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 receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services. A disqualified person is a person (which can be 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 “organization 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 an Obligated Group Member or the tax status of the Bonds if an excess benefit transaction were subject to IRS enforcement, pursuant to these “intermediate sanctions” rules.

State and Local Tax Exemption. 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. The majority of the Corporation’s real property currently is treated as exempt from real property taxation. Although the Corporation’s real property tax exemptions with respect to its core facilities are not currently, to the knowledge of management, under challenge or investigation, an audit could lead to a challenge that could adversely affect its real property tax exemptions.

It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the Corporation’s financial condition by requiring payment of income, local property or other taxes.

Maintenance of Tax-exempt Status of Interest on the Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds and the bond financed property, limitations on the investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings on bond proceeds be paid periodically to the United States Treasury, and a requirement that the issuer file an information report with the IRS. The Corporation has covenanted in the Loan Agreement that it will comply with such requirements. Future failure by the Corporation to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. The Authority has covenanted in the Bond Indenture that it will not

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take any action or refrain from taking any action that would cause interest on the Bonds to be included in gross income for federal income tax purposes.

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 review of private use. In addition, under its compliance check program initiated in 2007, 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 bonds. After analyzing responses, IRS representatives indicated that it had commenced a number of examinations of hospital tax-exempt bond issuances with wide-ranging areas of inquiry. In the final report, issued July 1, 2011, summarizing the findings and conclusions of the questionnaires, the IRS stressed the importance of formal post-issuance compliance and record-keeping procedures which, once implemented, the borrower should continuously review. The IRS suggested that it may issue future questionnaires as part of its goal to promote post- issuance compliance.

Effective with the 2009 tax year, tax-exempt organizations must also complete new 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 bond issues of tax-exempt borrowers, including 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.

There can be no assurance that the Corporation’s responses to a questionnaire, and IRS examination or Form 990 will not lead to an IRS review that could adversely affect the tax-exempt status or the market value of the Bonds or of other outstanding tax-exempt indebtedness of the Corporation or the Authority. Additionally, the Bonds or other tax-exempt obligations issued for the benefit of the Corporation may be, from time to time, subject to examinations or audits by the IRS.

Management of the Corporation believes that the Bonds properly comply with the tax laws. In addition, Bond Counsel will render an opinion with respect to the tax-exempt status of the Bonds, as described under the caption “TAX MATTERS.” No ruling with respect to the Bonds has been or will be sought by the IRS, however, and opinions of counsel are not binding on the IRS or the courts. There can be no assurance that an IRS examination of the Bonds will not adversely affect the Bonds or the market value of the Bonds. See “TAX MATTERS.”

Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code. As a tax-exempt organization, the Corporation is limited with respect to its use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. Uncertainty in this area has been reduced somewhat by the issuance by the IRS of guidelines on permissible physician recruitment practices. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and has issued a detailed audit guide suggesting that field agents scrutinize numerous activities of the hospitals in an effort to determine whether any action should be taken with respect to limitations on or revocation of their tax-exempt status or assessment of additional tax. Any suspension, limitation, or revocation of the Corporation’s tax-exempt status or assessment of significant tax liability would have a materially adverse effect on the Corporation and might lead to loss of tax exemption of interest on the Bonds.

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Other Risk Factors

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”). If adopted in its current form, the Proposed Guidance could restrict the ability of hospitals to purchase drugs under the 340B Program. The Corporation participates in the 340B Program and such restrictions could potentially have an adverse effect on the Obligated Group

Natural Disasters. The occurrences of natural disasters, including floods, volcanoes, forest fires and earthquakes, may damage part or all of the facilities of the Corporation’s medical campuses and facilities, interrupt utility service to part or all of the facilities or otherwise impair the operation of part or all of the Corporation’s facilities or the generation of revenues from part or all of the facilities of the Corporation beyond existing insurance coverages. All of the Corporation’s facilities are located in areas that are prone to forest fires and that may be damaged by earthquakes, volcanoes and floods.

Public Health Emergencies or Crises. The occurrence of a public health emergency or crisis, including an unexpected widespread outbreak of a contagious virus such as Ebola, Zika, or H1N1, may put stress on the capacity of part or all of the facilities of the Obligated Group, could require that resources be diverted from one part of the operations of the Obligated Group to another part, or could impair the operation of part or all of the facilities of the Obligated Group.

Construction Risks. Construction projects are subject to a variety of risks, including but not limited to delays in issuance of required building permits or other necessary approvals or permits, including environmental approvals, strikes, shortages of qualified contractors or materials and labor, and adverse weather conditions. Such events could delay occupancy of major construction projects. Cost overruns may occur due to change orders, delays in construction schedules, scarcity of building materials and labor and other factors. Cost overruns could cause project costs to exceed estimates and require more funds than originally allocated or require the Corporation to borrow additional funds to complete projects.

Other Future Risks. In the future, the following factors, among others, may adversely affect the operations of health care providers, including the Corporation, or the market value of the Bonds, to an extent that cannot be determined at this time.

(a) Adoption of legislation or implementation of regulations that would establish a national or statewide single-payer health program or that would establish national, statewide, local or otherwise regulated rates applicable to hospitals and other health care providers.

(b) Reduced demand for the services of the Corporation that might result from decreases in population or loss of market share to competitors.

(c) Bankruptcy of an indemnity/commercial insurer, managed care plan or other payors.

(d) Efforts by insurers and governmental agencies to limit the cost of hospital services, to reduce the number of hospital beds or other ancillary services and to reduce the utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care, or comparable regulations or attempts by third-party payers to control or restrict the operations of certain health care facilities.

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(e) Cost and availability of any insurance, such as professional liability, fire, automobile and general comprehensive liability coverages, which health care facilities of a similar size and type generally carry.

(f) The occurrence of a natural or man-made disaster, a pandemic or an epidemic that could damage the Corporation’s facilities, interrupt utility service or access to the facilities, result in an abnormally high demand for health care services or otherwise impair the Corporation’s operations and the generation of revenues from the facilities.

(g) Limitations on the availability of, and increased compensation necessary to secure and retain, nursing, technical and other professional personnel.

(h) 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 of the Corporation. 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 Corporation 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.

(i) Any increase in the quantity of indigent care provided which is mandated by law or required due to increased needs of the community to maintain the charitable status of the Corporation.

(j) The occurrence of a large scale terrorist attack or other mass casualty incident 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.

Oregon Certificate of Need Program

The State of Oregon employs a certificate of need program, whereby new hospitals are required to obtain certificate of need approval from the Office of Health Policy prior to an offering or development. A certificate of need is not required if a facility merely seeks to replace equipment with equipment performing similar technological functions or to upgrade equipment to improve the quality or cost-effectiveness of the services provided. A certificate of need also is not required for hospitals seeking to provide basic health care services. A certificate of need is required, however for any replacement, rebuilding or relocation of an existing hospital that involves a substantial increase or change in the services offered. Management of the Corporation is not aware of any pending or proposed project that would require a certificate of need from the Oregon Office of Health Policy.

Marketability of the Bonds

There is no assurance as to the liquidity of markets that may develop for the Bonds, the ability of beneficial owners to sell the Bonds or the price at which beneficial owners would be able to sell the Bonds. Neither the Underwriters nor any other financial institution is obligated to make a market in the Bonds, and any financial institution that does so may discontinue its market-making activities at any time without notice. Any market for the Bonds may be subject to disruption which could adversely affect the prices at which beneficial owners may sell the Bonds. The Bonds may trade at a discount from their original

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purchase prices depending upon interest rates, the market for obligations similar to the Bonds, the financial condition of the Obligated Group and other factors.

Bond Ratings

There is no assurance that the ratings assigned to the Bonds at the time of issuance will not be lowered or withdrawn at any time, the effect of which could adversely affect the market price for, and the marketability and liquidity of, the Bonds. See “RATINGS.”

Risks Related to Outstanding Variable Rate Obligations

Variable rate bonds previously issued for the benefit of the Corporation are currently outstanding, the interest rates on which could rise. The variable rate bonds are secured by a letter of credit and such letter of credit is subject to renewal risk. Such interest rates vary on a periodic basis and may be converted to a fixed interest rate. This protection against rising interest rates is not unrestricted, however, because the Corporation would be required to continue to pay interest at the variable rate until it is permitted to convert the variable rate bonds to a fixed rate pursuant to the terms of the applicable transaction documents. Previous credit market turmoil in the auction rate markets triggered sudden and significant increases in interest costs for many issuers (and conduit borrowers) of tax exempt debt.

Fees for extensions or replacement of the letter of credit supporting the Corporation’s outstanding variable rate bonds could be substantially higher than current rates. If the Corporation is not able to extend or replace such letter of credit or if certain events occur under the agreement relating to such letter of credit, the Corporation could be required to repay the principal of such variable rate bonds over a shorter period or, in certain circumstances, the principal could become immediately due and payable by the Corporation. The effect on the Corporation of any such increase in interest rates, increase in letter of credit fees or requirement that principal be repaid immediately or over a shorter period than the stated maturity, could be material.

The Corporation’s variable rate bonds are also subject to optional and mandatory tender provisions. The variable rate bonds are demand obligations that the Corporation may be required to purchase upon short notice. Although the Corporation has entered into a remarketing agreement with respect to such bonds to provide for the remarketing or payment of such obligations, the performance or financial condition of the remarketing agent and the letter of credit bank would affect the marketability and remarketing or payment of such bonds.

The Obligated Group also has previously issued an Obligation to the provider of the letter of credit. The agreement with such provider includes representations and covenants by the Corporation in addition to those included in the Master Indenture. The breach of a provision of such agreement could result in the declaration of an event of default under such agreement and, under certain circumstances, could result in the declaration by the Master Trustee of an event of default under the Master Indenture. The additional covenants in this agreement may be waived or amended by the applicable party or parties without the consent of, or any notice to, the Master Trustee, the Bond Trustee or the holders of the Bonds. Upon the occurrence of an event of default under this agreement, the outstanding amount due under such agreement could be declared immediately due and payable. The acceleration of amounts due any of this agreement could have a material adverse effect on the cash position and financial condition of the Obligated Group.

Investments

The Corporation has significant holdings in a diversified portfolio of investments. Market fluctuations have affected and may continue to affect materially the value of those investments, and those

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fluctuations may be and historically have been material. For information about recent investment performance of the Corporation, see APPENDIX A—“FINANCIAL INFORMATION – Liquidity and Capital Resources.”

Hedging Transactions.

The Corporation has entered into an interest rate swap agreement (the “Swap”) and may enter into more in the future. The Swap is subject to periodic “mark to market” valuations and at any time may have a negative value to the Corporation. A Swap counterparty may terminate a Swap upon the occurrence of certain “termination events” or “events of default.” The Corporation may terminate the Swap at any time. If either the counterparty to the Swap or the Corporation terminates the Swap during a negative value situation, the Corporation may be required to make a termination payment to such Swap counterparty, and such payment could be material. The existing Swap is secured under the Master Indenture, and the Corporation and Obligated Group Members may enter into interest rate swap agreements and other financial product and hedge devices that may be secured under the Master Indenture in the future. The Swap may require the posting of collateral under certain circumstances. The Swap and other investment contracts are subject to counterparty risk. See APPENDIX A—“FINANCIAL INFORMATION – Other Financial Information” for further information about the Swap and derivative instruments relating to the Corporation.

Pension and Benefit Funds.

As large employers, hospitals and health care providers may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers’ compensation 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. For information about the pension plans and funding status of the Corporation’s pension plans, see APPENDIX A—“FINANCIAL INFORMATION – Other Financial Information.”

Amendments to Master Indenture, Indenture and Loan Agreement.

The Obligated Group Members and the Master Trustee may modify the provisions of the Master Indenture in certain instances without the consent of the holders of Obligations and in other instances with consent of not less than a majority of the holders of the aggregate principal amount of Obligations outstanding. See APPENDIX D—“SUMMARY OF PRINCIPAL DOCUMENTS—The Master Indenture—Supplements Not Requiring Consent of Holders” and “—Supplements Requiring Consent of Holders.”

ENFORCEABILITY OF REMEDIES

Limitations on Enforceability of the Master Indenture and the Obligations

Bankruptcy and Insolvency Laws. The rights and remedies of owners of the Bonds are subject to various limitations under the federal Bankruptcy Code and other laws relating to insolvency and the rights of creditors generally. Some of those limitations are discussed below.

If any member of the Corporation Credit Group were to file a petition for relief under the Bankruptcy Code, the filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceedings against that member and its property. If the bankruptcy court so ordered, the property of the Corporation Credit Group member, including the accounts receivable and proceeds thereof, could be used for the financial rehabilitation of the member. The rights of the Master Trustee to

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enforce the Master Indenture and any Obligation could be delayed during the pendency of the rehabilitation proceeding.

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

A trustee in bankruptcy or a reorganization debtor has the right to recover, for the benefit of all unsecured creditors, certain “preferential” transfers made by the debtor within 90 days (or in some instances, one year) prior to the filing of the petition in bankruptcy. If any payments or transfers made by any member of the Corporation Credit Group to the Master Trustee were held to be preferential, it is possible that such payments or transfers might have to be returned, either to such member, or to the bankruptcy trustee. In such event, owners of the Bonds could be required to return payments of principal and/or interest on the Bonds if made from payments held to be preferential.

The state of insolvency, fraudulent transfer and bankruptcy laws relating to the enforceability of obligations of one corporation to make debt service payments on behalf of another related corporation is unsettled. The ability of the Master Trustee to require a Designated Affiliate to transfer moneys or assets to a Member of the Obligated Group to provide for payment of any Obligation under the Master Indenture if either the Designated Affiliate or the Member of the Obligated Group would be rendered insolvent thereby, could be subject to challenge. In particular, such obligations may be voidable under the Bankruptcy Code or applicable state fraudulent transfer statutes if the obligation is incurred without “reasonably equivalent” consideration to the obligor and if the incurrence of the obligation thereby renders the Member or the Designated Affiliate insolvent or leaves the Member or the Designated Affiliate with an unreasonably small amount of capital to engage in business. The standards for determining the reasonableness of consideration and the manner of determining insolvency are not clear and may vary under the Bankruptcy Code, state fraudulent transfer statutes and applicable judicial decisions.

Ability to Control Designated Affiliates. The ability of Corporation to require the Designated Affiliates to comply with the Master Indenture may be limited. The Corporation can enforce compliance with the Master Indenture by certain controlled Designated Affiliates by replacing members of the governing bodies of the controlled Designated Affiliates, if necessary. The ability of the Corporation to control the operations of non- controlled Designated Affiliates will be based upon a written contract alone. The written contract may not give the Corporation the power to replace the governing body or management of the non-controlled Designated Affiliate. Should any Designated Affiliate refuse to comply with the Master Indenture, the Corporation’s remedies may be limited to litigation to enforce the provisions of the written contract. The Designated Affiliate may have certain defenses in such litigation.

The assets and operating results of the Obligated Group, the Designated Affiliates and the Immaterial Affiliates will be combined for financial reporting purposes and will be used in determining whether various covenants and tests contained in the Master Indenture are met. Because the ability of the Corporation to require the non-controlled Designated Affiliates to comply with the Master Indenture is uncertain, the financial statements of the Corporation and the application of such tests and covenants may

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not accurately reflect the availability of the assets of non-controlled Designated Affiliates for payment of debt service on Obligation No. 26.

Other Limitations on Enforcement. The obligation of the Members of the Obligated Group to pay the Obligations (and the obligation of the Designated Affiliates to transfer funds and other assets to Members of the Obligated Group as required to pay the Obligations) may not be enforceable to the extent such payments and transfers (a) are required to be made on Obligations issued for a purpose inconsistent with the charitable purposes of the Member or Designated Affiliate from which such transfer is requested; (b) are required to be made on Obligations issued for the benefit of any entity other than a nonprofit corporation which is exempt from federal income taxes under Section 501(c)(3) of the Code and which is not a private foundation; (c) are required to be made from any funds or assets which are donor or grantor- restricted, or which are subject to a charitable or other trust which does not permit the use of such funds or assets for such a purpose; (d) which would result in the cessation or discontinuation of any material portion of the health care, or research or related services provided by the Member or the Designated Affiliate from which such transfer is requested. Due to the absence of clear legal precedent in this area, the extent to which assets of Members and Designated Affiliates will be unavailable for payment of the Obligations cannot now be determined. The amount of assets which fall within such category could be substantial.

Enforceability of the obligation of the Members of the Obligated Group to pay the Obligations (and the obligation of the Designated Affiliates to transfer funds and other assets to Members of the Obligated Group as required to pay the Obligations) may be limited or affected by the laws of bankruptcy, insolvency, reorganization, receivership, moratorium, fraudulent conveyance and other similar laws affecting the rights of creditors generally, and by the effect of general principals of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief. The opinion of the Corporation’s counsel as to the enforceability of the Master Indenture, the Loan Agreement and Obligation No. 26, will be qualified by the qualifications discussed in the previous sentence. In addition, the Corporation’s counsel will render no opinion regarding the enforceability of the Master Indenture, the Loan Agreement, and Obligation No. 26 against any party other than the Members of the Obligated Group. The Corporation’s counsel will render no opinion concerning any future Members.

The practical realization of rights upon a default will depend upon the exercise of various remedies specified in the Loan Agreement, the Master Indenture and the Bond Indenture, as applicable. Judicial action may be required in order for the Master Trustee or the Bond Trustee to exercise the remedies. Judicial action is often subject to delay. In addition, under existing law, certain of the remedies specified in the Loan Agreement, the Master Indenture and the Bond Indenture, as applicable, may be subject to the discretion of the court. A court may decide not to order specific performance of covenants contained in these documents.

THE AUTHORITY

The Authority is a public authority, created and existing under and by virtue of the laws of the State of Oregon (sometimes referred to herein as the “State”). The Bonds are being issued under the authority of Oregon Revised Statutes Section 441.525 to 441.595, as amended (the “Act”), the Bond Indenture and a bond resolution of the Authority, adopted by the Board of Directors of the Authority on September 20, 2016. The Authority is authorized by the Act to issue the Bonds for the purposes described herein and to enter into the Loan Agreement and the Bond Indenture. The Authority does not have the power to pledge, and has not pledged, its general credit to the payment of, or as security for the payment of, the Bonds. The Authority has no taxing power. No taxes, revenues or assets of the City of Salem, Oregon (the “City”) have been pledged or otherwise committed to pay the Bonds.

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The amounts owing under or with respect to the Bonds, the Bond Indenture or the Loan Agreement, and the obligations of the Authority under or with respect to the Bonds, the Bond Indenture or the Loan Agreement shall not constitute an indebtedness or a charge against the general credit of the Authority, or against the general credit or taxing powers of the City, within the meaning of any constitutional or charter provision or statutory provision, and shall not constitute or give rise to any pecuniary liability of the Authority or of the City. The amounts owing under or with respect to the Bonds do not constitute an indebtedness to which the faith and credit of the Authority or of the City is pledged.

The City has approved the Bonds pursuant to Section 147(f) of the Code. This approval does not obligate the City to take any other action in connection with the Bonds, and the City has no other obligations in connection with the Bonds. No taxes, revenues or other assets of the City are pledged or otherwise committed to pay the Bonds. The City is not responsible for any actions of the Authority, the Corporation or the Bond Trustee, and the City will not be liable to any party in connection with the Bonds, even if a Bond default occurs or interest on the Bonds ceases to be excludable from gross income under the Code. The City Attorney of the City of Salem has reviewed the actions and documents of the City and the Authority solely to insure that the documents and actions do not commit the City to take any action in connection with the Bonds, do not bind the City or its taxes, revenues and other assets, and do not create any actual or contingent liability for the City.

This Official Statement has been prepared by the Corporation and has not been prepared, reviewed or approved by the Authority or the City.

CONTINUING DISCLOSURE

Because the Bonds are limited obligations of the Authority, payable solely from amounts received from the Corporation, financial or operating data concerning the Authority is not material to an evaluation of the offering of the Bonds or to any decision to purchase, hold or sell the Bonds. Accordingly, the Authority is not providing any such information. The Corporation, on behalf of the Obligated Group, has undertaken all responsibilities for any continuing disclosure to Holders of the Bonds, as described below, and the Authority shall have no liability to the Holders of the Bonds or any other person with respect to Rule 15c2-12 promulgated by the SEC (the “Rule”).

The Corporation, on behalf of the Obligated Group, has covenanted for the benefit of Holders and Beneficial Owners of the Bonds to provide the following: (i) certain financial information and operating data relating to the Obligated Group by not later than 180 days following the end of each fiscal year of the Corporation (which currently is June 30) (the “Annual Report”), commencing with the report provided for the 2016 Fiscal Year, (ii) certain quarterly financial information and operating data (the “Quarterly Report”) by no later than 60 days following the end of each quarterly fiscal period of each fiscal year (except the fourth fiscal quarter), unaudited financial information for the Obligated Group for such fiscal quarter, prepared by the Corporation, and (iii) notices of the occurrence of certain enumerated events. The Annual Report and notices of listed events are to be filed with the Electronic Municipal Market Access website (“EMMA”) of the Municipal Securities Rulemaking Board. The specific nature of the information to be contained in the Annual Report, the Quarterly Report and in notices of listed events is set forth in APPENDIX E. These covenants are made by the Corporation to assist the Underwriters in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The Annual Report, Quarterly Report and notices of material events will be filed by the dissemination agent on behalf of the Corporation. See APPENDIX F—“FORM OF CONTINUING DISCLOSURE AGREEMENT.”

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ABSENCE OF MATERIAL LITIGATION

There is no controversy of any nature now pending against the Authority or the Corporation or, to the knowledge of their respective officers, threatened which seeks to restrain or enjoin the issuance of the Bonds or which in any way contests or affects the validity of the Bonds or any proceedings of the Authority or the Corporation taken with respect to the issuance or sale thereof.

The Corporation

As of the date of this Official Statement, there is no litigation or proceeding pending or, to the knowledge of the Corporation, threatened against it or the Obligated Group except (a) litigation, proceedings or claims involving professional liability claims or general liability claims in which the probable ultimate recoveries and the estimated costs and expense of defense, in the opinion of counsel to the Corporation, will be entirely within applicable insurance policy limits (subject to applicable deductibles or self-insurance retentions) or not in excess of the total available reserves held under applicable self- insurance programs, and (b) litigation, proceedings or claims involving other types of claims which if adversely determined would not have a material adverse effect on the operations or financial condition of the Corporation, taken as a whole.

The Authority

To the knowledge of the officers of the Authority, there is no controversy or litigation of any nature now pending against the Authority seeking to restrain or enjoin the issuance of the Bonds, or in any way contesting or affecting the validity of the Bonds, any proceedings of the Authority taken concerning the issuance or sale thereof, or the existence or powers of the Authority relating to the issuance of the Bonds.

TAX MATTERS

In the opinion of Orrick, Herrington & Sutcliffe LLP (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under section 103 of the Internal Revenue Code of 1986 (the “Code”) and is exempt from State of Oregon personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings in calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix E hereto.

To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of Oregon personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax

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consequences of ownership of Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public.

Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The Authority and the Corporation have made certain representations and have covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters.

In addition, Bond Counsel has relied, among other things, on the opinion of by Parks Bauer Sime Winkler & Fernety LLP, regarding the current qualification of the Obligated Group Members and Salem Health Hospitals and Clinics (the “Parent Corporation”) as organizations described in section 501(c)(3) of the Code and the intended operation of the facilities to be financed and refinanced by the Bonds as substantially related to an Obligated Group Member’s charitable purpose under Section 513(a) of the Code. Such opinion is subject to a number of qualifications and limitations. Furthermore, Counsel to the Corporation and the Parent Corporation cannot give and has not given any opinion or assurance about the future activities of the Corporation or the Parent Corporation, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or changes in enforcement thereof by the Internal Revenue Service. Failure of the Obligated Group Members or the Parent Corporation to be organized and operated in accordance with the IRS’s requirements for the maintenance of their status as organizations described in section 501(c)(3) of the Code, or to operate the facilities financed and refinanced by the Bonds in a manner that is substantially related to the Corporation’s charitable purposes under Section 513(a) of the Code, may result in interest payable with respect to the Bonds being included in federal gross income, possibly from the date of the original issuance of the Bonds.

Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of Oregon personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

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Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. For example, the Obama Administration’s budget proposals in recent years have proposed legislation that would limit the exclusion from gross income of interest on the Bonds to some extent for high-income individuals. The introduction or enactment of any such legislative proposals or clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express no opinion.

The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority or the Members of the Obligated Group, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority and the Corporation, on behalf of the Members of the Obligated Group, have covenanted, however, to comply with the requirements of the Code.

Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, the Members of the Obligated Group or the Beneficial Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Authority, the Members of the Obligated Group and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in, the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority or the Members of the Obligated Group legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the Authority, the Members of the Obligated Group or the Beneficial Owners to incur significant expense.

LEGALITY

The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Portland, Oregon, Bond Counsel to the Authority. A complete copy of the proposed form of Bond Counsel opinion is contained in APPENDIX E hereto. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Orrick, Herrington & Sutcliffe LLP, will also provide certain legal services for the Authority in its role as legal counsel and disclosure counsel to the Authority.

Certain legal matters will be passed upon for the Corporation by Parks Bauer Sime Winkler & Fernety LLP, and for the Underwriters by Hawkins Delafield & Wood LLP, which also undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

UNDERWRITING

The Bonds are being purchased by Citigroup Global Markets, Inc., as representative of Merrill Lynch, Pierce, Fenner & Smith Incorporated (collectively, the “Underwriters”). Pursuant to a Bond

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Purchase Contract (the “Purchase Contract”) with the Corporation, the Underwriters have agreed to purchase the Bonds at a purchase price of $______(which represents the par amount of the Bonds, [plus/less] original issue [premium/discount] of $______, less the Underwriters’ discount of $______), less the Underwriters’ discount of $______). The Purchase Contract provides that the Underwriters will purchase all of the Bonds, if any are purchased, and contains the agreement of the Corporation to indemnify the Underwriters against certain liabilities to the extent permitted by law. The Purchase Contract for the Bonds also provides that the fees of counsel for the Underwriters will be paid by the Corporation. The initial public offering prices set forth on the cover pages may be changed without notice from time to time by the Underwriters.

The Underwriter and its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The Underwriter and certain of its affiliates may have, from time to time, performed and may in the future perform, various investment banking services for the Authority and the Corporation, for which they may have received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriter and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the Authority and the Corporation.

Citigroup Global Markets Inc., an underwriter of the Bonds, has entered into a retail distribution agreement with each of TMC Bonds L.L.C. (“TMC”) and UBS Financial Services Inc. (“UBSFS”). Under these distribution agreements, Citigroup Global Markets Inc. may distribute municipal securities to retail investors through the financial advisor network of UBSFS and the electronic primary offering platform of TMC. As part of this arrangement, Citigroup Global Markets Inc. may compensate TMC (and TMC may compensate its electronic platform member firms) and UBSFS for their selling efforts with respect to the Bonds.

INDEPENDENT AUDITORS

In 2016, Salem Health Hospitals and Clinics and its subsidiaries, including the Corporation, changed the ending date of its fiscal year to June 30. The consolidated financial statements of Salem Health Hospitals and Clinics and its subsidiaries, including the Corporation, as of September 30, 2015 and 2014, and for the years then ended, included in APPENDIX B to this Official Statement, have been audited by KPMG LLP, independent auditors, as stated in its report appearing herein.

The consolidated financial statements of Salem Health Hospitals and Clinics and its subsidiaries, including the Corporation, which comprise the consolidated balances sheets for the nine-month period ended June 30, 2016 and the year ended September 30, 2015, are included as APPENDIX C to this Official Statement, have been audited by KPMG LLP, independent auditors, as stated in its report appearing herein.

FINANCIAL ADVISOR

Melio & Company, LLC, Chicago, Illinois (“Melio”), was engaged by the Corporation to provide financial advisory services for the development and implementation of a capital financing plan for the Corporation. Melio has not been engaged by the Corporation to compile, create, or interpret any information in this Official Statement relating to the Corporation, including without limitation any of the Corporation’s financial and operating data, whether historical or projected. Any information contained in this Official Statement concerning the Corporation has not been independently verified by Melio and

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inclusion of such information is not, and should not be construed as, a representation by Melio as to its accuracy or completeness or otherwise. Melio is not a public accounting firm and has not been engaged by the Corporation to review or audit any information in this Official Statement in accordance with auditing standards generally accepted in the United States.

THE TRUSTEE

U.S. Bank National Association is the current Bond Trustee and Master Trustee. Neither the Bond Trustee nor the Master Trustee have reviewed or participated in the preparation of this Official Statement and assumes no responsibility for the nature, contents, accuracy or completeness of the information set forth in this Official Statement or for the recitals contained in the Bond Indenture, Master Indenture or the Bonds, or for the validity, sufficiency, or legal effect of any of such documents. Neither the Bond Trustee nor the Master Trustee have any oversight responsibility, nor are accountable, for the use or application by the Corporation of any of the Bonds authenticated or delivered pursuant to the Bond Indenture or for the use or application of the proceeds of such Bonds by the Corporation. Neither the Bond Trustee nor the Master Trustee have evaluated the risks, benefits, or propriety of any investment in the Bonds and make no representation, and have not reached any conclusions, regarding the value or condition of any assets pledged or assigned as security for the Bonds, the technical or financial feasibility of the related project, or the investment quality of the Bonds, about all of which the Bond Trustee and Master Trustee express no opinion and expressly disclaim the expertise to evaluate.

RATINGS

Fitch Ratings and S&P Global Ratings have assigned long-term ratings of “A+” with a stable outlook and “A+” with a stable outlook to the Bonds, respectively, and the Underwriters’ obligations under the Purchase Contract are conditioned on such rating.

The Corporation furnished to each rating agency certain information and materials respecting the Bonds and the Corporation Credit Group. Such ratings reflect only the views of such organization, and any explanation of the significance of such ratings may only be obtained from the rating agency furnishing the same. No application was made to any other rating agencies for the purpose of obtaining additional ratings on the Bonds. A securities rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time. 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 respective rating agency, if, in its judgment, circumstances so warrant. The Underwriters have undertaken no responsibility either to bring to the attention of the Holders of the Bonds any proposed change in or withdrawal of any rating or to oppose any such proposed revision or withdrawal. Any such downward change in or withdrawal of any rating might have an adverse effect on the market price or marketability of the Bonds.

MISCELLANEOUS

The foregoing and subsequent summaries or descriptions of provisions of the Bonds, the Bond Indenture, the Loan Agreement, the Master Indenture, Supplement No. 1 and Obligation No. 26 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 the provisions of such documents. The appendices attached hereto are a part of this Official Statement. Copies, in reasonable quantity, of the Bond Indenture, the Loan Agreement and the Master Indenture may be obtained during the offering period upon request to the Underwriters and thereafter upon request to the principal corporate trust office of the Bond Trustee.

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This Official Statement is not to be construed as a contract or agreement between the Corporation and the purchasers or Owners of any of the Bonds. Only the information set forth herein under the captions “THE AUTHORITY” and “ABSENCE OF MATERIAL LITIGATION” (to the extent the information therein pertains to the Authority) has been furnished or reviewed by the Authority. All other information contained herein has been furnished by the Corporation, DTC, the Bond Trustee, the Master Trustee, the Underwriters and other sources (other than the Authority) which are believed to be reliable.

SALEM HEALTH

By:______President and Chief Executive Officer

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APPENDIX A INFORMATION CONCERNING SALEM HEALTH

The information under this heading, including without limitation the schedules attached hereto and included herein, has been provided solely by Salem Health and is believed to be reliable, but has not been verified independently by the Authority or the Underwriter. No representation whatsoever as to the accuracy, adequacy or completeness of such information is made by the Authority or the Underwriter.

TABLE OF CONTENTS

Page

INTRODUCTION ...... A-1 ORGANIZATION ...... A-1 FACILITIES AND SERVICES ...... A-2 STRATEGIC INITIATIVES ...... A-5 OHSU Partners ...... A-5 Corporation Strategy ...... A-9 SERVICE AREA ...... A-11 General ...... A-11 Economic and Demographic Information ...... A-11 Patient Services and Market Share ...... A-13 Historical Utilization ...... A-15 FINANCIAL INFORMATION ...... A-15 Historical Financial Information ...... A-15 Summary of Revenues and Expenses ...... A-18 Sources of Revenue...... A-18 Historical Coverage of Annual Debt Service ...... A-20 Liquidity and Capital Resources ...... A-20 Management’s Discussion and Analysis of Recent Financial Performance ...... A-21 Other Financial Information ...... A-23 GOVERNANCE AND ADMINISTRATION ...... A-25 Board of Trustees ...... A-25 Executive Management ...... A-25 MEDICAL STAFF ...... A-27 EMPLOYEES ...... A-27 LITIGATION ...... A-27 ACCREDITATION, LICENSES, APPROVALS, AND MEMBERSHIPS...... A-27 MEDICAL MALPRACTICE AND OTHER INSURANCE ...... A-28

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INTRODUCTION

Salem Health (formerly known as Salem Hospital and referred to herein as the “Corporation” or “Salem Health”) is an Oregon nonprofit corporation and a tax-exempt organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). The Corporation is the only member of the Obligated Group.

The Corporation is the largest private employer in Salem, Oregon, with 4,523 full and part-time employees (as of June 30, 2016). The medical staff is comprised of approximately 455 physicians, representing more than 60 specialties and subspecialties, and approximately 440 volunteers provide non- medical support for Salem Health.

As discussed under “FINANCIAL INFORMATION,” in 2016, the Corporation changed the ending date of its fiscal year from September 30 to June 30. The financial information for the Corporation presented in this Appendix A should be read in conjunction with the audited consolidated financial statements of SHHC (defined below) and affiliates (including the Corporation), including the notes thereto, contained in Appendices B and C to this Official Statement.

ORGANIZATION

Salem Health Hospitals and Clinics (“SHHC”) is an Oregon nonprofit corporation and a tax- exempt organization described in Section 501(c)(3) of the Code, that was formerly named Salem Health. SHHC is the “parent” corporation and sole corporate member of the Corporation, Salem Hospital Foundation, Salem Health West Valley, West Valley Hospital Foundation, Willamette Valley Insurance Corporation, and Willamette Valley Professional Services. All entities shown in the organization chart below are separate nonprofit corporations, and none of the entities, except Salem Health, are members of the Obligated Group.

SHHC was established in 1982 by the Board of the Corporation to facilitate the potential development of additional business activities in the Salem, Oregon vicinity. The members of the SHHC Board of Trustees also serve as the members of the Corporation’s Board of Trustees. See “GOVERNANCE AND ADMINISTRATION.”

Salem Health Hospitals and Clinics (“SHHC”)

Salem Health Salem Salem Health West Valley Willamette Willamette (the “Corporation”) Hospital West Valley Hospital Valley Valley (Sole Obligated Foundation Insurance Professional Group Member) Foundation Corporation Services

Salem Health was formed in 1969 through the merger of two independent, non-profit community facilities, Salem General Hospital (founded in 1896) and Salem Memorial Hospital (founded in 1916). The objective of the merger was to eliminate duplication of services and equipment, thus resulting in higher quality of patient care and service and greater operating efficiency. Salem Health is the only member of the Obligated Group.

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Salem Health Medical Group (“SHMG”) is an unincorporated department of Salem Health. SHMG is a physician network composed of approximately 200 employed and contracted providers practicing in 13 specialties: Family Medicine, Inpatient Rehabilitation, Hospitalists, Neonatology, Obstetrics and Gynecology, General and Trauma Surgery, Palliative Care, Inpatient Psychiatric Services, Sleep, Neurology, Occupational Medicine, Cardiothoracic Surgery and Convenient Care. SHMG is focused on patient convenience and access with an increased emphasis on value based care. SHMG offers evening and weekend options, which improves access to care for the community. SHMG providers are engaged to improve the patient experience, quality of care and decrease costs.

Salem Hospital Foundation (“Salem Foundation”), which does business as Salem Health Foundation, is an Oregon nonprofit corporation and a tax-exempt organization described in Section 501(c)(3) of the Code. Salem Foundation was established in 1968 by a group of Salem citizens to advance health care through gifts and donations, as a supporting organization for Salem Health.

Salem Health West Valley (“West Valley”) is an Oregon nonprofit corporation and a tax-exempt organization described in Section 501(c)(3) of the Code. West Valley, formerly named West Valley Hospital, is located in Dallas, Oregon, which is approximately 15 miles west of Salem, and became a controlled subsidiary of SHHC in 2002. West Valley is designated as a critical access health center with 25 licensed beds, and currently staffs 6 beds. SHMG physicians also provide services at West Valley.

West Valley Hospital Foundation (“West Valley Foundation”), which does business as Salem Health West Valley Foundation, is an Oregon nonprofit corporation and a tax-exempt organization described in Section 501(c)(3) of the Code. West Valley Foundation was formed in 2000, as a supporting organization for West Valley.

Willamette Valley Insurance Corporation (“WVIC”) is a Hawaii nonprofit corporation and a tax-exempt organization as described in Section 501(c)(3) of the Code. WVIC was formed in 2004 as the captive insurance corporation for SHHC and its subsidiaries. Management of SHHC uses this risk financing structure as a platform for more effective and proactive risk management. See “Medical Malpractice and Other Insurance” herein.

Willamette Valley Professional Services (“WVPS”) is an Oregon nonprofit corporation and a tax- exempt organization described in Section 501(c)(3) of the Code. WVPS was formed in 2004 as an entity that performs coding services and is the billing entity for the Corporation and West Valley employed physicians and physician groups.

FACILITIES AND SERVICES

Hospital Facilities. The Corporation operates the only hospital in Salem, which is recognized for its neuro-musculoskeletal, oncology, cardiac, rehabilitation, women and children’s and bariatric services. See “ – Awards, Recognition and Certifications” below.

The Corporation is licensed to operate the hospital, which includes: 405 acute care beds, 25 acute psychiatric beds and 24 rehabilitation beds. The hospital currently staffs 364 acute care, 25 acute psychiatric and 24 rehabilitation beds. The distribution of licensed and staffed beds as of June 30, 2016 is shown in the following table.

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TABLE 1 BED COMPLEMENT at June 30, 2016

Bed Category Licensed Staffed

Intensive Care 48 48 Immediate Care 72 72 Medical/Surgical 230 189 Obstetrics/Gynecology 45 45 Pediatric 10 10 Rehabilitation 24 24 Psychiatric 25 25 Total 454 413

______Source: Corporation records.

The main campus is located on approximately 35 acres of land that is five blocks south of the central business district of Salem, Oregon. This campus includes seven buildings providing patient care (described below), one parking structure, additional surface parking, and a central energy plant.

The Corporation has a master facilities plan with respect to the existing facilities and overall development of the main campus. The master facility planning process was recently completed in 2016 and is subject to regular review by the Corporation’s management and Board of Trustees

A following is a summary of the key buildings identified on the campus map below.

• Building A, Critical Care Tower. The acute care facility has 120 staffed beds, 12 surgery suites and five cath labs. Building A offers 24-hour emergency and Level II trauma care, including the busiest emergency department in the state, intensive care, cardiac intensive care, neurotrauma intensive care, intermediate care, inpatient and outpatient surgery, imaging and lab.

• Building B. Building B houses inpatient medical/surgical units with 189 staffed beds, cardiac non-invasive services, 24 staffed inpatient rehab beds, pharmacy and administrative offices.

• Building C. This condominium building built on property leased by the Corporation to the condominium’s association and a majority of the condominium units, which are owned by the Corporation, is located just north of Building A and houses the Corporation’s Cancer Institute, midwives, obstetrics and gynecology, radial cath lab, Spine Center, ten outpatient surgery suites (including two endoscopy rooms), a sleep disorders center, infusion services, wound care, along with a number of other outpatient programs. A number of physician offices and clinics are located on the upper floors of the building. Building C is connected to Buildings A, B and D by sky bridges.

• Building D, Family Birth Center, Education Center, Acute Care. The Family Birth Center has 36 beds, 12 labor and delivery rooms and a Level IIIA Neonatal Intensive Care Unit. Building D is also home to the Community Health Education Center, with resources and classes for community members. An additional 40 mixed use acute care beds have been opened on the fifth floor of Building D in October 2016.

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• Building M, Outpatient Rehabilitation Center. Building M offers adult and pediatric; physical therapy, speech therapy and occupational therapy, along with work injury management.

• Convenient Care. The Corporation’s Convenient Care clinic provides care for urgent needs and acute injuries, as well as offering exams for schools, sports, and individuals needing a pre- employment or commercial driver license exam.

• Building E, Inpatient Adult Psychiatric Unit. This 25-bed inpatient psychiatric medicine center serves patients with a variety of emotional and psychiatric challenges.

Awards, Recognitions, and Certifications. The Corporation has received numerous industry awards, recognitions and certifications, including:

• Magnet recognition, awarded by the American Nurses Credentialing Center to only 6 percent of hospitals in the nation for quality nursing practices

• Truven Health Analytics Top 50 Cardiovascular Hospitals, for top performance among peers in cardiovascular outcomes, clinical processes, and efficiency

• Top Work Places 2014 and 2016 and 2016 Best Training by The Oregonian

• Joint Replacement Center of Excellence, a national recognition as a top provider of excellence in joint-replacement care

• Spine Center of Excellence, a national recognition as a role model for other spine centers across the country

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• Bariatric Surgery Center of Excellence by the American Society for Metabolic and Bariatric Surgery

• Becker’s Hospital Review recognized the Corporation on a list of 100 Great Community Hospitals nationwide in 2016

• Press Ganey, an organization that measures health care satisfaction nationwide, awarded Salem Health the 2015 Press Ganey Success Story Award because of a specific and effective way that the organization has built culture and created positive change

• HealthGrades, the nation’s leading online resource for comprehensive information about physicians and hospitals, recognized the Corporation with the Distinguished Hospital Award for Clinical Excellence, putting it in the top 5 percent of more than 4,500 hospitals

STRATEGIC INITIATIVES

OHSU Partners

General. On November 19, 2015, Salem Health affiliated with Oregon Health and Science University (“OHSU”) through the execution of a Joint Management Agreement (the “Management Agreement”) among the two organizations and OHSU Partners, LLC, a newly formed limited liability company (“OHSU Partners”). OHSU and Salem Health are the sole members of OHSU Partners, each with a 50% membership interest. Under the terms of the Management Agreement, which is described in more detail below, each of OHSU and Salem Health remain separate legal entities and own their own assets. As described below, OHSU Partners manages the combined clinical enterprises of OHSU and Salem Health as a single economic entity and unified health system.

Total operating results of the integrated health system are apportioned to OHSU and Salem Health consistent with an allocation method based on each party’s historical operating income. The Management Agreement provides that 81% of operating results will be apportioned to OHSU and 19% will be apportioned to Salem Health. See “Calculation of Apportion of Operating Results” below.

Neither OHSU Partners nor OHSU is a Member of the Obligated Group or the Credit Group nor is either entity responsible for the payment of the principal of or interest on the Bonds or Obligation No. 26. The Corporation is not a member of the obligated group securing indebtedness issued by OHSU and has no responsibility for the payment of the principal of or interest on indebtedness issued or incurred by or for the benefit of OHSU.

OHSU Partners Strategy. Before the Affordable Care Act was signed into law, the Corporation’s Board of Trustees and executive leaders recognized the need to capitalize on Salem Health’s financial strength and reputation by seeking an equally strong partner in a deliberate and thoughtful strategy for the future of the organization. In November, 2015 the Corporation fulfilled this goal by signing a letter of intent to affiliate with OHSU, and formed a management company to set the strategic direction for the clinical enterprises of both organizations. Salem Health and OHSU envision a value-based health care system with goals to improve clinical effectiveness and outcomes and improve the health and well-being of the populations served. Their vision is grounded in cost-effective care and built upon a foundation of partnerships that come together to jointly manage a regional, integrated system that operates historically distinct clinical enterprises as a unified economic entity with scale, resources, and expertise to optimize the value of health care, continuously improve operational efficiency, provide a safe and patient centered experience, expand access to health care services, support and enable continued health care research activity toward discovery of new treatments and therapies, and to prepare future generations of clinicians to succeed

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in an integrated system of care and innovation and serving as a national model for academic and community partnerships.

OHSU Partners Management. A small management team operates OHSU Partners, including a chief executive officer, a chief financial officer, a chief clinical integration officer, a chief strategy officer, and a chief information officer.

Summary of the Management Agreement. Key elements of the affiliation and provisions of the Management Agreement include, but are not limited to, the following:

• OHSU and Salem Health delegate to OHSU Partners the responsibility and authority to oversee and manage each party’s clinical enterprises as a part of a unified, integrated health system while each party retains its separate legal identity and Board of Directors.

• OHSU maintains its responsibilities to manage and oversee activities related to its education and research missions.

• Each party (1) is and will continue to be the licensed operator of its facilities, and (2) will continue to perform all functions legally required to be performed directly by such licensed entity.

• Each party retains the authority, consistent with OHSU Partners’ right to oversee and manage the integrated health system, to (1) enter into contracts, (2) acquire, construct and operate property, and (3) incur debt.

• Each party retains the authority, among other things, to: (1) approve the integrated health system’s operating and capital budgets, (2) employ agents and employees, and (3) approve certain of the other party’s material third party transactions.

• The initial term of the Management Agreement is 40 years and it may be renewed or extended by written agreement of the parties. The Management Agreement is subject to termination in the event of material breaches of the Management Agreement or for certain other reasons specified in the Management Agreement.

While the Management Agreement does not contain provisions relating to the addition of additional members to the OHSU Partners umbrella, the Operating Agreement forming OHSU Partners contemplates the future addition of hospitals and health systems to further the charitable and public purposes and missions of OHSU and Salem Health. The allocation percentages described above could be adjusted in connection with the addition of new members by amendment of the Management Agreement, which requires the approval of both OHSU and Salem Health.

Oregon Health and Science University. Financial and other information relating to OHSU may be found on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) system under base CUSIP number 685869. The following information concerning OHSU has been derived solely from information posted by OHSU on EMMA or otherwise provided by OHSU and has not been reviewed for accuracy or completeness by Salem Health. OHSU is not controlled by or under common control with Salem Health. OHSU is not a Member of the Obligated Group or the Credit Group and has no responsibility for the payment of the principal of or interest on the Bonds or Obligation No. 26. Accordingly, only limited information is provided concerning OHSU in this Appendix A derived solely from public sources and OHSU and solely for the purpose of evaluation of OHSU’s potential obligations under the Management Agreement. Operations and financial condition of OHSU may be affected by factors other than those described herein, including without limitation, many of the factors described in the Official

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Statement under the caption “BONDHOLDER RISKS.” No assurance can be given as to the nature of such factors or the potential effects thereof upon OHSU.

OHSU is an Oregon public corporation and a component unit of the State of Oregon (the “State”) that operates the only health sciences university in the State, providing a wide array of health, education, research and outreach services. OHSU became an independent public corporation pursuant to an act of the Oregon Legislative Assembly in 1995 (the “Act”). All of the members of OHSU’s Board of Directors (except the President of OHSU, who serves as an ex officio voting member) are appointed by the Governor of the State and confirmed by the Oregon Senate.

OHSU is home to Oregon’s only major academic health center, which serves a multistate area with tertiary health care services from its campus in Portland, Oregon, where it operates two hospitals with 576 licensed beds. During 2015, OHSU Hospital and Doernbecher Children’s Hospital represented 8.3% of the available beds and 11.2% of the filled beds for the entire State. The OHSU hospitals had an 81% occupancy rate for available beds in 2015, compared to the Oregon statewide average of 60.7% according to the Oregon Association of Hospitals and Health Systems’ Oregon DataBank. As an academic health center, OHSU’s professional staff is composed primarily of the faculty of OHSU’s School of Medicine. The OHSU faculty practice plan is the largest organized clinical practice in Oregon. As of December 31, 2015, there were over 1,447 active faculty practice plan members, including physicians, nurse practitioners, physician assistants and other licensed independent practitioners from across all medical specialties. In addition to its inpatient focus in Portland, OHSU is working with other health care providers to leverage expertise and resources throughout Oregon.

For the fiscal year ended June 30, 2015, OHSU had total census days of 165,745 (excluding newborns), admissions of 29,244 and an average length of stay of 5.8 days. OHSU also had 47,995 emergency room visits, and 811,510 outpatient admissions.

OHSU financial results for the fiscal year ended June 30, 2015, and for the nine-months ended March 31, 2016 are posted on EMMA as described above. Audited financial statements for the year ended June 30, 2016, are not available as of the date of this Official Statement. Preliminary, unaudited financial information indicates that OHSU generated consolidated operating income of $308 million in fiscal year 2016 on $3,073 million of operating revenues, compared to $277 million in consolidated operating income on $2,531 million of operating revenues in 2015, a net increase in earnings that includes two large, offsetting year-to-year changes.

On a consolidated basis, gift, grant and contract revenue increased by $344 million, with the recording of the discounted present value of two gift pledges to the Knight Cancer Challenge: Phil and Penny Knight’s $500 million matching pledge was recorded in 2016, while Gert Boyle’s $100 million gift was recorded in 2015. Offsetting most of the higher gift revenue was a $311 million increase in defined benefit pension expense due to the Oregon Supreme Court’s Moro decision, which reversed most of the pension benefit reductions passed by the Oregon legislature as cost-saving measures in two earlier fiscal years. The defined benefit pension expense / (benefit) for was $222 million in 2016, compared to $(89) million in 2015.

For management purposes, OHSU divides consolidated operating income into several components. Total university operations are measured prior to applying GASB Statement No. 68 (GASB 68) adopted in 2015, meaning that defined benefit pension costs are included at the required cash contribution set by the State of Oregon Public Employees Retirement Board, $32 million in 2016 and $38 million in 2015. In addition, State appropriations are included within operating revenues for management purposes since they support educational and other program costs, and gifts are booked when the cash is drawn up from the Foundations to support programs, rather than when the gifts are pledged. Making these adjustments

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smooths out large, generally non-cash, fluctuations in consolidated revenue and expense, allowing the university to better monitor and manage year-to-year trends in operations. Using the noted management adjustments, the total university operations component of operating income was $157 million in 2016, an increase of $47 million from $110 million in 2015. A 10 percent growth in patient revenues, combined with recording the first $16 million of the State’s $200 million grant to the Knight Cancer Challenge for research and related facilities, account for most of this improvement. As indicated, these financial results are preliminary and may be adjusted as audit work is completed.

On February 1, 2016, OHSU affiliated with Tuality Healthcare (“Tuality”) through the execution of a Management Agreement (the “Tuality Agreement”) between the organizations. Tuality owns and operates Tuality Community Hospital, a 167 licensed bed acute care hospital located in Hillsboro, Oregon, and Tuality Forest Grove Hospital, a 48 licensed bed acute care hospital located in Forest Grove, Oregon. Under the Tuality Agreement, OHSU agrees to oversee the unified and integrated clinical enterprises of OHSU and Tuality as a single, integrated economic unit. OHSU and Tuality remain as separate entities, own their own assets and continue to be the licensed operators of their own facilities. The Tuality clinical enterprise is considered part of the OHSU clinical enterprise for purposes of the Management Agreement with Salem Health, described above. Under the Tuality Agreement, OHSU agrees to be responsible for Tuality’s operating income and loss, including making cash payments to Tuality in an amount equal to any Tuality operating loss, in the manner specified in the Tuality Agreement. The initial term of the Tuality Agreement is 20 years. Tuality reported an operating loss of $(2.6) million for the first five months of the Tuality Agreement, ending June 30, 2016.

Non-Binding Agreement with Adventist Health. On August 8, 2016, OHSU and OHSU Partners executed a non-binding agreement with Adventist Health System/West, doing business as Adventist Health (“Adventist Health”), a leading health care provider serving among other places, the Portland metropolitan area and Tillamook, Oregon. Adventist Health – Portland is a faith-based, not-for-profit health care network consisting in Oregon of a 302-bed medical center, 34 medical clinics and home care and hospice services in the Portland/Vancouver metro area and a 25-bed critical access hospital in Tillamook. The non- binding agreement memorializes the intention of the parties to enter into definitive agreements that will result in an affiliation among the parties relating to the Oregon facilities of Adventist Health. Under the intentions set forth in the non-binding agreement, the Oregon facilities of Adventist Health would become a third organization managed and overseen by OHSU Partners as a single integrated health system with OHSU and Salem Health, with the operating results of the integrated health system proportioned among OHSU, Salem Health and Adventist Health. Adventist Health would remain a separate legal entity and own its own assets, in the same manner as OHSU and Salem Health. OHSU, Salem Health and Adventist Health would not join each other’s obligated groups or guarantee each other’s outstanding debt. The non- binding agreement provides that if definitive agreements are not executed by December 31, 2016, the non- binding agreement will terminate, unless extended by mutual consent. If definitive agreements are entered into, the terms of the agreements may vary materially from the terms of the non-binding agreement, including the terms summarized above.

Calculation of Apportionment of Operating Results. The Management Agreement provides for the combined net operating results of the integrated health system to be apportioned to the parties consistent with the allocation method established in the Management Agreement. Each of the parties is assigned an “Allocation Percentage,” which is a fixed percentage established in the Management Agreement based on each party’s aggregate historical operating income during an approximately six year period prior to the commencement of the Management Agreement. OHSU’s Allocation Percentage is 81% and the Corporation’s Allocation Percentage is 19%. Each month, the Allocation Percentages are required to be applied to the net operating results of the integrated health system to determine each party’s “Allocation Amount.” If a party’s Allocation Amount is less that that party’s clinical enterprise operating results for any period, such party has a “due to” amount payable to the other party. If a party’s Allocation Amount is

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more than such party’s clinical enterprise operating results for any period, that party has a “due from” receivable from the other party. The Management Agreement provides that the due to/due from amounts shall be settled by cash transfers no later than 45 days following the end of each fiscal quarter and settled within 45 days of the delivery of each party’s fiscal year-end audited financial statements; provided that no such action shall be taken if it would result in a material default under any current or future debt-related agreement. The Management Agreement does not impose any restrictions on the use of cash transferred to either party.

The following table outlines the allocation of operating results for the fiscal year ended June 30, 2016.

TABLE 2 OHSU PARTNERS ALLOCATION OF OPERATING RESULTS (Dollars in Thousands) Total OHSU Hospital Operating Income for Fiscal Year Ended June 30, 2016 Before Research and Mission Support (1,2) $195,453

Salem Health Operating Income for the Twelve Months Ended June 30, 2016(2) $ 56,604

Combined Clinical Enterprise Operating Income $252,057

OHSU Allocation Amount $203,713 OHSU “Due From” Receivable $ 8,260

Salem Health Allocation Amount $ 48,344 Salem Health “Due To” Payable $ (8,260)

______Source: OHSU and Corporation records. (1) Includes Tuality Operating Loss for 5 months Ended June 30, 2016 ($2,622) (2) Excludes “Due To/From” and OHSUP, LLC activities of $8,260 and ($2,026), respectively

Corporation Strategy

Lean. The Corporation began using a Lean Management System in 2010. During the six years of implementation to date there has been significant progress in the execution of lean strategy deployment methodologies and utilization of lean management tools across all levels of employees within the organization. The Corporation deploys its Lean Management System under the leadership of the Vice President for Kaizen, with the presence of an onsite Lean Sensei consultant.

Lean strategy deployment is a system-wide discipline to align the whole organization with Board- approved one year and five year strategies: Financial Performance; Quality and Safety; Patient Experience; Employee Engagement; Physician Engagement and Population Management. Lean strategy deployment utilizes visual management tools with cascading visibility boards present at every department. Through this focused alignment of approximately 4,500 employees, the Corporation is able to create improvement in the care delivery system.

Lean management tools are used by employees to reduce waste from clinical and non-clinical processes. The cultural change has transformed the Corporation from one where leaders identify and solve problems, to one where visual management tools help all employees see and act together to quantifiably improve outcomes. Lean engagement is significant across the organization, in the nine-months ended

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June 30, 2016, Salem Health staff completed 1,340 lean process improvement activities resulting in significant reduction of waste.

Epic Community Connect. The Corporation and Salem Clinic, the area’s largest independent primary and multi-specialty care clinic, implemented in February 2016 Epic’s Community Connect, a single platform where clinical data is shared to improve quality for patients and improve communication across the care continuum. Care providers need access to critical clinical information about their patients across the continuum of care. The Epic system is a well-regarded electronic tool in the health care industry today, which provides a stable and accessible electronic health record for the shared patients and improving operational efficiency for all providers. Through the use of electronic health records, including electronic prescribing capacity (collectively referred to as EHRs), Salem Health and Salem Clinic are able to deliver enhanced patient care, through an integrated, accessible, patient-centric medical record that facilitates quality care, coordination, and communication.

Population Health. The Corporation is a participating member in Propel Health (“Propel”), a joint venture among other Oregon hospitals, including: Asante Health System (Medford, Ashland, Grants Pass), Bay Area Hospital (Coos Bay), Mid-Columbia Medical Center (The Dalles), Oregon Health and Science University (Portland), St. Charles Health System (Bend), Sky Lakes Medical Center, Inc. (Klamath Falls), and a health plan, Moda Health. Propel uses dedicated technology to aggregate health information from a variety of sources to identify risk factors, deploy evidence-based best practices, and coordinate care with patients and their families throughout the State of Oregon. Propel’s population health programs and tools are also used to manage SHHC’s self-funded health plan with approximately 5,600 members along with other key populations. The population health management tools and processes focus on patients identified as having a “rising-risk” for acute care and chronic illness; care advising and coordination at the primary care level; case management within the acute care setting; and transitions of care to properly return the patient to the care of their primary physician.

Additionally, the Corporation participates in an Accountable Care Organization (“ACO”), Oregon ACO LLC, through Propel that is enrolled in the Medicare Shared Savings Program (“MSSP”). MSSP is a three-year program that commenced January 1, 2016.

Magnet. As one of the largest health care professional disciplines, nurses are challenged with the expectation to achieve optimal organizational and patient outcomes through their practice. The Magnet Recognition Program® recognizes health care organizations for quality patient care, nursing excellence and innovations in professional nursing practice.

Magnet designation is a rigorous, multi-year process wherein a hospital engages nurses and other employees in the four pillars of Magnet: Transformational Leadership; Structural Empowerment; Exemplary Professional Practice; and New Knowledge, Innovations and Improvement. The Corporation received its initial designation as a Magnet Hospital in 2010 and was re-designated in 2015. The Corporation’s nursing staff, including bedside caregivers, specialty nurses, and nurse leaders, are realizing improved outcomes through participation in the Magnet Recognition Program.

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SERVICE AREA

General

The Corporation is located in the city of Salem, Oregon, which is approximately 50 miles south of Portland, Oregon in the Willamette River Valley. Salem is the capital of the State of Oregon, as well as the county seat for Marion County, and is the State’s third largest city.

The Corporation defines its primary service area as the combined cities of Salem and Keizer, which is adjacent to a portion of the northern border of Salem (collectively, the “Cities”), and its secondary service area as the remainder of Marion and Polk Counties. This section provides information concerning the Cities, and Marion and Polk Counties which together constitute the Salem Metropolitan Statistical Area (including the Cities) (“Salem MSA”).

Economic and Demographic Information

The following table shows historic population estimates as of July 1, 2010 and July 1, 2015 and projected population for 2020 for each of the Cities and Marion and Polk Counties (including the Cities).

TABLE 3 Historic and Projected Population Primary and Secondary Service Areas

2010(1) 2015(2) 2020(3) Salem 155,100 160,690 n/a Keizer 36,570 36,985 n/a Marion County 315,900 329,770 355,189 Polk County 75,495 78,570 88,081

Source: Center for Population Research and Census, Portland State University (“PSU CPRC”); Office of Economic Analysis, Department of Administrative Services, State of Oregon (“OEA”).

(1) PSU CPRC Revised Certified July 1, 2010 Population Estimates; Certified as of March 31, 2011, based on Census 2010 counts and data. (2) PSU CPRC July 1, 2015 Annual Population Report Tables; Population Estimate, April 2016. (3) OEA, Forecasts of Oregon’s County Populations and Components of Change, 2010 – 2050, Release Date March 28, 2013; projected population estimates for the Cities not available.

The economy of the Salem MSA is based on government employment, agriculture, food processing, wood and paper products and light manufacturing. According to estimates from the city of Salem, the median household income for the City was estimated to be approximately $49,508 in 2014.

Major employers include the State of Oregon, Salem-Keizer School District, the Corporation, Marion and Polk Counties, Chemeketa Community College, T-Mobile, the City of Salem and Norpac Foods. There are several colleges and universities located in the Salem MSA, including Willamette University, Corban University and Chemeketa Community College, in Salem, as well as Western Oregon University, in Monmouth, Oregon (Polk County), approximately 17 miles southwest of Salem.

The following map depicts the Corporation’s primary and secondary service areas, including hospitals within these service areas.

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Salem Health Service Area Map

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Patient Services and Market Share

The following table describes the origin of the Corporation’s patients during the twelve-months ended June 30, 2016.

TABLE 4 PATIENT ORIGIN TWELVE MONTHS ENDED JUNE 30, 2016

Inpatient Outpatient Total Primary Service Area Municipalities Salem 15,686 198,179 213,865 Keizer 2,763 35,290 38,053 Subtotal: Primary Service Area 18,449 233,469 251,918 Secondary Service Area Municipalities Stayton 1,325 15,079 16,404 Dallas 1,726 10,952 12,678 Independence/Monmouth 1,181 10,346 11,527 Woodburn 847 6,864 7,711 Silverton 608 5,281 5,889 Subtotal: Secondary Service Area 5,687 48,522 54,209 Other Oregon 2,895 24,511 27,406 Outside Oregon 338 3,699 4,037 Total 27,369 310,201 337,570

Source: Corporation records.

The following table compares patient discharge data for the Corporation and the three hospitals located in its primary and secondary service areas that offer acute services for the twelve-months ended June 30, 2013, 2014, and 2015, and for the nine-month period from July 1, 2015 to March 31, 2016.

TABLE 5 PATIENT DISCHARGES WITHIN SERVICE AREA

Three Year Nine-Months Twelve-Months Ended June 30, Compound Ended March 31, Annual 2013 2014 2015 Growth Rate 2016 Salem Health 23,996 25,011 26,741 5.6% 20,331 Legacy Silverton Medical Center(1) 4,799 4,666 4,551 (2.6%) 3,279 Santiam Memorial Hospital 1,059 1,143 1,093 1.6% 782 Salem Health West Valley(2) 159 143 186 8.2% 105 Total 30,013 30,963 32,571 4.2% 24,497

Source: Oregon Association of Hospitals and Health Systems (OAHHS). (1) Silverton Health affiliated with Legacy Health effective June 1, 2016, and Silverton Hospital was renamed Legacy Silverton Medical Center. (2) Affiliate of Corporation.

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The following table describes the market share of all patient discharges for patients originating in Marion and Polk Counties during for the twelve-months ended June 30, 2013, 2014, and 2015, and for the nine-month period from July 1, 2015 to March 31, 2016.

Total patient discharges in Marion and Polk Counties for the Corporation were 34,889, 35,270 and 36,981, respectively, for the twelve-months ended June 30, 2013, 2014 and 2015, and 28,028 for the nine- month period from July 1, 2015 to March 31, 2016.

TABLE 6 MARKET SHARE OF PATIENT DISCHARGES PRIMARY AND SECONDARY SERVICE AREAS

2013 2014 2015 2016(1) Hospital Primary Secondary Primary Secondary Primary Secondary Primary Secondary Salem Health(2) 75.7% 40.6% 76.8% 42.8% 77.4% 44.4% 77.3% 45.2% Salem Health West Valley(3) 0.0% 1.1% 0.0% 1.0% 0.0% 1.3% 0.0% 0.9% OHSU Hospital(2) 7.0% 8.5% 6.2% 8.1% 6.7% 8.0% 6.6% 7.8%

Competitors Legacy Silverton Medical Center 8.3% 19.8% 8.2% 18.6% 8.1% 16.9% 7.5% 16.4% Kaiser Sunnyside Medical Center 2.8% 3.5% 2.2% 2.5% 1.7% 2.5% 2.0%2.2% Legacy Emanuel Hospital & Health Center 0.9% 1.5% 0.7% 1.5% 0.7% 1.3% 0.9% 1.9% Kaiser Hospital Website 0.0% 0.0% 0.3% 0.7% 0.6% 0.7% 0.7% 0.8% Providence St. Vincent Medical Center 0.9% 2.1% 0.9% 1.9% 0.7% 1.8% 0.7% 2.0% Providence Portland Medical Center 0.6% 0.7% 0.7% 1.0% 0.6% 0.9% 0.6% 1.1% Legacy Good Samaritan Hospital & Medical Center 0.4% 0.7% 0.4% 0.6% 0.4% 0.8% 0.5% 0.9% Santiam Memorial Hospital 0.6% 5.3% 0.7% 6.1% 0.5% 5.7% 0.4% 5.3% Legacy Meridian Park Hospital 0.4% 6.3% 0.4% 6.2% 0.4% 6.9% 0.4% 6.7% Good Samaritan Regional Medical Center 0.4% 3.1% 0.5% 2.9% 0.4% 2.9% 0.3% 2.6% Willamette Valley Medical Center 0.3% 1.6% 0.3% 1.3% 0.2% 1.3% 0.2% 1.2% Samaritan Albany General Hospital 0.2% 1.5% 0.2% 1.1% 0.1% 0.9% 0.2% 0.9% Samaritan Lebanon Community Hospital 0.0% 0.1% 0.0% 0.1% 0.0% 0.1% 0.1% 0.1%

Other 1.3% 3.6% 1.4% 3.7% 1.4% 3.5% 1.4% 3.8% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Oregon Association of Hospitals and Health Systems (OAHHS). (1) First three quarters of 2016. (2) OHSU Partners includes OHSU, the Corporation and Tuality Healthcare, located in Hillsboro, Oregon. For more information about OHSU Partners, see “STRATEGIC INITIATIVES – OHSU Partners.” (3) Affiliate of Corporation.

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Historical Utilization

The following table presents selected utilization statistics of the Corporation for the indicated periods.

TABLE 7 UTILIZATION STATISTICS

Fiscal Year Ended Nine-Months Ended September 30, June 30, 2014 2015 2015 2016

Staffed Beds-Monthly Average 401 414 414 413 Admissions(1) 22,968 24,503 18,474 18,046 Patient Days(1) 103,483 109,921 83,554 83,454 Average Length of Stay (Days) 4.51 4.49 4.52 4.62 Average Daily Census (ADC) ADC Acute/Rehab/Psych 284 301 306 304 ADC Observation 18 23 22 29 Total ADC 302 324 328 333

Percent Occupancy (%) 75% 78% 79% 81% Births 3,241 3,292 2,378 2,547 Emergency Room Visits 95,380 103,849 77,580 82,550 Convenient Care Visits 15,664 16,760 13,157 12,755 Outpatient Admissions(2) 250,441 261,634 194,221 203,363 Surgical Cases: Inpatient 7,147 7,217 5,397 5,634 Outpatient 6,468 6,507 4,973 4,667

Source: Corporation records. (1) Acute, rehabilitation, and psychiatric statistics; excludes nursery statistics. (2) Excludes emergency room visits and convenient care visits.

FINANCIAL INFORMATION

Historical Financial Information

The following comparative summary balance sheets and summaries of revenues and expenses of the Corporation for fiscal years ended September 30, 2014 and 2015 have been derived from the consolidating schedules to the audited consolidated financial statements of SHHC, which includes the Corporation, for such fiscal years. The financial information for the Corporation for the fiscal years ended September 30, 2014 and 2015 should be read in conjunction with the audited consolidated financial statements of SHHC and affiliates (including the Corporation), including the notes thereto, and the report of KPMG LLP, independent public accountants, contained in Appendix B to this Official Statement.

In 2016, the Corporation changed the ending date of its fiscal year to June 30. The following comparative summary balance sheet and summary of revenues and expenses of the Corporation for the nine-months ended June 30, 2016 have been derived from the consolidating schedules to the audited consolidated financial statements of SHHC and affiliates (including the Corporation) for such nine-month period. The financial information for the Corporation for the nine-months ended June 30, 2016 should be read in conjunction with the audited consolidated financial statements of SHHC and affiliates (including

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the Corporation), including the notes thereto, and the report of KPMG LLP, independent public accountants, contained in Appendix C to this Official Statement. The first 12-month audited fiscal year for the Corporation will be for the fiscal year ending June 30, 2017.

The financial data for the nine month periods ended June 30, 2015 are unaudited, but include all adjustments management considers necessary to present such information in conformity with accounting principles generally accepted in the United States of America.

Corporation Condensed Consolidated Balance Sheets. The table on the following page presents the condensed consolidated balance sheets of the Corporation, which are derived from the audited financial statements as of September 30, 2014 and 2015 and as of June 30, 2015 and June 30, 2016. The condensed consolidated balance sheet as of June 30, 2015 is unaudited.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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TABLE 8 CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

Fiscal Year Ended Nine-Months Ended

September 30, June 30, 2014 2015 2015 2016 Assets (unaudited) Current assets: Cash and cash equivalents $ 3,412 $ 6,303 $ 9,329 $ 3,435 Gross patient accounts receivable 174,826 175,769 186,292 191,135 Less allowances (104,477) (104,606) (109,501) (114,927) Net patient accounts receivable 70,349 71,163 76,791 76,208 Other receivables 32,756 30,101 27,737 32,616 Total current assets $ 106,517 $ 107,567 $ 113,857 $ 112,259

Assets designated by Board 438,637 468,055 486,048 509,518 Assets held by trustee 11,678 6,105 6,057 6,192 Property and equipment, net 445,277 454,530 447,943 475,098 Other assets 27,688 21,896 28,969 24,103 Total assets $1,029,797 $1,058,153 $1,082,874 $1,127,170

Liabilities and Net Assets Current liabilities: Accounts payable $ 37,497 $ 33,939 $ 30,511 $ 39,972 Construction accounts payable 3,311 2,611 1,390 6,510 Accrued payroll, benefit and other liabilities 30,036 35,350 39,208 42,958 Estimated liability to Medicare & Medicaid 2,926 2,255 3,062 1,628 Current portion of long-term debt 10,054 5,661 9,892 5,660 Total current liabilities $ 83,824 $ 80,056 $ 84,064 $ 96,728

Other liabilities 24,051 23,854 25,567 28,332 Long term debt 296,895 291,234 296,710 291,050 Total liabilities $ 404,770 $ 395,144 $ 406,341 $ 416,110 Net assets: Unrestricted net assets 622,467 660,390 673,771 707,715 Temporarily restricted net assets 2,560 2,619 2,762 3,345 Total net assets $ 625,027 $ 663,009 $ 676,533 $ 711,060

Total liabilities and Net Assets $1,029,797 $1,058,153 $1,082,874 $1,127,170

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Summary of Revenues and Expenses

The following table presents a summary of the Corporation’s revenue and expenses for the fiscal years ended September 30, 2014 and 2015, and the nine-month periods ended June 30, 2015 and 2016. The statement of operations for the nine month period ended June 30, 2015, is unaudited.

TABLE 9 CORPORATION STATEMENTS OF OPERATIONS (Dollars in Thousands)

Fiscal Year Ended Nine-Months Ended September 30, June 30, 2014 2015 2015 2016 (unaudited) Operating Revenues Net patient revenue $584,345 $631,347 $480,043 $502,099 Other operating revenue 23,380 36,198 20,375 31,358 Total operating revenue $607,725 $667,545 $500,417 $533,457

Operating Expenses Labor and benefits $318,947 $343,843 $254,845 $278,832 Supplies 97,380 102,188 76,269 76,597 Depreciation 36,510 38,469 28,492 30,229 Professional fees 28,204 28,897 21,465 22,037 Other 98,702 105,041 78,870 96,186 Total operating expenses $579,743 $618,438 $459,941 $503,881

Income from operations 27,982 49,107 40,476 29,576 Other income (loss), net 30,506 (833) 14,059 17,085 Excess of revenue over expenses $ 58,488 $ 48,274 $ 54,535 $ 46,661

Operating EBIDA margin(1) (unaudited) 12.8% 15.0% 15.8% 14.5% Operating margin (unaudited) 4.6% 7.4% 8.2% 5.5%

Source: Corporation records. (1) EBIDA margin is a measurement of the Corporation’s earnings before interest, taxes, depreciation and amortization as a percentage of its total operating revenue.

Sources of Revenue

The Corporation derives a substantial portion of its operating revenues from Medicare and Medicaid programs as well as commercial insurance plans that reimburse all or a portion of the negotiated rate for health care services provided to patient members of their plans. As a consequence, the operating revenues of the Corporation depend to a great extent upon the availability and level of reimbursement or payments under such programs and such contracts.

Government Programs. Administration of benefits for Medicare beneficiaries is performed either by CMS or Medicare Advantage plans created by third-party insurers. Payments rates for Medicare patients are updated annually via Medicare’s rate setting process.

Medicaid benefits in Oregon are provided geographically by Coordinated Care Organizations (“CCO”). There are approximately 100,000 Medicaid lives in the Salem region and their benefits are

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administered by Willamette Valley Community Health, in which SHHC has a combined 18% ownership stake.

Commercial Insurance. The local health plan market place is competitive with many regional, local and national companies. The Corporation has contracts with the majority of health plans that have a significant presence in the Corporation’s service area. The Corporation’s service area health plan market place is characterized by significant competition between many regional and national health plans, and no single commercial payer accounts for more than 23% of the Corporation’s commercial patient service revenue source. Many of the Corporation’s commercial health plan contracts are one year agreements, which are routinely updated and may be terminated by either party upon written notice. Certain other contracts do not have stated expirations and may be terminated by either party upon written notice. The Corporation’s contract with Kaiser Permanente, however, is a seven year contract that commenced May 1, 2013.

TABLE 10 PAYOR MIX (% of Gross Patient Revenues)

Fiscal Year Ended Nine-Months Ended September 30, June 30, 2014 2015 2015 2016 Payor Group (unaudited)

Medicare 43.3% 43.7% 43.6% 43.6% Medicaid 18.7 20.7 20.7 21.6 Commercial Insurance (1) 22.1 21.1 21.3 20.4 Kaiser Health Plan 9.3 9.0 8.9 8.5 Self Pay 3.0 1.7 1.7 1.8 Other (2) 3.6 3.8 3.8 4.1 Total 100.0% 100.0% 100.0% 100.0%

Source: Corporation records. (1) Includes Blue Cross/Regence and other commercial insurers. (2) Includes workers’ compensation insurance, auto and miscellaneous.

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Historical Coverage of Annual Debt Service

The following table shows, for the fiscal years ended September 30, 2014 and 2015, the Corporation’s coverage of actual annual debt service on outstanding long-term indebtedness. TABLE 11 ANNUAL DEBT SERVICE COVERAGE* (Dollars in Thousands) Fiscal Year Ended September 30, 2014 2015 Income Available for Debt Service: Excess of Revenue over Expenses $58,488 $ 48,274 Depreciation 36,510 38,469 Interest and Amortization 13,018 12,837 Change in Fair Value of Equity Securities (19,517) 19,641 Total $88,499 $119,221

Annual Debt Service $15,484 $21,649 Debt Service Coverage (times) 5.7 5.5 ______Source: Corporation records.

As a result of the issuance of the Bonds and the refunding of the Refunded Bonds, maximum annual debt service will decrease from $22.0 million to $16.44 million, which would increase coverage of maximum annual debt service for the fiscal year ended September 30, 2015 from 5.4 times to 7.3 times.* See “Plan of Financing” in the front portion of this Official Statement.

Liquidity and Capital Resources Liquidity. The following table presents the Corporation’s unrestricted cash and board designated assets as of September 30, 2014 and 2015 (audited) and at June 30, 2015 (unaudited) and 2016 (audited).

TABLE 12 UNRESTRICTED CASH AND BOARD DESIGNATED ASSETS (Dollars in Thousands)

Fiscal Year Ended Nine Month Ended September 30, June 30, 2014 2015 2015 2016 (unaudited)

Cash and Cash Equivalents $ 3,412 $ 6,303 $ 9,329 $ 3,435 Board Designated Assets 438,637 468,055 486,048 509,518 Total $442,049 $474,358 $495,377 $512,953

Average Daily Expense 1,488 1,589 1,579 1,728 Days Cash on Hand 297 299 314 297

Source: Corporation records.

* Preliminary; subject to change. Based on estimated current market conditions.

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Investment Policy. The Board has adopted an investment policy that sets forth the investment objectives, performance expectations, standards of prudence, and general guidelines related to the management of cash and board designated assets (the “Funds”) of the Corporation. Under this policy, the Board authorizes Corporation management, investment consultant and investment managers to manage the Funds within limits of the investment policy.

Direct governance of the investment policy is provided by the Finance Committee and Investment Subcommittee of the Board. Implementation of the investment policy is provided through a centralized investment program managed by the Chief Financial Officer and the Corporation’s professional investment advisor. Portfolio performance is reviewed on a monthly basis with the financial advisor, Finance Committee and Investment Subcommittee.

The ability of the Corporation to generate investment income and realized gains is dependent in large measure on market conditions. The market value of the centralized investment portfolio, as well as investment income, have fluctuated in the past and may continue to fluctuate in the future. All net unrealized gains and losses are reported in the statement of unrestricted revenues, expenses and other changes in unrestricted net assets and are excluded from the excess of revenue over expenses from continuing operations. Given the size of its centralized investment program, Corporation management anticipates that changes in levels of realized returns on its investment portfolio are likely to continue to have an impact on the Corporation’s excess of revenues over expenses and that unrealized gains or losses will impact its unrestricted net assets.

As of June 30, 2016, the fund categories, current allocations (maximum permissible equity holding 55%) and balances were as follows:

TABLE 13 PERCENT OF INVESTMENTS BY ASSET CLASS (Dollars in Thousands) Current Percent of Asset Class Investments Market Value

Fixed Income 48.2% $245,675 Domestic Large Cap Equities 35.8 182,082 International Equities 9.6 48,854 Enhanced Cash 6.4 32,623 Total(1) 100.0% $509,234

Source: Corporation Records. (1) $283 accrued interest receivable not included.

Management’s Discussion and Analysis of Recent Financial Performance

Comparison of the Nine-month Period Ended June 30, 2016 to Nine-month period ended June 30, 2015 (unaudited). For the nine-month period ended June 30, 2016, the Corporation had income from operations of $29.6 million reflecting an operating margin of 5.5% compared to the income from operations of $40.9 million for the nine-month period ended June 30, 2015 (unaudited).

Net patient revenue increased $22.1 million, from $480.0 million for the nine-month period ended June 30, 2015 (unaudited) to $502.1 million for the nine-month period ended June 30, 2016, an increase of 4.6%. Overall average daily census and occupancy increased by 1.5% and 2.5% respectively. Births increased 7.1% to 2,547 from 2,378 in the prior period. The Corporation experienced an overall increase

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in outpatient activity. During the nine-month period ending June 30, 2016, combined visits to urgent care and the emergency room grew by 5.0% to 95,305, and other outpatient visits increased by 4.7% to 203,363. During this period, outpatient surgeries declined by 6.1% to 4,667, due to reductions in urology and vascular procedures. The Corporation is utilizing lean management techniques to improve facility throughput in order to more effectively accommodate the overall additional volume.

Total operating revenue increased $33.0 million, from $500.4 million for the nine-month period ended June 30, 2015 to $533.4 million for the nine-month period ended June 30, 2016, largely due to the $22.1 million increase in net patient revenue discussed above. In addition, the Corporation achieved receipt of $6.3 million in quality improvement incentive payments from the State’s Hospital Transformation Performance Program (“HTPP”), and approximately $3.0 million in quality incentive payments from commercial payors. While the Corporation must meet certain quality and performance measures to receive these incentive payments in the future, the programs and payments are ongoing and the Corporation is eligible for such program payments in the future.

Operating expenses for the nine-month period ended June 30, 2016 totaled $503.9 million, compared to $459.6 million for the nine-month period ended June 30, 2015, an increase of $44.3 million. $24.0 million of the increase in operating expenses was labor and benefits. After adjusting for the increase in volume, labor and benefits experienced an additional $4.5 million increase related to growth in SHMG; specifically expansion of hospitalist coverage and the addition of cardio thoracic and general surgeons. The nine-month period ending June 30, 2016 was the first reporting period during which the Corporation recorded activities with respect to OHSU Partners. For this seven-month period, the Corporation recorded an increase of $2.0 million in purchased services, included in other expenses in Table 9 above, in which the Corporation and OHSU shared equally the OHSU Partners management fee. There was an additional increase in purchased services in the amount of $6.1 million reflecting the amount due to OHSU to accurately reflect the Corporation’s 19% Allocation Percentage of OHSU Partners total operating income for the period. See “STRATEGIC INITIATIVES – OHSU Partners.”

Other income, including investment income, increased $3.0 million from $14.1 million for the nine- month period ended June 30, 2015 to $17.1 million for the nine-month period ended June 30, 2016, reflecting to improved investment portfolio returns.

Cash and board-designated assets as of June 30, 2016 totaled $513.0 million. The $17.6 million increase from the June 30, 2015 balances are due to cash flows from operations and positive investment market experience noted above, which were offset by additions to property and equipment, and debt payments. Net patient accounts receivable was $76.8 million as of June 30, 2016, a decrease of $0.6 million from June 30, 2015. Net property and equipment increased by $27.5 million from June 30, 2015 to June 30, 2016 as a result of building a new outpatient rehabilitation center and expanding the central energy plant.

Current liabilities increased $13.7 million from June 30, 2015 to June 30, 2016, mainly due to increases in accounts payable and accrued payroll liabilities related to timing of payments. Long-term debt decreased $5.7 million from June 30, 2015 to June 30, 2016 reflecting scheduled long-term debt payments.

Comparison of Fiscal Year Ended September 30, 2015 to September 30, 2014. The Corporation produced a consolidated excess of revenue over expenses of $48.3 million for the twelve-months ended September 30, 2015 compared to $58.5 million for the twelve-months ending September 30, 2014. The Corporation’s operating activities reported income from operations of $49.1 million for the twelve-months

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ended September 30, 2015 compared to $28.0 million for the twelve-months ended September 30, 2014, an increase of $19.1 million.

The Corporation produced an operating margin of 7.4% in 2015 compared to 4.6% in 2014. The impacts of health care reform, specifically expansion of Medicaid due to the Affordable Care Act, continued to increase the number of patients with insurance and reduce the levels of charity care and bad debt expense.

Net patient revenues, after adjustments for bad debt, of $631.3 million for the twelve-months ended September 30, 2015 exceeded the $584.3 million for the twelve-months ended September 30, 2014 by $47.0 million or 8.0%. Total operating revenues of $667.5 million for the twelve-months ended September 30, 2015 exceeded the $607.7 million for the twelve-months ended September 30, 2014 by $59.8 million or 9.8%. The increase in revenues is the combined result of a 6.2% increase in inpatient utilization, a 1% increase in surgery volume, an 8.6% increase in emergency room and urgent care utilization and a 4.5% increase in other outpatient visits. The remaining increase relates to specific quality incentive payments received during the period, including $8.0 million in HTPP.

Total operating expenses increased by 6.7% from $579.7 million for the twelve-months ended September 30, 2014 to $618.4 million for the twelve-months ended September, 2015. The increase in operating expenses was predominantly due to the increase in volumes, which impacted salaries and medical supplies. The Corporation’s total expense per adjusted discharge, a measure of per unit expense, decreased by 4.8% for the twelve-months ended September 30, 2015 when compared to the twelve-months ended September 30, 2014. Management continues to focus on waste removal through the use of lean management tools and in anticipation of future national reimbursement headwinds. See “STRATEGIC INITIATIVES – Corporation Strategy – Lean.”

Other income including investment income, decreased $30.9 million from $30.1 million for the twelve-months ended September 30, 2014 to negative $0.8 million for the twelve-months ended September 30, 2015 due to the decreased investment market performance.

Cash and cash equivalents and board-designated assets as of September 30, 2015 totaled $474.4 million, an increase of $32.3 million from September 30, 2014, related to cash flows from operations. Net patient accounts receivable was $71.2 million as of September 30, 2015, an increase of $0.8 million from September 30, 2014. Net property and equipment increased by $9.3 million from September 30, 2014 to September 30, 2015 as a result of implementing Epic Community Connect at Salem Clinic and an upgrade of the angiography hemodynamic system. See “STRATEGIC INITIATIVES – Corporation Strategy – Epic Community Connect.”

Current liabilities decreased $4.3 million from September 30, 2014 to September 30, 2015, due to decreases in accounts payable. Long-term debt decreased $5.7 million from September 30, 2014 to September 30, 2015 as a result of making scheduled payments on such obligations.

Other Financial Information

Derivative Instruments and Hedging Activities

As described below, the Corporation has an interest-rate-related derivative instrument to manage its exposure on its debt instruments. The Corporation does not enter into derivative instruments for any purpose other than cash flow hedging purposes. The Corporation follows FASB ASC 815-10, Derivatives and Hedging. ASC 815-10 provides accounting and reporting standards for derivative instruments and hedging activities and requires that the Corporation recognize these as either assets or liabilities in the consolidated balance sheets and measure them at fair value.

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In 2008, the Corporation entered into an interest rate swap transaction to effectively convert the Series 2008B variable rate debt to a fixed rate of 3.541% through August 15, 2034. The interest rate swap has a notional amount of $75 million. The Corporation evaluated the interest rate swap transaction and determined that it met the criteria to be classified as a cash flow hedge and the changes in fair value have been recorded as a change in unrestricted net assets in the accompanying consolidated financial statements.

The interest rate swap transaction allows the Corporation to terminate the financial instrument by requiring full settlement of any interest or termination value, upon five days written notice given to the Series 2008B bond insurer and counterparty. The fair value of the interest rate swap agreement is determined by or based on the spread in interest rates with consideration of credit risk to both the Corporation and its counterparty. The estimated fair value of the interest rate swap at June 30, 2016 and September 30, 2015 was a liability of $18,828,000 and $15,992,000, respectively. The Corporation was not required to post collateral against the liability of its interest rate swap during the nine-months ended June 30, 2016 and the fiscal year ended September 30, 2015. The Corporation has not been required to post any collateral to-date for the life of the swap.

Pension and Other Post-Retirement Benefits

Defined Contribution Retirement Plan. The Corporation has a contributory, defined contribution retirement plan (the “Retirement Plan”) covering substantially all full-time employees. All eligible employees are allowed to contribute to the Retirement Plan on the first day of the month following their date of hire. The Corporation contributes 5.5% to 8.5% of participating employees’ annual compensation to the Retirement Plan, depending upon employment status, length of service and employee contribution amount. To receive the benefit of the Corporation’s contributions, employees must have one year or more of service at either the Corporation or West Valley and contribute at least 1.0% of their annual compensation to the Retirement Plan. Retirement Plan costs were $12,056,000 and $14,269,000 for the years ended June 30, 2016 and September 30, 2015, respectively, and are included in labor and benefits in the accompanying consolidated statements of operations.

Postretirement Health Care Plan. The Corporation sponsors a postretirement health care plan (the “Postretirement Plan”) that provides health care benefits to certain retirees and their dependents until the retirees reach the age of Medicare eligibility. Generally, retirees are eligible to participate in the Postretirement Plan if they retire from either the Corporation or West Valley at age 55 years or older with 10 years of service. Retirees can convert 25% of their unused extended illness bank balance to an equivalent dollar amount, which may then be used to purchase medical, dental, or vision coverage for the retiree and/or dependents. Any unused extended illness bank balance is forfeited when the retiree reaches the age of Medicare eligibility.

The Corporation accounts for the Postretirement Plan in accordance with FASB ASC 715, Compensation – Retirement Benefits, which requires the employer to recognize the overfunded or underfunded status of a plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through changes in unrestricted net assets. Under ASC 715 Compensation – Retirement Benefits, the measurement of the funded status is the difference between the fair value of the plan assets compared to the benefit obligation of the plan.

Under ASC 715, the Corporation is required to recognize in unrestricted net assets any unrecognized net actuarial gains or losses and any unrecognized prior service costs or credits as they arise. Also, the Corporation is required to disclose in the notes to the consolidated financial statements additional information about the effect on net periodic benefit cost on the next fiscal year that arises from the delayed recognition of these items. The Corporation’s measurement date for plan assets and benefit obligation is

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June 30. For the nine-months ended June 30, 2016 and the fiscal year ended September 30, 2015, the Corporation utilized the RP-2014 mortality tables for estimating the actuarial values.

GOVERNANCE AND ADMINISTRATION

Board of Trustees

A 10-member Board of Trustees is responsible for establishing and directing the functions, business, and governance of the Corporation. The bylaws require that Trustees be individuals of good character and reputation, preferably with a background in community service.

To avoid the appearance of impropriety, the Board has a policy that requires any Trustee with an actual or potential conflict of interest to refrain from voting on any such matters when presented to the Board. Trustees are asked to complete conflict of interest statements annually, in addition to declaring a conflict when applicable on specific matters before the Board.

The table below presents the current Trustees and their tenure on the Board.

TABLE 14 BOARD OF TRUSTEES

Current Term Name Title Employer Expires John Combes Trustee American Hospital Association 2019 Bonnie Driggers Chair-Elect Education Consultant, Self-Employed 2017 Theresa Haskins Trustee Portland General Electric 2017 Katherine Keene Trustee SAIF Insurance (Retired) 2018 Robert Kelly Trustee Salem Emergency Physicians 2017 Nancy Reyes-Molyneux Trustee Radiation Therapy Consultants 2017 Kenneth Sherman, Jr. Trustee Sherman Sherman Johnnie and Hoyt 2019 Lane Shetterly Trustee Shetterly Irick and Ozias 2018 Robert Wells Board Chair City of Salem (Retired) 2019 Alan Wynn Secretary/Treasurer Truitt Bros. Inc. 2017

Executive Management

The Board has delegated the Corporation’s day-to-day management to the President and Chief Executive Officer and the members of the administrative team of the Corporation. The following are brief professional biographical summaries of the President and Chief Executive Officer and certain members of the administrative team:

Cheryl Nester Wolfe, RN, President and Chief Executive Officer. In November 2015, Ms. Nester Wolfe assumed the role of Chief Executive Officer and President of the Corporation. She has over 40 years of experience in the health care industry. Ms. Nester Wolfe joined the Corporation in July 2007 as the Senior Vice President, Operations/Chief Nursing Officer. She arrived at Salem Health from O’Connor Hospital, San Jose, CA, where she served as Senior Vice President/Chief Administrative Officer/Chief Nursing Office/Chief Responsibility Officer (2005-2007). Ms. Nester Wolfe has also previously served as Vice President, Nursing and Patient Care at St. Mary’s Medical Center, San Francisco, CA (2003-2004) and Nursing Administrator at Community Hospital of the Monterey Peninsula, Monterey,

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CA (1985-2002). Ms. Nester Wolfe received her Master’s Degree in Nursing from University of Phoenix and her Baccalaureate Degree in Nursing from Old Dominion University.

James Parr, Chief Financial Officer. Mr. Parr serves as the Chief Financial Officer of the Corporation, and has responsibility for the long-range financial planning and financial management of SHHC. Specific areas that report to Mr. Parr include finance, supply chain, payer contracting, health information management, patient financial services, and access services. Mr. Parr arrived at Salem Health in 2007 from Seattle Children’s Hospital where he served as the Director of Finance & Strategic Analysis, Research Division. Mr. Parr began his 20 year career in public accounting with Arthur Andersen in the Audit practice and worked as an audit manager at KPMG prior to joining Seattle Children’s. Mr. Parr is Chartered Accountant (ACA) and a member of the Institute of Chartered Accountants in England & Wales. Mr. Parr received his Undergraduate & Master’s Degree in Mechanical Engineering from the University of Birmingham, UK and a Master’s Degree of Business Administration from Willamette University.

Ralph A. Yates, DO, Chief Medical Officer. As Chief Medical Officer of the Corporation, Dr. Yates is responsible for oversight of medical staff issues, medical staff engagement, clinical safety, developing partnerships and implementing strategy for continuous improvement within the Corporation. He has over 36 years of experience in the health care industry, and oversees and medically directs the fifteen departments and 155 clinicians of SHMG and continues to see patients one day a week in one of the group’s family physician locations. Dr. Yates arrived at the Corporation as Chief Medical Offer for the SHMG in 2014 from The Portland Clinic, Portland, OR where he served as a partner and branch medical director. A family physician, he carried a full clinical load in addition to his duties as a partner there. He helped create The Portland Clinic’s 400 clinician ACO, the Portland Coordinated Care Association, serving as its first Medical Director and Chair of its board. Dr. Yates is Clinical Assistant Professor of Family Medicine, Western University of Health Sciences (1985-Present) and Clinical Associate Professor, Department of Family Medicine, Oregon Health Sciences University (1990-Present). He was appointed by Governor Kulongoski to the Oregon Medical Board from 2008-2014 during which he served as Chair (2011- 2012). Dr. Yates received his Doctor of Osteopathic Medicine from the Kirksville College of Osteopathic Medicine. A graduate of the United States Coast Guard Academy, he served in the United States Coast Guard (“USCG”) for five years after graduation leaving as a Lieutenant and later the USCG Reserve as Lieutenant Commander. Dr. Yates is a member of the American Osteopathic Board of Family Physicians, American College of Sports Medicine, American Diabetes Association, American Osteopathic Association, Oregon Medical Association, and Osteopathic Physicians & Surgeons of Oregon.

Bahaa Wanly, Interim Chief Operating Officer and Vice President, Salem Health Medical Group. As Interim Chief Operating Officer and Vice President, SHMG, Mr. Wanly is responsible for operations of the Corporation, West Valley and SHMG, including development of strategic direction and the effective implementation of all approved strategies, tactics, policies and procedures in all practices that comprise the integrated provider network. Mr. Wanly has over 15 years of experience in health care and hospital administration. Prior to joining Salem Health in 2015, Mr. Wanly served as an Administrator at UW Medicine: University of Washington Medical Center in Seattle Washington and UW Medicine: Harborview Medical Center. Mr. Wanly also previously served as Administrator at NeighborCare Community Health in Seattle, WA. He received his Master’s Degree in Health Administration from University of Washington, and his Bachelor of Arts and a Bachelor of Science Degree at Oregon State University.

Leah Mitchell, Chief Information Officer and Vice President. Ms. Mitchell, as the Chief Information Officer and Vice President of Kaizen, Quality, Safety, and Patient Care Services at the Corporation, is the liaison responsible for supporting the integration of Kaizen principles to improve quality and safety for patients. Kaizen is a Japanese term meaning continuous improvement. Ms. Mitchell has been with the Corporation for 10 years. She oversees organizational support services including pharmacy,

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lab, imaging, nutrition services, environmental services, patient transport, and the community health education center. Ms. Mitchell previously worked for a cardiac medical group in Texas. She is a Registered Nurse with a background in Cardiovascular and Intensive Care nursing. Ms. Mitchell is also a certified pilot and flight instructor and was a secondary education teacher for several years. She received her Master of Science in Nursing from University of Phoenix and her Bachelor of Science in Business and Commercial Aviation from Bob Jones University. Ms. Mitchell holds an Associate’s Degree in Nursing from Amarillo College.

The Corporation’s administrative staff also includes additional vice presidents and approximately 30 department directors who are responsible for administrative and ancillary services within the Corporation.

MEDICAL STAFF

As of June 30, 2016, the Corporation’s medical staff included 543 physicians with clinical privileges, representing over 60 specialties and subspecialties (including 89 employed physicians, all of whom are active staff members). Of the 543 physicians, 455 have admitting privileges as active and active- provisional staff and 88 have courtesy status. As of June 30, 2016, 414 (approximately 91%) of the active and active-provisional members of the Corporation’s medical staff were board-certified. As of June 30, 2016, the average age of the Corporation’s active and active-provisional medical staff was 46 years of age. The top ten admitting physicians accounted for approximately 20% of inpatient admissions for the nine-month period ended June 30, 2016. The Corporation’s medical staff is presently a broad mix of small physician groups and some larger multi-specialty group practices.

EMPLOYEES

As of June 30, 2016, the Corporation employed approximately 4,500 staff, of which 68% are full time employees. Over one-half of the staff has been employed longer than five years. The Corporation does not have any employees represented by a collective bargaining representative.

LITIGATION

There is no known pending or threatened material litigation, which is not covered by insurance of the Corporation and within applicable limits.

ACCREDITATION, LICENSES, APPROVALS, AND MEMBERSHIPS

The Corporation is accredited by The Joint Commission (“TJC”). The last TJC accreditation survey was completed on May 20, 2016. This accreditation is effective until the next survey, which will happen 18 to 39 months from the previous accreditation survey. In addition to the Corporation’s TJC accreditation, the Joint Center and Spine Center were recertified as TJC Centers of Excellence as of March 2016. These certifications are effective for 24 months post completion. The Corporation’s comprehensive cancer program is approved by the American College of Surgeons/Commission on Cancer, effective through 2016. Salem Health Laboratory is certified by the College of American Pathologists and Centers for Medicare and Medicaid Services, effective through 2016. Salem Health Imaging is certified by the American College of Radiology in the following modalities: CT, PET, Nuclear Medicine, Breast MRI, Mammography, Breast Ultrasound and Stereotactic breast biopsy with varying effective dates through 2017 to 2019. The Corporation is licensed by the State of Oregon Department of Human Resources and approved for participation in the Medicare and Medicaid programs. The Corporation is a member of the American Hospital Association and Oregon Association of Hospitals and Health Systems.

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MEDICAL MALPRACTICE AND OTHER INSURANCE

General and professional liability insurance coverage for SHHC, including the Corporation, is currently provided by WVIC and Zurich-Steadfast Insurance Company. Both policies are claims-made policies with a retroactive date of October 1, 2002.

SHHC is insured for medical malpractice claims up to $1,000,000 per occurrence with a $6,000,000 annual aggregate limit through WVIC, a wholly-owned captive insurance company of the Corporation. WVIC does not purchase reinsurance. Zurich-Steadfast Insurance Company provides SHHC with a second layer of coverage for $34,000,000 per occurrence and a $34,000,000 annual aggregate limit above the primary coverage amount. The total medical malpractice insurance coverage of SHHC is $35,000,000.

In addition, SHHC maintains workers’ compensation, directors and officer’s liability, privacy and security, property insurance and several other lines of insurance coverage at levels that management believes are appropriate.

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APPENDIX B

AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2014

[THIS PAGE INTENTIONALLY LEFT BLANK]

SALEM HEA/7+ Consolidated Financial Statements and Additional Information September 30, 2015 and 2014 (With Independent Auditors’ Report Thereon)

6$/(0+($/7+

7DEOHRI&RQWHQWV

3DJH V  Independent Auditors’ Report 1–2

Consolidated Financial Statements:

Consolidated Balance Sheets 3

Consolidated Statements of Operations 4

Consolidated Statements of Changes in Net Assets 5

Consolidated Statements of Cash Flows 6

Notes to Consolidated Financial Statements 7–32

6XSSOHPHQWDU\,QIRUPDWLRQ Schedule I – Consolidating Balance Sheets 33–36

Schedule II – Consolidating Statements of Operations 37–38

KPMGLLP Suite 3800 1300 South West Fifth Avenue Portland, OR 97201

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The Board of Trustees Salem Health:

5HSRUWRQWKH)LQDQFLDO6WDWHPHQWV We have audited the accompanying consolidated financial statements of Salem Health and its subsidiaries (Oregon nonprofit corporations) (collectively, the Corporation), which comprise the consolidated balance sheets as of September 30, 2015 and 2014, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’sResponsibilityfortheFinancialStatements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Salem Health and its subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

OtherMatter Our audits was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary consolidating information included in schedules I and II is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

Portland, Oregon January 13, 2016

2 6$/(0+($/7+ Consolidated Balance Sheets September 30, 2015 and 2014 (In thousands)

$VVHWV   Current assets: Cash and cash equivalents $ 7,873 4,376 Patient accounts receivable, less allowance for doubtful accounts of $15,243 in 2015 and $17,472 in 2014 74,010 73,099 Other receivables 15,374 17,396 Supplies inventory 6,522 6,607 Prepaid expenses and other 7,728 8,160 Total current assets 111,507 109,638 Assets limited as to use 496,850 475,063 Property and equipment, net 454,920 445,426 Rental and other property held for future development, net of accumulated depreciation of $3,821 in 2015 and $3,483 in 2014 13,697 14,516 Other noncurrent assets 7,333 6,501 Total assets $ 1,084,307 1,051,144 /LDELOLWLHVDQG1HW$VVHWV Current liabilities: Accounts payable $ 34,670 38,590 Construction accounts payable 2,629 3,812 Accrued liabilities: Payroll, payroll taxes, and withholdings 11,465 8,846 Paid time off 16,263 15,185 Other 8,337 7,208 Estimated third-party payor settlements, net 3,150 3,280 Current portion of long-term debt 5,661 10,054 Current portion of estimated medical malpractice claims liability 1,664 2,815 Total current liabilities 83,839 89,790 Long-term debt, net of current portion 291,234 296,895 Accrued postretirement healthcare benefits 6,535 7,402 Fair value of interest rate swap agreement 15,992 12,821 Other long-term liabilities 36 23 Estimated medical malpractice claims liability, net of current portion 5,327 8,422 Total liabilities 402,963 415,353 Net assets: Unrestricted 675,590 630,100 Temporarily restricted 3,479 3,416 Permanently restricted 2,275 2,275 Total net assets 681,344 635,791 Total liabilities and net assets $ 1,084,307 1,051,144

See accompanying notes to consolidated financial statements. 3 6$/(0+($/7+ Consolidated Statements of Operations Years ended September 30, 2015 and 2014 (In thousands)

  Operating revenue: Patient service revenue, net of contractual allowances and discounts $ 683,887 633,302 Provision for bad debts (26,595) (26,416) Net patient service revenue, less provision for bad debts 657,292 606,886 Other revenue 36,164 22,004 Net assets released from restriction used for operations 280 324 Total operating revenue 693,736 629,214 Operating expenses: Labor and benefits 358,803 333,214 Medical and other supplies 104,873 99,468 Purchased services and other 92,971 89,872 Depreciation 39,687 37,630 Professional fees 30,586 29,591 Interest and amortization 12,837 13,018 Total operating expenses 639,757 602,793 Excess of revenue over expenses from operations 53,979 26,421 Other income: Investment income (loss), net (1,190) 33,134 Other, net (1,259) (289) Total other income (loss), net (2,449) 32,845 Excess of revenue over expenses 51,530 59,266 Change in net unrealized gain or loss on other-than-trading securities (3,308) 1,212 Change in fair value of interest rate swap agreement (3,171) (1,015) Change in postretirement benefit obligation 418 (708) Net assets released from restriction used for property and equipment 21 231 Change in unrestricted net assets $ 45,490 58,986

See accompanying notes to consolidated financial statements.

4 6$/(0+($/7+ Consolidated Statements of Changes in Net Assets Years ended September 30, 2015 and 2014 (In thousands)

7HPSRUDULO\ 3HUPDQHQWO\ 8QUHVWULFWHG UHVWULFWHG UHVWULFWHG 7RWDO Net assets at September 30, 2013 $ 571,114 2,977 2,274 576,365 Excess of revenue over expenses 59,266 — — 59,266 Change in net unrealized gain on other-than-trading securities 1,212 (21) — 1,191 Change in fair value of interest rate swap agreement (1,015) — — (1,015) Change in postretirement benefit obligation (708) — — (708) Net assets released from restriction used for property and equipment 231 (231) — — Restricted contributions — 745 1 746 Temporarily restricted investment and other income, net — 270 — 270 Net assets released from restrictions for operations — (324) — (324) Change in net assets 58,986 439 1 59,426 Net assets at September 30, 2014 630,100 3,416 2,275 635,791 Excess of revenue over expenses 51,530 — — 51,530 Change in net unrealized gain (loss) on other-than-trading securities (3,308) (50) — (3,358) Change in fair value of interest rate swap agreement (3,171) — — (3,171) Change in postretirement benefit obligation 418 — — 418 Net assets released from restriction used for property and equipment 21 (21) — — Restricted contributions — 400 — 400 Temporarily restricted investment and other income, net — 14 — 14 Net assets released from restrictions for operations — (280) — (280) Change in net assets 45,490 63 — 45,553 Net assets at September 30, 2015 $ 675,590 3,479 2,275 681,344

See accompanying notes to consolidated financial statements.

5 6$/(0+($/7+ Consolidated Statements of Cash Flows Years ended September 30, 2015 and 2014 (In thousands)

  Cash flows from operating activities: Change in net assets $ 45,553 59,426 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 40,254 38,159 Change in net unrealized losses (gains) on non fair value option investments 3,358 (1,191) Change in net unrealized losses (gains) on fair value option investments and realized losses (gains) on sales of investments 10,880 (24,247) Change in fair value of interest rate swap agreement 3,171 1,015 Restricted contributions for property and equipment (3) (14) Impairment loss 725 — Permanently restricted contributions — (1) Loss on disposal of property and equipment — 7 Changes in operating assets and liabilities: Patient accounts receivable (911) 1,767 Other receivables 2,022 (6,645) Supplies inventory 85 (318) Prepaid expenses 432 (765) Other noncurrent assets (1,060) (2,173) Accounts payable (7,297) 9,243 Accrued liabilities 4,826 2,823 Estimated third-party payor settlements, net (130) (3,131) Accrued postretirement healthcare benefits (867) 292 Other long-term liabilities 13 (22) Estimated medical malpractice claims liability (4,246) 894 Net cash provided by operating activities 96,805 75,119 Cash flows from investing activities: Purchases of investments (122,497) (34,362) Proceeds from sales of investments 86,472 14,121 Purchases of property and equipment and rental and other property (47,232) (51,166) Net cash used in investing activities (83,257) (71,407) Cash flows from financing activities: Repayment of tax-exempt bonds (10,054) (3,280) Repayment of other long-term debt — (502) Restricted contributions for property and equipment 3 14 Permanently restricted contributions — 1 Net cash used in financing activities (10,051) (3,767) Net increase (decrease) in cash and cash equivalents 3,497 (55) Cash and cash equivalents at beginning of year 4,376 4,431 Cash and cash equivalents at end of year $ 7,873 4,376 Supplemental disclosure of cash flow information: Cash paid for interest $ 12,679 12,830

See accompanying notes to consolidated financial statements. 6 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

 2UJDQL]DWLRQDQG3ULQFLSOHVRI&RQVROLGDWLRQ Salem Health and subsidiaries (collectively, the Corporation) are Oregon nonprofit corporations providing a comprehensive system of healthcare services to the communities of Salem and Dallas, Oregon, and the surrounding Marion and Polk Counties.

The accompanying consolidated financial statements include the accounts and transactions of the Corporation and its subsidiaries, of which the Corporation is the parent holding company and sole member. The subsidiaries are Oregon nonprofit corporations and consist of Salem Hospital (Salem) and West Valley Hospital (West Valley) (collectively, the Hospitals); Salem Hospital Foundation (SHF) and West Valley Hospital Foundation (WVHF) (collectively, the Foundations); Willamette Valley Insurance Corporation (WVIC), a captive insurance company formed in November 2004 domiciled in Hawaii; and Willamette Valley Professional Services (WVPS), whose principal purpose is to provide professional billing services to the Hospitals, which are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The Corporation has formed an Obligated Group which is responsible for paying hospital revenue bond debt. Currently Salem Hospital is the only member of the Obligated Group.

The Hospitals provide healthcare and healthcare-related services to patients in their service areas. The Hospitals’ mission is to improve the health and well-being of the people and the communities they serve. The Foundations are dedicated to raising, managing, and distributing funds to help the Hospitals achieve their mission.

 6XPPDU\RI6LJQLILFDQW$FFRXQWLQJ3ROLFLHV (a) UseofEstimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates include uncollectible and contractual reserves on patient accounts receivable, valuation of investments, assignment of useful lives to property and equipment, third-party payor cost report settlements, self-insured liabilities, interest rate swap valuation, and postretirement liabilities.

(b) CashandCashEquivalents Cash equivalents include investments in highly liquid instruments with original maturities of three months or less, excluding assets limited as to use. Cash equivalents totaled $739 and $336 at September 30, 2015 and 2014, respectively.

The Corporation maintains bank accounts at several financial institutions. The Corporation’s bank balances at each financial institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250. At September 30, 2015 and 2014, the Corporation’s bank balances at certain financial institutions exceeded FDIC coverage.

7 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

(c) PatientAccountsReceivableandAllowanceforDoubtfulAccounts Patient accounts receivable are recorded at an estimated contractual arrangement and do not bear interest. Amounts collected on patient accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The primary risk of noncollection of patient accounts receivable relates to uninsured patient accounts and patient accounts for which the primary insurance payor has paid, but patient responsibility amounts (generally, deductibles and copayments) remain outstanding.

The allowances for doubtful accounts are primarily estimated based upon the Hospitals’ historical collection experience, the age of the patient’s account, the patient’s economic ability to pay, and the effectiveness of collection efforts. Patient accounts receivable balances are routinely reviewed in conjunction with historical collection rates and other economic conditions that might ultimately affect the collectibility of patient accounts when considering the adequacy of the amounts recorded in the allowance for doubtful accounts. Actual write-offs historically have approximated management’s expectations.

The mix of gross receivables from significant third-party payors as of September 30, 2015 and 2014 was as follows:

  Medicare 42% 40% Medicaid 17 19 Private pay 5 6 Commercial and other payors 36 35

The mix of gross patient service revenue from significant third-party payors as of September 30, 2015 and 2014 was as follows:

  Medicare 48% 48% Medicaid 21 19 Private pay 2 3 Commercial and other payors 29 30

Significant changes in payor mix, business office operations, economic conditions, or trends in federal and state governmental healthcare coverage could affect the Hospitals’ collection of accounts receivable, cash flows, and results of operations. The Hospitals’ patient responsibility write-offs were $28,824 and $37,139 in fiscal 2015 and 2014, respectively. The Hospital also maintains an allowance for doubtful accounts for third-party payors, which has been determined based on historical bad debt expense on those account types. As a result of the actual write-offs and estimated uncollectible amounts, total bad debt expense, which is a reduction in net patient service revenue, for the years ended September 30, 2015 and 2014 was $26,595 and $26,416, respectively.

8 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

(d) SuppliesInventory Supplies inventory is stated at the lower of cost (as determined by the first-in, first-out method) or market.

(e) AssetsLimitedastoUse Assets limited as to use consist of investments designated by the Corporation’s Board of Trustees (the Board) for future capital acquisitions and other purposes, investments held by the Foundations whose use has been restricted by donors, and assets held by a trustee under a bond indenture agreement (notes 4 and 11). Funds held by trustee are set aside in separate trust accounts for future capital projects and debt service reserve funds.

Investments in equity and debt securities are reported at fair value in the accompanying consolidated balance sheets. The fair values are based on quoted market prices at the reporting date for those or similar investments. Investment income or loss (including realized gains and losses on investments, unrealized gains and losses on investments for which the Corporation has designated the fair value option, interest, and dividends) is included in the excess of revenue over expenses unless the income or loss is restricted by the donor or law. All of the Corporation’s investments are classified as other-than-trading securities at September 30, 2015 and 2014. The Corporation has elected the fair value option under FASB ASC 825-10 Financial for certain of its investment securities as discussed at note 11. Unrestricted unrealized gains and losses on other-than-trading investments for which the fair value option has not been elected are excluded from excess of revenues over expenses unless they are considered other-than-temporarily impaired.

For each of the investment categories for which the fair value option has not been elected, the Corporation continually monitors investment performance and the potential need for recording an impairment on investments. A number of criteria are considered during this process including, but not limited to: whether the Corporation intends to sell the security; the current fair value as compared to cost of the security; the length of time the security’s fair value has been below cost; the likelihood that the Corporation will be required to sell the security before recovery of its cost basis; objective information supporting recovery in a reasonable period of time; specific credit issues related to the issuer; and current economic conditions.

For debt securities that the Corporation does not intend to sell and more likely than not would not be required to sell prior to recovery of the cost basis, the Corporation recognizes other-than-temporary losses in accordance with the provisions of the ASC 320 –. The amount of the other-than-temporary loss is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other changes in net assets. For the fiscal years ended September 30, 2015 and 2014, the Corporation recognized no other-than-temporary losses.

The Corporation holds investments in corporate bonds, fixed income mutual funds, U.S. Treasury and government agency securities, and equity mutual funds (note 11). Management believes that the 9 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

Corporation’s credit risk with respect to these investments is minimized due to the diversity of the individual investments and the financial strength of the entities, which have issued the securities or instruments. However, due to changes in economic conditions, interest rates, and common stock prices, the market value of the Corporation’s investments can be volatile. Consequently, the fair value of the Corporation’s investments could change significantly in the near term as a result of such volatility.

(f) PropertyandEquipment Property and equipment (including acquisitions of rental and other property held for future development) are stated at cost. Donated property and equipment are recorded at estimated fair value on the date of donation. Improvements and replacements of property and equipment are capitalized. Routine maintenance and repairs are charged to expense as incurred.

Depreciation is computed using the straight-line method over the shorter of the lease term or estimated useful life of each class of depreciable asset. The estimated useful life of buildings and improvements is 5 to 50 years while the estimated useful life of equipment is 2 to 20 years. Net interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets.

(g) TemporarilyandPermanentlyRestrictedNetAssets Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Permanently restricted net assets are those whose use has been restricted by donors to be maintained in perpetuity.

(h) ConsolidatedStatementsofOperations Excess of revenues over expenses from operations includes amounts generated from direct patient care, other revenue related to the operation of the Hospitals’ facilities, unrestricted contributions received by the Foundations, and gains (losses) on disposals of property and equipment. Other activities that result in income or expenses unrelated to the Hospitals’ and the Foundations’ primary missions are excluded from excess of revenues over expenses from operations. Other income (loss) includes net investment income; change in unrealized gains and losses on investment securities for which the fair value option is elected; any other-than-temporary impairment losses on investment securities; rental income and expenses related to nonoperating real estate properties; gain (loss) on disposals of rental and other property held for future development; loss on extinguishment of debt; and other incidental transactions.

The consolidated statements of operations include the excess of revenue over expenses. Changes in unrestricted net assets that are excluded from the excess of revenue over expenses, consistent with industry practice, include the change in net unrealized gains (losses) on securities for which the fair value option was not elected; change in net benefit obligation related to postretirement benefits; change in fair value of interest rate swap agreement for an effective hedging relationship; contributions of long-lived assets (including assets acquired using contributions, which, by donor restriction, are to be used for the purpose of acquiring such assets); and discontinued operations.

10 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

(i) NetPatientServiceRevenue Services are rendered to patients under contractual arrangements with Medicaid and Medicare programs and various other payors including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), which provide for payment or reimbursement at amounts different from established rates. Contractual adjustments represent the difference between established rates for services and amounts reimbursed by these third-party payors.

The Medicare program reimburses Salem at prospectively determined rates for the majority of inpatient and outpatient services rendered to patients, primarily on the basis of Medicare severity diagnosis-related groups (MS-DRGs) and Ambulatory Payment Classification Groups (APCs), respectively. West Valley is a “critical access hospital” (CAH) for Medicare program purposes. As a CAH, West Valley may not operate more than 25 beds and the average length of stay for acute care patients may not exceed 96 hours. The Medicare and Medicaid program reimburses West Valley on the basis of its current allowable costs. When paid under cost reimbursement, the Hospitals are reimbursed at an interim rate with final settlement determined after submission of annual cost reports and audits thereof by the fiscal intermediaries, subjecting the Hospitals to retroactive settlements for prior year cost reports. Actual settlements historically approximated management’s expectations.

Salem’s cost reports have both been audited and final settled by the Medicare fiscal intermediaries through September 30, 2013 and the Medicaid fiscal intermediaries through September 30, 2012. West Valley’s cost reports have both been audited and final settled by the Medicare fiscal intermediaries through September 30, 2013 and the Medicaid fiscal intermediaries through September 30, 2011.

The Hospitals have also entered into payment agreements with certain commercial insurance carriers, HMOs, and PPOs to provide medical services to subscribing participants. The basis for payment to the Hospitals under these agreements includes prospectively determined rates per discharge, actual charges, and fee schedules.

(j) ContributionsReceived Unconditional promises to give cash and other assets to the Corporation are recorded as other revenues and other receivables at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received or at which point the conditions have been substantially met. Gifts are reported as either temporarily or permanently restricted contributions if they are received with donor stipulations that limit the use of the donated assets. When the terms of a donor restriction are met, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations and consolidated statements of changes in net assets as net assets released from restrictions.

Contributions of long-lived assets such as property and equipment are reported as unrestricted, and are excluded from the excess of revenue over expenses. Contributions of long-lived assets with explicit restrictions that specify how the assets are to be used and contributions of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the Corporation reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. 11 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

SHF is a beneficiary under various wills and trust agreements, the total realizable amounts of which are not presently estimable. SHF’s share of such bequests is recorded when the probate court has declared the testamentary instrument valid and the proceeds are measurable.

(k) IncomeTaxes The Corporation, Salem, West Valley, SHF, WVHF, WVPS, and WVIC are tax-exempt organizations pursuant to Internal Revenue Code (IRC) Section 501(c)(3). As such, only unrelated business income is subject to federal or state income taxes. The Corporation accounts for uncertainty in income taxes in accordance with FASB ASC 740-10, . Management has not recorded a provision as unrelated business income, if any, is immaterial to the consolidated financial statements.

Accounting principles generally accepted in the United States of America require the Corporation to evaluate tax positions taken by the Corporation and recognize a tax liability (or asset) if the Corporation has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. Management has analyzed tax positions taken by the Corporation and has concluded that as of September 30, 2015 there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements. The Corporation is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Corporation management believes it is no longer subject to income tax examinations for years prior to fiscal year 2009.

(l) Reclassifications Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to current period presentation. These reclassifications had no material effect on the results of operations or financial position for any period presented.

12 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

 %HQHILWVWRWKH&RPPXQLW\ The Corporation provides services to the community both for people in need and to enhance the health status of the broader community as part of its charitable mission.

(a) ServicesforPeopleinNeed The following represents the estimated cost of providing certain services to the community, along with a description of selected activities sponsored by the Hospitals during 2015 and 2014:

In support of its mission, the Hospitals voluntarily provide medically necessary patient care services that are discounted or free of charge to persons who have insufficient resources and/or who are uninsured. The criteria for charity care are determined based on eligibility for insurance coverage, household income, qualified assets, catastrophic medical events, or other information supporting a patient’s inability to pay for services provided. Specifically, the Hospitals provide an uninsured discount of 15% to all uninsured patients. Further discounts are available for patients, on a sliding scale, whose household income is less than 400% of the federal poverty level or roughly $97 for a family of four in Salem, Oregon. For patients whose household income is at or below 200% of the federal poverty level, a full subsidy is available. In addition to the household income criteria, the 13 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

patients’ qualified assets (e.g., assets and investments excluding patient’s primary residence), and other catastrophic or economic circumstances are considered in determining eligibility for charity care.

In addition to charity care, the Hospitals provide services under various states’ Medicaid programs for financially needy patients and to Medicare beneficiaries. The aggregate cost of providing services to Medicaid and Medicare beneficiaries exceeds the aggregate reimbursements from these programs.

The cost of services provided to beneficiaries of the Medicaid and Medicare programs and cost of charity care is estimated based on the relationship of costs (excluding the provision for doubtful accounts and those costs associated with medical education, research, community health services, and other contributions) to billed charges for Medicaid and Medicare patient accounts and for patient charges written off as charity deductions.

The Hospitals also employ financial counselors and social workers, who assist patients in obtaining coverage for their healthcare needs. This includes assistance with workers compensation, motor vehicle accident policies, COBRA, veterans’ assistance, and public assistance programs, such as Medicaid. During 2015 and 2014, the Corporation assisted patients many of which received coverage through a third party, reducing the patients’ financial responsibility. The costs associated with this program were $318 and $300 in 2015 and 2014, respectively.

(b) BenefitstoCommunity Community health services include classes provided to the community at minimal or no cost, health education for children and parents with young families, resource centers, support groups, health screenings, senior wellness, volunteer programs, caregivers respite, and support for parish nursing programs.

Community benefit activities include activities that develop community health programs and partnerships.

Donations to charitable organizations include direct support provided to community organizations through cash or in-kind donations that support organizations’ missions of supporting health and human services, civic and community causes, and business development efforts.

In-kind contributions provided by the Corporation include the following: facility space, staff availability for training and education opportunities, supplies, and professional services in collaboration with charitable, educational, and government organizations throughout the community.

(c) OtherBenefits In furtherance of its mission, the Corporation also commits significant time and resources to endeavors and critical services that meet unfilled community needs. Many of these activities are sponsored with the knowledge that they will not be self-supporting or financially viable. Such programs include hospice, mental and behavioral health, primary care clinics in underserved neighborhoods, free patient transportation, lodging, meals, and medications for transient patients when needed, participation in

14 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

blood drives, and the provision of educational opportunities for students interested in pursuing medical-related careers.

The Corporation also provides additional benefits to the community through the advocacy of community service by employees. Employees of the Corporation serve numerous organizations through board representation, membership in associations, and other related activities.

 $VVHWV/LPLWHGDVWR8VH Assets limited as to use consisted of the following at September 30, 2015 and 2014:

  Board designated for capital acquisitions and other purposes: Cash and short-term fixed income $ 17,121 51,791 Low duration fixed income 77,236 100,093 Core fixed income mutual funds 168,211 113,321 Domestic equity mutual funds 171,252 150,716 International equity mutual funds 49,524 39,890 Accrued interest receivable 402 454 Total internally designated for capital acquisitions and other purposes 483,746 456,265 Held by the Foundations: Cash and cash equivalents 74 117 Core fixed income mutual funds 2,614 2,581 Domestic equity mutual funds 3,942 3,998 International equity mutual funds 364 421 Accrued interest receivable 4 3 Total held by the Foundations 6,998 7,120 Held by trustee: Cash and cash equivalents 141 651 Low duration fixed income 5,952 11,007 Accrued interest receivable 13 20 Total held by trustee 6,106 11,678 Total assets limited as to use $ 496,850 475,063

Cash and short-term fixed income investments consist primarily of separately held U.S. Treasury and agency securities, corporate bonds, and money market funds with an average duration of one year or less.

Low duration fixed income investments consist primarily of separately held U.S. Treasury and agency securities, corporate bonds, money market funds, and fixed income focused mutual funds with an investment strategy to hold securities with an average duration of one to three years.

15 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

Core fixed income investments consist of fixed income mutual funds with investment strategies of holding securities with an average duration of three to five years.

Investment income (losses), net, consisted of the following for the years ended September 30, 2015 and 2014:

  Investment income: Interest and dividend income $ 8,706 9,099 Realized gains on sales of investments, net 11,174 3,961 Change in net unrealized (losses) gains on fair value option investments (20,869) 20,276 Investment expenses (201) (202) Investment (loss) income, net $ (1,190) 33,134 Changes in net assets: Change in net unrealized gain (loss) on other-than-trading securities $ (3,358) 1,191

The following tables summarize the Corporation’s investments that are not accounted for under the fair value option and had unrealized losses as of September 30, 2015:

*URVV XQUHDOL]HG )RUOHVVWKDQPRQWKV )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 3,380 3,435 55 Fixed income mutual funds 172,269 175,203 2,934 U.S. Treasury securities 97 103 6 U.S. government agency securities 59 59 — Total $ 175,805 178,800 2,995 *URVV XQUHDOL]HG )RUPRQWKVRUORQJHU )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 300 307 7 Fixed income mutual funds 38,848 39,202 354 U.S. government agency securities 5,951 5,990 39 Total $ 45,099 45,499 400

16 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

*URVV XQUHDOL]HG 7RWDO )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 3,680 3,742 62 Fixed income mutual funds 211,117 214,405 3,288 U.S. Treasury securities 97 103 6 U.S. government agency securities 6,010 6,049 39 $ 220,904 224,299 3,395

The following tables summarize the Corporation’s investments that are not accounted for under the fair value option and had unrealized losses as of September 30, 2014:

*URVV XQUHDOL]HG )RUOHVVWKDQPRQWKV )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 8,195 8,274 79 Fixed income mutual funds 138,941 139,243 302 U.S. Treasury securities 10,505 10,523 18 U.S. government agency securities 10,053 10,111 58 Total $ 167,694 168,151 457 *URVV XQUHDOL]HG )RUPRQWKVRUORQJHU )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 1,558 1,581 23 U.S. government agency securities 7,686 7,848 162 Total $ 9,244 9,429 185 *URVV XQUHDOL]HG 7RWDO )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 9,753 9,855 102 Fixed income mutual funds 138,941 139,243 302 U.S. Treasury securities 10,505 10,523 18 U.S. government agency securities 17,739 17,959 220 $ 176,938 177,580 642

The individual securities included in the above tables, which have unrealized losses, have been assessed by management and do not require an adjustment for other-than-temporary impairment because the Corporation does not intend to sell and do not believe they would be required to sell the securities prior to maturity or

17 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

market recovery. Those unrealized losses were primarily driven by changes in interest rates and overall market conditions.

 3URSHUW\DQG(TXLSPHQW1HW Property and equipment consisted of the following at September 30, 2015 and 2014:

  Land and improvements $ 42,933 42,925 Buildings and improvements 532,211 511,665 Equipment 339,497 321,214 914,641 875,804 Less accumulated depreciation (487,017) (450,281) 427,624 425,523 Construction in progress 27,296 19,903 Property and equipment, net $ 454,920 445,426

 /RQJ7HUP'HEW Long-term debt consisted of the following at September 30, 2015 and 2014:

  Hospital Revenue Bonds, Series 2006A; payable in installments from $1,780 to $17,040 beginning in 2014 through 2036; interest at rates ranging from 4.50% to 5.00% $ 113,823 115,736 Hospital Revenue Bonds, Series 2008A; payable in installments from $760 to $7,900 beginning in 2015 through 2023; interest rates ranging from 5.25% to 5.75% 39,417 46,497 Hospital Revenue Bonds, Series 2008B; payable in installments from $3,575 to $6,000 beginning in 2019 through 2034; interest at rates resetting every 7 days; the rates were 0.02% and 0.05% as of September 30, 2015 and 2014, respectively 75,000 75,000

18 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

  Hospital Revenue Bonds, Series 2013A; payable in installments from $420 to $2,935 beginning in 2014 through 2036; interest rate is 2.30% through June 1, 2020 $ 34,155 34,580 Hospital Revenue Bonds, Series 2013B; payable in installments from $415 to $2,935 beginning in 2014 through 2036; interest rate is 2.57% through June 1, 2020 34,160 34,585 Other 340 551 296,895 306,949 Less current portion (5,661) (10,054) $ 291,234 296,895

In November 2006, Salem entered into a Loan Agreement (the 2006 Agreement) with the Authority whereby the Authority issued $120,000 of paramount fixed-rate tax-exempt Revenue Bonds and $38,025 of paramount tax-exempt variable rate Revenue and Refunding Bonds (Salem Hospital Project), Series 2006A (2006A Bonds) and Series 2006B (2006B Bonds) (collectively, the 2006 Bonds), respectively. The proceeds from Series 2006A were used to finance various capital projects at Salem. The proceeds from Series 2006B were used to advance refund $36,175 of remaining Series 1998 Bonds. In April 2008, Salem purchased the 2006B Bonds in lieu of redemption and defeased the entire amount of the bonds. This transaction was financed by a nonrevolving taxable line of credit discussed below. The 2006A Bonds were issued at a premium in the amount of $3,123, of which $1,230 and $1,097 has been cumulatively amortized and recorded as interest expense in the accompanying consolidated statements of operations for the years ended September 30, 2015 and 2014, respectively. The remaining amount of unamortized premium included in long-term debt was $1,893 and $2,026 as of September 30, 2015 and 2014, respectively.

In October 2008, Salem entered into a Loan Agreement (the October 2008 Agreement) with the Authority, whereby the Authority issued $59,710 of par amount fixed-rate tax-exempt Revenue Bonds, Series 2008A (the 2008A Bonds) with a final maturity of 2023. The proceeds from 2008A Bonds were used in part to refinance a portion of a nonrevolving line of credit that existed at that time, to finance various capital projects at Salem, and the remaining $5,971 was deposited into a debt service reserve fund. The 2008A Bonds were issued at a premium of $778, of which $545 and $481 have been cumulatively amortized and recorded as interest expense in the accompanying consolidated statements of operations for the fiscal years ended September 30, 2015 and 2014, respectively. The remaining unamortized premium included in long-term debt was $233 and $297 as of September 30, 2015 and 2014, respectively. The 2008A Bonds maturing in 2023 are subject to optional redemption on or before 2018; the bonds maturing prior to 2023 are not subject to this optional redemption. The 2008A Bonds are subject to annual mandatory sinking fund redemption prior to maturity, beginning in 2015 ranging from $760 to $7,900, to special sinking fund redemption and to optional and mandatory tender for purchase and remarketing in certain circumstances as described in the October 2008 Agreement.

In November 2008, Salem entered into a Loan Agreement (the November 2008 Agreement) with the Authority, whereby the Authority issued $75,000 of par amount variable-rate tax-exempt Revenue Bonds

19 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

(the 2008B Bonds) with a final maturity of 2034 and $50,000 of par amount variable-rate tax-exempt Revenue Bonds (the 2008C Bonds) with a final maturity of 2036. The 2008C Bonds were refinanced in 2014. The 2008B Bonds bear interest at rates that change weekly. The combined proceeds from the 2008B and 2008C Bonds were used to fully refund the remaining balance on a nonrevolving line of credit that existed at that time and to finance various capital projects at Salem. The Series 2008B Bonds are subject to purchase from time to time at the option of the owners thereof and are required to be purchased in certain events. In order to assure the availability of funds for the payment of the purchase price, Salem has provided for the purchase of such 2008B Bonds under a direct-pay letter-of-credit agreement (the Letter of Credit). The maximum commitment under this Letter of Credit is $76,048 for the 2008B Bonds. The 2008B Bonds are subject to annual mandatory sinking fund redemptions beginning in 2019 ranging from $3,575 to $6,000. The 2008B Bonds are subject to optional and special redemption prior to maturity at the direction of Salem under certain circumstances as described in the November 2008 Agreement. The 2008B Letter of Credit has an 18-month repayment term and expires in April 2018. A direct-pay letter-of-credit agreement (2008C Letter of Credit) which provided for the purchase of the 2008C Bonds was terminated in 2014 upon refinance of the 2008C Bonds.

In June 2013, Salem entered into a Loan Agreement (the June 2013 Agreement) with the Authority, whereby the Authority privately placed issuances to two banks a total of $70,000 of par amount fixed rate tax exempt Revenue Bonds in the amounts of $35,000 and $35,000 (the 2013A and 2013B Bonds) with final maturities of 2036 and 2036, respectively. The proceeds of the 2013A and 2013B Bonds were used in part to refinance the 2008C Bonds and to finance various capital projects at Salem. The 2013A and 2013B Bonds were issued at par value with stated interest rates of 2.30% and 2.57%, respectively that are fixed under an initial rate period until June 1, 2020. Subsequent to this initial rate period, the bonds are convertible to one of several different fixed or variable interest rate options based on market conditions at that time. The bonds are subject to combined annual mandatory sinking fund redemptions beginning in 2015 ranging from $835 to $5,870.

Additionally, Salem entered into an interest rate management transaction in November 2004 to hedge the 2004B Bonds. In 2008, Salem amended this swap to be a cash flow hedge of the 2008B Variable Rate Bonds. The swap agreement maintains the total notional amount of $75,000 and converts the variable interest rate to a fixed rate of approximately 3.541%. See note 7 for further information related to Salem’s interest management transactions.

Scheduled principal repayments of long-term debt are as follows:

5HYHQXH ERQGV 2WKHU 7RWDO 2016 $ 5,415 60 5,475 2017 9,645 64 9,709 2018 10,870 69 10,939 2019 11,270 74 11,344 2020 11,735 73 11,808 Thereafter 245,495 — 245,495 $ 294,430 340 294,770

20 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

Interest costs, including amortization of bond premium, in the amounts of $12,837 and $13,018 were charged to operations during the years ended September 30, 2015 and 2014, respectively.

 'HULYDWLYH,QVWUXPHQWVDQG+HGJLQJ$FWLYLWLHV Salem has an interest-rate-related derivative instrument to manage its exposure on its debt instruments. The Corporation does not enter into derivative instruments for any purpose other than cash flow hedging purposes. The Corporation follows FASB ASC 815-10, . ASC 815-10 provides accounting and reporting standards for derivative instruments and hedging activities and requires that Salem recognize these as either assets or liabilities in the consolidated balance sheets and measure them at fair value.

In 2008, Salem entered into an interest rate swap transaction to effectively convert the 2008B variable rate debt to a fixed rate of 3.541% through August 15, 2034. The interest rate swap has a notional amount of $75,000. Salem evaluated the interest rate swap transaction and determined that it met the criteria to be classified as a cash flow hedge and the changes in fair value have been recorded as a change in unrestricted net assets in the accompanying consolidated financial statements.

The interest rate swap transaction allows Salem to terminate the financial instrument by requiring full settlement of any interest or termination value, upon five days’ written notice given to Salem’s bond insurer and counterparty. The fair value of the interest rate swap agreement is determined by or based on the spread in interest rates with consideration of credit risk to both Salem and its counterparty. The estimated fair value of the interest rate swap at September 30, 2015 and 2014 was a liability of $15,992 and $12,821, respectively. Salem was not required to post collateral against the liability of its interest rate swap during the year ended September 30, 2015 or 2014 and has not been required to post any collateral to date for the life of the swap.

 7HPSRUDULO\5HVWULFWHG1HW$VVHWV Temporarily restricted net assets were restricted for the following purposes at September 30, 2015 and 2014:

  Acquisition or construction of property and equipment for the Hospitals $ 420 434 Specific programs of the Hospitals 2,263 2,143 Scholarships 562 557 Other 234 282 $ 3,479 3,416

21 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

 5HWLUHPHQWDQG3RVWUHWLUHPHQW3ODQV (a) DefinedContributionRetirementPlan The Hospitals have a contributory, defined contribution retirement plan (the Retirement Plan) covering substantially all full-time employees. All eligible employees are allowed to contribute to the Retirement Plan on the first day of the month following their date of hire. The Hospitals contribute 5.5% to 8.5% of participating employees’ annual compensation to the Retirement Plan. To receive the benefit of the Hospitals’ contributions, employees must have one year or more of service at one of the Hospitals and contribute at least 1.0% of their annual compensation to the Retirement Plan. Retirement Plan costs were $14,269 and $13,203 for the years ended September 30, 2015 and 2014, respectively, and are included in labor and benefits in the accompanying consolidated statements of operations.

(b) PostretirementHealthcarePlan The Hospitals also sponsor a postretirement healthcare plan (the Postretirement Plan) that provides healthcare benefits to certain retirees and their dependents until the retirees reach the age of Medicare eligibility. Generally, retirees are eligible to participate in the Postretirement Plan if they retire from one of the Hospitals at age 55 years or older with 10 years of service. Retirees can convert 25% of their unused extended illness bank (EIB) balance to an equivalent dollar amount, which may then be used to purchase medical, dental, or vision coverage for the retiree and/or dependents. Any unused balance will be forfeited when the retiree reaches the age of Medicare eligibility.

The Corporation accounts for the Postretirement Plan in accordance with FASB ASC 715, – which requires the employer to recognize the overfunded or underfunded status of a plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through changes in unrestricted net assets. Under ASC 715 –, the measurement of the funded status is the difference between the fair value of the plan assets compared to the benefit obligation of the plan. ASC 715 also required the Corporation to recognize in unrestricted net assets any unrecognized net actuarial gains or losses and any unrecognized prior service costs or credits as they arise and disclose in the notes to the consolidated financial statements additional information about the effect on net periodic benefit cost on the next fiscal year that arises from the delayed recognition of these items. The Corporation’s measurement date for plan assets and benefit obligation is September 30. For the years ended September 30, 2015 and 2014 the Corporation utilized the RP-2014 and RP-2000 mortality tables, respectively, for estimating the actuarial values.

22 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

The accrued liability for postretirement benefits at September 30, 2015 and 2014 was as follows:

  Change in benefit obligation: Benefit obligation at beginning of year $ 7,850 7,594 Service cost 318 314 Interest cost 229 257 Participants’ contributions 464 670 Actuarial loss (gain) (957) 169 Benefits paid (912) (1,154) Benefit obligation at end of year $ 6,992 7,850 Change in plan assets: Fair value of plan assets at beginning of year $ — — The Hospitals’ contributions 448 484 Participants’ contributions 464 670 Benefits paid (912) (1,154) Fair value of plan assets at end of year $ — —

A reconciliation of the Postretirement Plan’s funded status at September 30, 2015 and 2014 to the Hospitals’ accrued postretirement healthcare benefits at September 30, 2015 and 2014 was as follows:

  Funded status at September 30, 2015 and 2014 $(6,992) (7,850) Current portion of accrued postretirement healthcare benefits 457 448 Long-term portion of accrued postretirement healthcare benefits at September 30 $ (6,535) (7,402)

The current portion of accrued postretirement healthcare benefits is included in accrued liabilities in the accompanying consolidated balance sheets.

23 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

The components of the Hospitals’ net periodic postretirement benefit cost included in labor and benefits in the accompanying consolidated statements of operations for the years ended September 30, 2015 and 2014 were as follows:

  Service cost $318 314 Interest cost 229 257 Amortization of prior service credit (539) (539) Net periodic postretirement benefit cost $ 8 32

Gains accumulated in unrestricted net assets in the accompanying consolidated statements of changes of net assets through the years ended September 30, 2015 and 2014 were $1,343 and $925, respectively. The components of the Hospitals’ other changes in plan assets and benefit obligations recognized in unrestricted net assets in the accompanying consolidated statements of changes of net assets for the years ended September 30, 2015 and 2014 were as follows:

  Net loss (gain) $ (957) 169 Amortization of prior service cost 539 539 Total recognized in unrestricted net assets $ (418) 708

Weighted average assumptions used to determine benefit obligations for 2015 and 2014 were as follows:   Discount rate 3.00% 3.00% Rate of compensation increase 3.75 3.75

For actuarial measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2015 through 2018. Thereafter, the rate was assumed to decrease by approximately 0.5% percentage point on an annual basis to 5.5% in 2022 and then decrease gradually to 3.84%.

24 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

Assumed healthcare cost trend rates have a significant effect on the amounts reported for postretirement healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects for the years ended September 30, 2015 and 2014:

  One-percentage-point increase: Increase in total of service and interest cost components $ 43 47 Increase in postretirement benefit obligation 395 487 One-percentage-point decrease: Decrease in total of service and interest cost components $ (39) (43) Decrease in postretirement benefit obligation (370) (454)

Benefit payments funded by Salem Health, which reflect future service, as appropriate, are expected to be paid as follows for the years ending September 30: 2016 $457 2017 476 2018 562 2019 631 2020 673 2021–2025 3,761

These estimates are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.

 )XQFWLRQDO&ODVVLILFDWLRQRI([SHQVHV Expenses on a functional basis for the years ended September 30, 2015 and 2014 were as follows:

  Healthcare services $ 569,310 533,420 General and administrative 70,447 69,373 $ 639,757 602,793

25 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

 )DLU9DOXH0HDVXUHPHQWVDQGWKH)DLU9DOXH2SWLRQ (a) FairValueofFinancialInstruments The carrying amounts for each class of financial instrument noted below are included in the consolidated balance sheets under the indicated captions.

The fair values of the financial instruments as discussed below as of September 30, 2015 and 2014 represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at the measurement date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Corporation’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Corporation based on the best information available in the circumstances.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments: ; ; $ ; ; ; ; : The carrying value of these financial instruments is equal to the carrying amounts, at face value or cost plus accrued interest, and approximates fair value because of the short maturity of these instruments.

%: All equity securities are classified as available-for-sale and measured using quoted market prices at the reporting date multiplied by the quantity held. Debt securities classified as available-for-sale are measured using quoted market prices multiplied by the quantity held when quoted market prices are available. If quoted market prices for those debt securities are not available, the fair value is determined using matrix pricing, which is based on quoted prices for securities with similar coupons, ratings, and maturities, rather than on specific bids and offers for the designated security.

&: The carrying value of the interest rate swap agreement is equal to the estimated fair value of the agreement. The fair value of interest rate swap is determined using pricing models developed based on the LIBOR swap rate and other observable market data. The value was determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and Salem.

'$: The carrying amount and fair value of long-term debt were $296,895 and $300,866 respectively, as of September 30, 2015, and $306,949 and $314,194, respectively, as of September 30, 2014. The fair value of the Corporation’s long-term debt is measured using quoted offered-side prices when quoted market prices are available. If quoted market prices are not available, the estimated fair value is determined by discounting the future cash flows of each instrument at rates that reflect, among other things, market interest rates and the Corporation’s credit standing. In determining an appropriate spread to reflect its credit standing, the Corporation considers credit default swap spreads, bond yields of other long-term debt offered by the Corporation, and interest rates currently offered to the 26 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

Corporation for similar debt instruments of comparable maturities by the Corporation’s bankers as well as other banks that regularly compete to provide financing to the Corporation.

(b) FairValueHierarchy FASB ASC 820-10, ()* establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is significant to the fair value measurement in its entirety. There were no reclassification of securities between Level 1 and Level 2 during the fiscal years ended September 30, 2015 and 2014.

The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value and items for which the fair value option has been elected) at September 30, 2015:

)DLUYDOXHPHDVXUHPHQWVDW UHSRUWLQJGDWHXVLQJ 4XRWHGSULFHV LQDFWLYH 6LJQLILFDQW PDUNHWVIRU RWKHU 6LJQLILFDQW LGHQWLFDO REVHUYDEOH XQREVHUYDEOH 6HSWHPEHU DVVHWV LQSXWV LQSXWV  /HYHO /HYHO /HYHO Assets: Corporate bonds $ 5,350 — 5,350 — Fixed income mutual funds 237,202 237,202 — — U.S. Treasury securities 3,119 — 3,119 — Equity mutual funds 225,082 225,082 — — U.S. government agency — securities 8,341 — 8,341 — Total $ 479,094 462,284 16,810 —

27 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

)DLUYDOXHPHDVXUHPHQWVDW UHSRUWLQJGDWHXVLQJ 4XRWHGSULFHV LQDFWLYH 6LJQLILFDQW PDUNHWVIRU RWKHU 6LJQLILFDQW LGHQWLFDO REVHUYDEOH XQREVHUYDEOH 6HSWHPEHU DVVHWV LQSXWV LQSXWV  /HYHO /HYHO /HYHO Liabilities: Interest rate swap $ 15,992 — 15,992 — Total $ 15,992 — 15,992 —

The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value and items for which the fair value option has been elected) at September 30, 2014:

)DLUYDOXHPHDVXUHPHQWVDW UHSRUWLQJGDWHXVLQJ 4XRWHGSULFHV LQDFWLYH 6LJQLILFDQW PDUNHWVIRU RWKHU 6LJQLILFDQW LGHQWLFDO REVHUYDEOH XQREVHUYDEOH 6HSWHPEHU DVVHWV LQSXWV LQSXWV  /HYHO /HYHO /HYHO Assets: Corporate bonds $ 24,299 — 24,299 — Fixed income mutual funds 192,857 192,857 — — U.S. Treasury securities 14,309 — 14,309 — Equity mutual funds 195,024 195,024 — — U.S. government agency — securities 21,462 — 21,462 — Total $ 447,951 387,881 60,070 —

Liabilities: Interest rate swap $ 12,821 — 12,821 — Total $ 12,821 — 12,821 —

28 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

 &RPPLWPHQWVDQG&RQWLQJHQFLHV (a) GeneralandProfessionalLiabilityInsurance On a claims-made basis, WVIC provides excess insurance coverage up to a $1,000 self-insured retention limit per occurrence and $6,000 annual aggregate limit for healthcare professional liability (the $1,000/$6,000 limits) for Salem effective November 1, 2004. WVIC provided insurance coverage for West Valley between May 1, 2005 and September 30, 2007 and for the fiscal years ended September 30, 2014 and 2015. In excess of the $1,000/$6,000 limits, the Hospitals annually purchase reinsurance coverage for claims up to $34,000 in aggregate on a claims-made basis. Reinsurance contracts do not relieve the Corporation from its obligations to claimants. Failure of reinsurers to honor their obligations could result in losses to the Corporation. The Corporation evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurer to manage its exposure to significant losses from reinsurer insolvencies.

General and professional liability costs are accrued based upon an actuarial determination with estimated future medical malpractice losses recorded at the expected, undiscounted level. The Corporation has recorded estimated liabilities for incurred but not reported medical malpractice claims and for deductibles on reported claims aggregating $6,991 and $11,237 as of September 30, 2015 and 2014, respectively. The estimated liabilities for incurred but not reported medical claims are recorded on the Hospitals’ books. WVIC carries the estimated liabilities for deductibles on reported claims. Management believes that these estimated liabilities are adequate; however, the establishment of estimated liabilities for incurred but not reported medical malpractice claims and for deductibles on reported claims is an inherently uncertain process, and there can be no assurance that currently established reserves will prove adequate to cover actual ultimate expenses. Subsequent actual experience could result in reserves being too high or too low, which could positively or negatively impact operations in future periods.

The Corporation adheres to FASB ASU No. 2010-24, (Topic 954): + . ASU No. 2010-24 requires claim liabilities to be reported without consideration of insurance recoveries and receivables for insurance recoveries to be reported separately subject to a valuation allowance as appropriate. In accordance with ASU No. 2010-24, the Corporation recorded an asset for insurance recoveries receivable and estimated liabilities, which are not net of any estimated recoveries in amount, of $250 and $5,500, as of September 30, 2015 and 2014, respectively. The insurance recovery receivable and insured claims liability are included in other receivables and accounts payable in the accompanying consolidated balance sheets. No valuation allowance was recorded related to reinsurance receivables as of September 30, 2015 or 2014.

(b) Self­InsuredEmployeeBenefits The Corporation is self-insured for employee medical and dental claims. Claims are accrued as the incidents become known. The Corporation has recorded an accrual for the estimated claims including estimates of the ultimate costs for both reported claims and claims incurred but not reported of $2,303 and $2,630 as of September 30, 2015 and 2014, respectively. Management believes that these amounts, 29 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

which have been included within other accrued liabilities in the accompanying consolidated balance sheets, are adequate to cover estimated employee medical and dental claims.

(c) RiskManagement In the ordinary course of business, the Corporation is exposed to various risks of loss from torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; and natural disasters. Management believes that adequate commercial insurance coverage has been purchased for claims arising from such matters. Settled claims have not exceeded this commercial coverage for the years ended September 30, 2015 and 2014. The Corporation is self-insured for workers’ compensation claims. The Corporation has recorded estimated liabilities for claims in the amount of $2,383 and $1,621 as of September 30, 2015 and 2014, respectively.

(d) RegulationandLitigation The healthcare industry is governed by various laws and regulations of federal, state, and local governments. These laws and regulations are subject to ongoing government review and interpretation, and include matters such as licensure, accreditation, reimbursement for patient services, and referrals for Medicare and Medicaid beneficiaries. Compliance with these laws and regulations is required for participation in government healthcare programs and have become more complicated in recent years due to changes resulting from the Health Reform Law and the introduction of health benefit exchanges and coordinated care organizations into the local marketplace. Certain governmental agencies routinely investigate and pursue allegations concerning possible overpayments resulting from violation of fraud and abuse statutes by healthcare providers. These types of investigations may result in settlements involving fines and penalties as well as repayment of improper reimbursement. The Corporation has implemented procedures for monitoring and enforcing compliance with laws and regulations and is not aware of significant instances of noncompliance.

(e) OperatingLeases The Corporation has certain noncancelable operating leases for office space and equipment. The Corporation recorded lease expense of $2,305 and $2,156, which is included in purchased services and other in the consolidated statements of operations for the years ended September 30, 2015 and 2014, respectively.

The following is a schedule of future minimum payments required under the Corporation’s operating leases at September 30, 2015: 2016 $ 1,659 2017 1,492 2018 1,362 2019 1,077 2020 1,042 Thereafter 2,250 $ 8,882

30 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

 ,QYHVWPHQWVLQ+HDOWK5HODWHG$FWLYLWLHV The following is a summary of the Corporation’s related-party investments which are included in other noncurrent assets in the accompanying consolidated balance sheets at September 30, 2015 and 2014:

The Corporation’s share of ,QYHVWPHQWEDODQFHLQFOXGHG LQFRPH ORVVHV LQFOXGHGLQWKH LQWKHDFFRPSDQ\LQJ DFFRPSDQ\LQJFRQVROLGDWHG FRQVROLGDWHGEDODQFHVKHHWV VWDWHPHQWVRIRSHUDWLRQVIRU %DVLVRI 2ZQHUVKLS DVRI6HSWHPEHU WKH\HDUVHQGHG6HSWHPEHU (QWLW\ DFFRXQWLQJ SHUFHQWDJH    

PPP Equity method 0.25% $ 2,571 1,385 2,032 905 WVCH Cost method 18.20% 545 545 — — PHA Equity method 14.30% 1,099 666 (901) —

(a) PremierPurchasingPartners,L.P.(PPP) PPP is a California limited partnership formed to allow its partners to obtain discounts by pooling certain purchases. In January 2004, Salem purchased 9,518 shares of PPP for $75. Premier is a public company and a portion of the Corporation’s shares vest into Class B stock each year. The Corporation’s investment in PPP is accounted for under the equity method of accounting as the original shares purchased become vested and converted into Class B stock. Salem also receives periodic distributions of its share of PPP’s profits.

(b) WillametteValleyCommunityHealth(WVCH) In June 2012, the Corporation, on behalf of the Hospitals, cofounded WVCH with nine other providers of healthcare in Marion and Polk Counties. WVCH is an Oregon limited liability company and is certified by the Oregon Health Authority as a coordinated care organization (CCO). In 2011, the Oregon Legislature enacted House Bill 3650, which established the initial framework for the creation of CCOs with the State of Oregon. Section 26 of H.B. 3650 provides that CCOs will be responsible for providing fully integrated physical health services, chemical dependency, mental health services, and beginning dental health services. CCOs will initially provide the foregoing health services to Medicaid beneficiaries. The Corporation’s investment in WVCH is accounted for under the cost method.

(c) PopulationHealthAllianceofOregon,LLC(PHA) In August 2014, the Corporation cofounded PHA with eight other organizations. PHA was established with the intent to be a third-party provider of services to effectively manage the population health risks of its members. The Corporation’s investment in WVCH is accounted for under the equity method due to the significant influence the Corporation has with the organization.

31 (Continued) 6$/(0+($/7+ Notes to Consolidated Financial Statements September 30, 2015 and 2014 (In thousands)

 6XEVHTXHQW(YHQWV The Corporation evaluated subsequent events after the consolidated balance sheet date of September 30, 2015 through January 13, 2016, which was the date the consolidated financial statements were issued.

(a) SalemHealthAffiliationwithOHSU On November 19, 2015, Oregon Health and Science University (“OHSU”) and the Corporation completed execution of a Joint Management Agreement (the “Management Agreement”) dated October 1, 2015. The Management Agreement implements an affiliation between the two entities. Key elements of the affiliation and provisions of the Management Agreement include, but are not limited to, the following:

 Each of OHSU and the Corporation remain separate legal entities. OHSU and Salem Health have not joined each other’s master trust indenture obligated group and do not otherwise guarantee each other’s outstanding debt. OHSU maintains its responsibilities to manage and oversee activities related to its education and research mission.  OHSU Partners LLC (the “Management Company”) has been formed to manage and oversee the clinical functions and activities of OHSU and the Corporation, consistent with the terms and conditions of the Management Agreement. OHSU and the Corporation are the members of the Management Company.  The Management Company will manage the combined clinical enterprises of OHSU and the Corporation as a single economic entity by managing the combined revenues, expenses and net operating performance of the clinical enterprises as one health system with one bottom line.  The total, combined and consolidated net operating results of the integrated health system will be apportioned to OHSU and the Corporation consistent with an allocation method based on each party’s historical operating income.  The Corporation will change their fiscal year from ending in September to June, effective June 30, 2016. Therefore, fiscal year 2016 will be a short 9 month year.

32 6FKHGXOH, 6$/(0+($/7+ Supplemental Schedule – Consolidating Balance Sheet September 30, 2015 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO :HVW9DOOH\ +RVSLWDO 6DOHP ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +RVSLWDO )RXQGDWLRQ +RVSLWDO )RXQGDWLRQ +HDOWK &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current assets: Cash and cash equivalents $ 6,303 594 259 8 126 583 — — 7,873 Patient accounts receivable, net 71,163 — 2,847 — — — — — 74,010 Intercompany and other receivables 16,329 51 27 1 308 762 — (2,104) 15,374 Supplies inventory 6,153 — 369 — — — — — 6,522 Prepaid expense and other 7,619 — 109 — — — — — 7,728 Total current assets 107,567 645 3,611 9 434 1,345 — (2,104) 111,507 Due from West Valley Hospital, net 1,391 — — — — — — (1,391) — Due from Willamette Valley Professional Svc — — — — — — — — — Due from Salem Health 545 — — — — — — (545) — Assets limited as to use, net of current portion 474,160 6,755 — 243 — 15,692 — — 496,850 Property and equipment, net 441,518 12,483 — 917 — 2 — 454,920 Rental and other property held for future development, net 13,012 685 — — — — — — 13,697 Other noncurrent assets 19,960 — 487 — 545 — — (13,659) 7,333 Total assets $ 1,058,153 8,085 16,581 252 1,896 17,037 2 (17,699) 1,084,307

See accompanying independent auditors’ report.

33 (Continued) 6FKHGXOH, 6$/(0+($/7+ Supplemental Schedule – Consolidating Balance Sheet September 30, 2015 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO :HVW9DOOH\ +RVSLWDO 6DOHP ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +RVSLWDO )RXQGDWLRQ +RVSLWDO )RXQGDWLRQ +HDOWK &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current liabilities: Accounts and intercompany payable $ 33,939 576 973 2 545 521 — (1,886) 34,670 Construction accounts payable 2,611 — 18 — — — — — 2,629 Accrued liabilities: Payroll, payroll taxes, and withholdings 11,051 — 414 — — — — — 11,465 Paid time off 15,623 — 640 — — — — — 16,263 Other 8,422 — 187 — — — — (272) 8,337 Estimated third-party payor settlements, net 2,255 — 895 — — — — — 3,150 Current portion of long-term debt 5,661 — — — — — — — 5,661 Current portion of estimated medical malpractice claims liability 494 — 35 — — 1,135 — — 1,664 Total current liabilities 80,056 576 3,162 2 545 1,656 — (2,158) 83,839 Due to Salem Hospital, net — — 1,391 — — — — (1,391) — Long-term debt, net of current portion 291,234 — — — — — — — 291,234 Accrued postretirement healthcare benefits 6,247 — 288 — — — — — 6,535 Fair value of interest rate swap agreement 15,992 — — — — — — — 15,992 Other long-term liabilities 33 — 2 — — 752 — (751) 36 Estimated medical malpractice claims liability 1,582 — 110 — — 3,635 — — 5,327 Total liabilities 395,144 576 4,953 2 545 6,043 — (4,300) 402,963 Net assets: Unrestricted 660,390 1,825 11,583 179 1,351 10,994 2 (10,734) 675,590 Temporarily restricted 2,619 3,417 45 63 — — — (2,665) 3,479 Permanently restricted — 2,267 — 8 — — — — 2,275 Total net assets 663,009 7,509 11,628 250 1,351 10,994 2 (13,399) 681,344 Total liabilities and net assets $ 1,058,153 8,085 16,581 252 1,896 17,037 2 (17,699) 1,084,307

See accompanying independent auditors’ report.

34 6FKHGXOH, 6$/(0+($/7+ Supplemental Schedule – Consolidating Balance Sheet September 30, 2014 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO :HVW9DOOH\ +RVSLWDO 6DOHP ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +RVSLWDO )RXQGDWLRQ +RVSLWDO )RXQGDWLRQ +HDOWK &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current assets: Cash and cash equivalents $ 3,412 300 350 3 126 185 — — 4,376 Patient accounts receivable, net 70,349 — 2,750 — — — — — 73,099 Intercompany and other receivables 18,518 7 16 — 224 — — (1,369) 17,396 Supplies inventory 6,237 — 370 — — — — — 6,607 Prepaid expense and other 8,001 — 159 — — — — — 8,160 Total current assets 106,517 307 3,645 3 350 185 — (1,369) 109,638 Due from West Valley Hospital, net 5,312 — — — — — — (5,312) — Due from Willamette Valley Professional Svc 3,840 — — — — — — (3,840) — Due from Salem Health 546 — — — — — — (546) — Assets limited as to use, net of current portion 450,315 6,795 — 324 — 17,629 — — 475,063 Property and equipment, net 432,171 — 12,336 — 917 — 2 — 445,426 Rental and other property held for future development, net 13,106 1,410 — — — — — — 14,516 Other noncurrent assets 17,990 — 520 — 546 — — (12,555) 6,501 Total assets $ 1,029,797 8,512 16,501 327 1,813 17,814 2 (23,622) 1,051,144

See accompanying independent auditors’ report.

35 (Continued) 6FKHGXOH, 6$/(0+($/7+ Supplemental Schedule – Consolidating Balance Sheet September 30, 2014 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO :HVW9DOOH\ +RVSLWDO 6DOHP ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +RVSLWDO )RXQGDWLRQ +RVSLWDO )RXQGDWLRQ +HDOWK &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current liabilities: Accounts and intercompany payable $ 37,497 50 1,346 — 546 1,066 — (1,915) 38,590 Construction accounts payable 3,311 — 501 — — — — — 3,812 Accrued liabilities: Payroll, payroll taxes, and withholdings 8,476 — 370 — — — — — 8,846 Paid time off 14,630 — 555 — — — — — 15,185 Other 6,930 — 278 — — — — — 7,208 Estimated third-party payor settlements, net 2,926 — 354 — — — — — 3,280 Current portion of long-term debt 10,054 — — — — — — — 10,054 Current portion of estimated medical malpractice claims liability — — — — — 2,815 — — 2,815 Total current liabilities 83,824 50 3,404 — 546 3,881 — (1,915) 89,790 Due to Salem Hospital, net — — 5,312 — — — 3,840 (9,152) — Long-term debt, net of current portion 296,895 — — — — — — — 296,895 Accrued postretirement healthcare benefits 6,972 — 430 — — — — — 7,402 Fair value of interest rate swap agreement 12,821 — — — — — — — 12,821 Other long-term liabilities 21 — 2 — — — — — 23 Estimated medical malpractice claims liability 4,237 — 199 — — 3,986 — — 8,422 Total liabilities 404,770 50 9,347 — 546 7,867 3,840 (11,067) 415,353 Net assets: Unrestricted 622,467 2,862 7,106 236 1,267 9,947 (3,838) (9,947) 630,100 Temporarily restricted 2,560 3,333 48 83 — — — (2,608) 3,416 Permanently restricted — 2,267 — 8 — — — — 2,275 Total net assets 625,027 8,462 7,154 327 1,267 9,947 (3,838) (12,555) 635,791 Total liabilities and net assets $ 1,029,797 8,512 16,501 327 1,813 17,814 2 (23,622) 1,051,144

See accompanying independent auditors’ report.

36 6FKHGXOH,, 6$/(0+($/7+ Supplemental Schedule – Consolidating Statement of Operations September 30, 2015 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO :HVW9DOOH\ +RVSLWDO 6DOHP ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +RVSLWDO )RXQGDWLRQ +RVSLWDO )RXQGDWLRQ +HDOWK &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Operating revenue: Patient service revenue, net of contractual allowances and discounts $ 656,073 — 27,814 — — — — — 683,887 Provision for bad debts 24,726 — 1,869 — — — — — 26,595 Net patient service revenue, less provision for bad debts 631,347 — 25,945 — — — — — 657,292 Other revenues 36,198 1,051 613 65 — 1,853 666 (4,282) 36,164 Net assets released from restriction used for operations — 265 — 15 — — — — 280 Total operating revenue 667,545 1,316 26,558 80 — 1,853 666 (4,282) 693,736 Operating expenses: Labor and benefits 343,843 — 13,586 — — — 1,374 — 358,803 Medical and other supplies 102,188 2 2,715 1 — — 10 (43) 104,873 Purchased services and other 92,204 1,613 3,259 154 — 789 79 (5,127) 92,971 Depreciation 38,469 — 1,217 — — — 1 — 39,687 Professional fees 28,897 24 1,532 3 — 72 58 — 30,586 Interest and amortization 12,837 — — — — — — — 12,837 Total operating expenses 618,438 1,639 22,309 158 — 861 1,522 (5,170) 639,757 Operating income (loss) 49,107 (323) 4,249 (78) — 992 (856) 888 53,979 Other income (loss): Investment income (loss), net (1,264) 19 3 17 — 35 — — (1,190) Other, net 431 (725) (1) — 84 — — (1,048) (1,259) Total other income (loss), net (833) (706) 2 17 84 35 — (1,048) (2,449) Excess (deficit) of revenue over (under) expenses 48,274 (1,029) 4,251 (61) 84 1,027 (856) (160) 51,530 Change in net unrealized gain (loss) on other-than-trading securities (3,306) (24) — 1 — 21 — — (3,308) Change in fair value of interest rate swap agreement (3,171) — — — — — — — (3,171) Change in postretirement benefit obligation 293 — 125 — — — — — 418 Contributions for property and equipment 525 — — 100 — — — (625) — Net assets released from restriction used for — 16 — 5 — — — — 21 property and equipment — — — — — — — — — Change in unrestricted net assets $ 42,615 (1,037) 4,376 45 84 1,048 (856) (785) 45,490

See accompanying independent auditors’ report.

37 6FKHGXOH,, 6$/(0+($/7+ Supplemental Schedule – Consolidating Statement of Operations September 30, 2014 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO :HVW9DOOH\ +RVSLWDO 6DOHP ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +RVSLWDO )RXQGDWLRQ +RVSLWDO )RXQGDWLRQ +HDOWK &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Operating revenue: Patient service revenue, net of contractual allowances and discounts $ 609,072 — 24,230 — — — — — 633,302 Provision for bad debts 24,727 — 1,689 — — — — — 26,416 Net patient service revenue, less provision for bad debts 584,345 — 22,541 — — — — — 606,886 Other revenues 23,380 672 213 131 — 2,100 22 (4,514) 22,004 Net assets released from restriction used for operations — 315 — 9 — — — — 324 Total operating revenue 607,725 987 22,754 140 — 2,100 22 (4,514) 629,214 Operating expenses: Labor and benefits 318,947 — 12,969 — — — 1,298 — 333,214 Medical and other supplies 97,380 3 2,124 1 — — 9 (49) 99,468 Purchased services and other 85,684 1,789 3,368 109 — 3,825 132 (5,035) 89,872 Depreciation 36,510 — 1,119 — — — 1 — 37,630 Professional fees 28,204 25 1,258 — — 67 37 — 29,591 Interest and amortization 13,018 — — — — — — — 13,018 Total operating expenses 579,743 1,817 20,838 110 — 3,892 1,477 (5,084) 602,793 Operating income (loss) 27,982 (830) 1,916 30 — (1,792) (1,455) 570 26,421 Other income (loss): Investment income (loss), net 32,045 426 3 3 — 657 — — 33,134 Other, net (1,539) — (1) — 84 — — 1,167 (289) Total other income (loss), net 30,506 426 2 3 84 657 — 1,167 32,845 Excess (deficit) of revenue over (under) expenses 58,488 (404) 1,918 33 84 (1,135) (1,455) 1,737 59,266 Change in net unrealized gain (loss) on other-than-trading securities 1,170 59 — 15 — (32) — — 1,212 Change in fair value of interest rate swap agreement (1,015) — — — — — — — (1,015) Change in postretirement benefit obligation (567) — (141) — — — — — (708) Contributions for property and equipment 511 — 59 — — — — (570) — Net assets released from restriction used for property and equipment — 231 — — — — — — 231 Change in unrestricted net assets $ 58,587 (114) 1,836 48 84 (1,167) (1,455) 1,167 58,986

See accompanying independent auditors’ report.

38

APPENDIX C

AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED JUNE 30, 2016 AND THE YEAR ENDED SEPTEMBER 30, 2015

[THIS PAGE INTENTIONALLY LEFT BLANK]

SALEM HEALTH HOSPITALS AND CLINICS

Consolidated Financial Statements and Additional Information

June 30, 2016 and September 30, 2015

(With Independent Auditors’ Report Thereon)

6$/(0+($/7++263,7$/6$1'&/,1,&6

7DEOHRI&RQWHQWV

3DJH V  Independent Auditors’ Report 1–2

Consolidated Financial Statements:

Consolidated Balance Sheets 3

Consolidated Statements of Operations 4

Consolidated Statements of Changes in Net Assets 5

Consolidated Statements of Cash Flows 6

Notes to Consolidated Financial Statements 7–34

6XSSOHPHQWDU\,QIRUPDWLRQ Schedule I – Consolidating Balance Sheets 35–38

Schedule II – Consolidating Statements of Operations 39–40

KPMG LLP Suite 3800 1300 South West Fifth Avenue Portland, OR 97201

,QGHSHQGHQW$XGLWRUV’5HSRUW

The Board of Trustees Salem Health Hospitals and Clinics:

5HSRUWRQWKH)LQDQFLDO6WDWHPHQWV We have audited the accompanying consolidated financial statements of Salem Health Hospitals and Clinics and its subsidiaries (Oregon nonprofit corporations), which comprise the consolidated balance sheets as of June 30, 2016 and September 30, 2015, and the related consolidated statements of operations, changes in net assets, and cash flows for the 9-month period ended June 30, 2016 and the year ended September 30, 2015, and the related notes to the consolidated financial statements.

Management’sResponsibilityfortheFinancialStatements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Salem Health Hospitals and Clinics and its subsidiaries as of June 30, 2016 and September 30, 2015, and the results of their operations and their cash flows for the 9-month period ended June 30, 2016 and the year ended September 30, 2015 in accordance with U.S. generally accepted accounting principles.

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

OtherMatter Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary consolidating information included in schedules I and II is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.

Portland, Oregon October 7, 2016

2

6$/(0+($/7++263,7$/6$1'&/,1,&6 Consolidated Balance Sheets June 30, 2016 and September 30, 2015 (In thousands)

-XQH 6HSWHPEHU $VVHWV   Current assets: Cash and cash equivalents $ 5,413 7,873 Patient accounts receivable, less allowance for doubtful accounts of $15,199 in 2016 and $15,243 in 2015 79,325 74,010 Other receivables 20,919 15,374 Supplies inventory 6,861 6,522 Prepaid expenses and other 6,329 7,728 Total current assets 118,847 111,507 Assets limited as to use 537,699 496,850 Property and equipment, net 475,541 454,920 Rental and other property held for future development, net of accumulated depreciation of $4,046 and 2016 and $3,821 in 2015 13,480 13,697 Other noncurrent assets 10,182 7,333 Total assets $ 1,155,749 1,084,307 /LDELOLWLHVDQG1HW$VVHWV Current liabilities: Accounts payable $ 44,295 37,299 Accrued liabilities: Payroll, payroll taxes, and withholdings 14,689 11,465 Paid time off 18,989 16,263 Other 10,259 8,337 Estimated third-party payor settlements, net 2,107 3,150 Current portion of long-term debt 5,660 5,661 Current portion of estimated professional liability 1,834 1,664 Total current liabilities 97,833 83,839 Long-term debt, net of current portion 291,050 291,234 Accrued postretirement healthcare benefits 6,453 6,535 Fair value of interest rate swap agreement 18,828 15,992 Other long-term liabilities 12 36 Estimated professional liability, net of current portion 7,482 5,327 Total liabilities 421,658 402,963 Net assets: Unrestricted 727,907 675,590 Temporarily restricted 3,907 3,479 Permanently restricted 2,277 2,275 Total net assets 734,091 681,344 Total liabilities and net assets $ 1,155,749 1,084,307

See accompanying notes to consolidated financial statements.

3 6$/(0+($/7++263,7$/6$1'&/,1,&6 Consolidated Statements of Operations 9-month period ended June 30, 2016 and year ended September 30, 2015 (In thousands)

PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   Operating revenue: Patient service revenue, net of contractual allowances and discounts $ 541,503 683,887 Provision for bad debts (19,389) (26,595) Net patient service revenue, less provision for bad debts 522,114 657,292 Other revenue 33,347 36,164 Net assets released from restriction used for operations 301 280 Total operating revenue 555,762 693,736 Operating expenses: Labor and benefits 290,436 358,803 Medical and other supplies 78,764 104,873 Purchased services and other 88,702 92,971 Depreciation 31,185 39,687 Professional fees 23,173 30,586 Interest and amortization 9,362 12,837 Total operating expenses 521,622 639,757 Excess of revenue over expenses from operations 34,140 53,979 Other income: Investment income (loss), net 18,207 (1,190) Other, net (539) (1,259) Total other income (loss), net 17,668 (2,449) Excess of revenue over expenses 51,808 51,530 Change in net unrealized gain or loss on non fair value option investments 3,211 (3,308) Change in fair value of interest rate swap agreement (2,836) (3,171) Change in postretirement benefit obligation (325) 418 Net assets released from restriction used for property and equipment 459 21 Change in unrestricted net assets $ 52,317 45,490

See accompanying notes to consolidated financial statements.

4 6$/(0+($/7++263,7$/6$1'&/,1,&6 Consolidated Statements of Changes in Net Assets 9-month period ended June 30, 2016 and year ended September 30, 2015 (In thousands)

7HPSRUDULO\ 3HUPDQHQWO\ 8QUHVWULFWHG UHVWULFWHG UHVWULFWHG 7RWDO Net assets at September 30, 2014 $ 630,100 3,416 2,275 635,791 Excess of revenue over expenses 51,530 — — 51,530 Change in net unrealized gain (loss) on other-than-trading securities (3,308) (50) — (3,358) Change in fair value of interest rate swap agreement (3,171) — — (3,171) Change in postretirement benefit obligation 418 — — 418 Net assets released from restriction used for property and equipment 21 (21) — — Restricted contributions — 400 — 400 Temporarily restricted investment and other income, net — 14 — 14 Net assets released from restrictions for operations — (280) — (280) Change in net assets 45,490 63 — 45,553 Net assets at September 30, 2015 675,590 3,479 2,275 681,344 Excess of revenue over expenses 51,808 — — 51,808 Change in net unrealized gain (loss) on other-than-trading securities 3,211 1 — 3,212 Change in fair value of interest rate swap agreement (2,836) — — (2,836) Change in postretirement benefit obligation (325) — — (325) Net assets released from restriction used for property and equipment 459 (459) — — Restricted contributions — 892 2 894 Temporarily restricted investment and other income, net — 295 — 295 Net assets released from restrictions for operations — (301) — (301) Change in net assets 52,317 428 2 52,747 Net assets at June 30, 2016 $ 727,907 3,907 2,277 734,091

See accompanying notes to consolidated financial statements.

5 6$/(0+($/7++263,7$/6$1'&/,1,&6 Consolidated Statements of Cash Flows 9-month period ended June 30, 2016 and year ended September 30, 2015 (In thousands)

PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   Cash flows from operating activities: Change in net assets $ 52,747 45,553 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization 31,482 40,254 Change in net unrealized (gains) losses on non fair value option investments (3,212) 3,358 Change in net unrealized (gains) losses on fair value option investments and realized (gains) losses on sales of investments (9,929) 10,880 Change in fair value of interest rate swap agreement 2,836 3,171 Restricted contributions for property and equipment (484) (3) Impairment loss — 725 Permanently restricted contributions (2) — Loss on disposal of property and equipment 18 — Changes in operating assets and liabilities: Patient accounts receivable (5,315) (911) Other receivables (5,545) 2,022 Supplies inventory (339) 85 Prepaid expenses 1,399 432 Other noncurrent assets (3,062) (1,060) Accounts payable 6,493 (7,297) Accrued liabilities 7,872 4,826 Estimated third-party payor settlements, net (1,043) (130) Accrued postretirement healthcare benefits (82) (867) Other long-term liabilities (24) 13 Estimated professional liability 2,325 (4,246) Net cash provided by operating activities 76,135 96,805 Cash flows from investing activities: Purchases of investments (43,896) (122,497) Proceeds from sales of investments 16,187 86,472 Purchases of property and equipment and rental and other property (51,327) (47,232) Net cash used in investing activities (79,036) (83,257) Cash flows from financing activities: Repayment of tax-exempt bonds — (10,054) Repayment of other long-term debt (45) — Restricted contributions for property and equipment 484 3 Permanently restricted contributions 2 — Net cash provided by (used in) financing activities 441 (10,051) Net (decrease) increase in cash and cash equivalents (2,460) 3,497 Cash and cash equivalents at beginning of year 7,873 4,376 Cash and cash equivalents at end of year $ 5,413 7,873 Supplemental disclosure of cash flow information: Cash paid for interest $ 7,212 12,679 Change in construction related payables 504 2,194

See accompanying notes to consolidated financial statements.

6 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

 2UJDQL]DWLRQDQG3ULQFLSOHVRI&RQVROLGDWLRQ Salem Health Hospitals and Clinics and subsidiaries (collectively, the Corporation) are Oregon nonprofit corporations providing a comprehensive system of healthcare services to the communities of Salem and Dallas, Oregon, and the surrounding Marion and Polk Counties.

The accompanying consolidated financial statements include the accounts and transactions of the Corporation and its subsidiaries, of which the Corporation is the parent holding company and sole member. The subsidiaries are Oregon nonprofit corporations and consist of Salem Health (Salem) and Salem Health West Valley (West Valley) (collectively, the Hospitals); Salem Hospital Foundation (SHF) and West Valley Hospital Foundation (WVHF) (collectively, the Foundations); Willamette Valley Insurance Corporation (WVIC), a captive insurance company formed in November 2004 domiciled in Hawaii; and Willamette Valley Professional Services (WVPS), whose principal purpose is to provide professional billing services to the Hospitals, which are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The Corporation has formed an Obligated Group which is responsible for paying hospital revenue bond debt. Currently Salem is the only member of the Obligated Group.

The Hospitals provide healthcare and healthcare-related services to patients in their service areas. The Hospitals’ mission is to improve the health and well-being of the people and the communities they serve. The Foundations are dedicated to raising, managing, and distributing funds to help the Hospitals achieve their mission.

For the 9-month period ended June 30, 2016, the Corporation affiliated with OHSU clinical enterprises (note 2). As a result of this affiliation, the Corporation has changed its fiscal year to end on June 30. Therefore the 2016 consolidated financial statements reflect the results of the Corporation as of June 30, 2016 and for the 9-month period from October 1, 2015 through June 30, 2016.

 2+68$IILOLDWLRQ On November 19, 2015, the Corporation affiliated with OHSU clinical enterprises through the execution of a Joint Management Agreement (the Management Agreement) among the two organizations and OHSU Partners, LLC, a newly formed limited liability company (OHSU Partners). OHSU and Salem Health are the sole members of OHSU Partners. Under the terms of the Management Agreement, which is described in more detail below, each of the Corporation and OHSU remain separate legal entities and own their own assets. OHSU Partners, however, will manage the combined clinical enterprises of the Corporation and OHSU as a single economic entity and unified health system. The total operating results of the integrated health system will be apportioned to the Corporation and OHSU consistent with an allocation method based on each party’s historical operating income. The Management Agreement provides that 81% of the excess of revenue over expenses from operations will be apportioned to OHSU and 19% will be apportioned to the Corporation.

OHSU Partners and OHSU are not members of the obligated group securing indebtedness issued for the benefit of the Corporation and has no responsibility for the payment of the principal of or interest on indebtedness issued or incurred by or for the benefit of the Corporation. Likewise, the Corporation is not a

7 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

member of the obligated group securing indebtedness issued for the benefit of OHSU and has no responsibility for the payment of the principal of or interest on indebtedness issued or incurred by or for the benefit of OHSU.

The following is a brief description of the Management Agreement and the method of apportioning operating results between OHSU and the Corporation.

SummaryoftheManagementAgreement. Key elements of the affiliation and provisions of the Management Agreement include, but are not limited to, the following:

 The Corporation and OHSU delegate to OHSU Partners the responsibility and authority to oversee and manage each party’s clinical enterprises as a part of a unified, integrated health system while each party retains its separate legal identity and Board of Directors/Trustees.  OHSU maintains its responsibilities to manage and oversee activities related to its education and research missions.  Each party (1) is and will continue to be the licensed operator of its facilities and (2) will continue to perform all functions legally required to be performed directly by such licensed entity.  Each party retains the authority, consistent with OHSU Partners’ right to oversee and manage the integrated health system, to (1) enter into contracts, (2) employ agents and employees, (3) acquire, construct and operate property, and (4) incur debt.  Each party retains the authority, among other things, to: (1) approve the integrated health system’s operating and capital budgets and (2) approve certain of the other party’s material third-party transactions.  The initial term of the Management Agreement is 40 years and it may be renewed or extended by written agreement of the parties. The Management Agreement is subject to termination in the event of material breaches of the Management Agreement or for certain other reasons specified in the Management Agreement.

Calculation of Apportionment of Operating Results. The Management Agreement provides for the combined net operating results of the integrated health system to be apportioned to the parties consistent with the allocation method established in the Management Agreement. Each of the parties is assigned an “Allocation Percentage,” which is a fixed percentage established in the Management Agreement based on each party’s aggregate historical operating income during an approximately six year period prior to the commencement of the Management Agreement. OHSU’s Allocation Percentage is 81% and Salem Health Allocation Percentage is 19%. If a party’s allocation amount is less than that party’s clinical enterprise operating results for any period, such party has a “due to” amount payable to the other party. If a party’s allocation amount is more than such party’s clinical enterprise operating results for any period, that party has a “due from” receivable from the other party. The Management Agreement provides that the due to/due from amounts shall be settled by cash transfers no later than 45 days following the end of each fiscal quarter; provided that no such action shall be taken if the parties believe it would result in a material default under any current or future debt-related agreement.

8 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

For the 9-month period ended June 30, 2016, the Corporation incurred an expense of $8,260 payable to OHSU under the allocation calculation, which is included in purchased services and other in the consolidated statements of operations. Of this amount $6,624 was paid and $1,636 is included in accounts payable at June 30, 2016.

The Corporation and OHSU share the expenses of OHSU Partners equally as a management fee. For the 9- months ended June 30, 2016, the corporation paid $2,026 in management fees which is included in purchased services and other in the statements of operations.

 6XPPDU\RI6LJQLILFDQW$FFRXQWLQJ3ROLFLHV (a) UseofEstimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates include uncollectible and contractual reserves on patient accounts receivable, valuation of investments, assignment of useful lives to property and equipment, third-party payor cost report settlements, self-insured liabilities, interest rate swap valuation, and postretirement liabilities.

(b) CashandCashEquivalents Cash equivalents include investments in highly liquid instruments with original maturities of three months or less, excluding assets limited as to use. Cash equivalents totaled $874 and $739 at June 30, 2016 and September 30, 2015, respectively.

The Corporation maintains bank accounts at several financial institutions. The Corporation’s bank balances at each financial institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250. At June 30, 2016 and September 30, 2015, the Corporation’s bank balances at certain financial institutions exceeded FDIC coverage.

(c) PatientAccountsReceivableandAllowanceforDoubtfulAccounts Patient accounts receivable are recorded at an estimated contractual arrangement and do not bear interest. Amounts collected on patient accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The primary risk of noncollection of patient accounts receivable relates to uninsured patient accounts and patient accounts for which the primary insurance payor has paid, but patient responsibility amounts (generally, deductibles and copayments) remain outstanding.

The allowances for doubtful accounts are primarily estimated based upon the Hospitals’ historical collection experience, the age of the patient’s account, the patient’s economic ability to pay, and the effectiveness of collection efforts. Patient accounts receivable balances are routinely reviewed in conjunction with historical collection rates and other economic conditions that might ultimately affect the collectibility of patient accounts when considering the adequacy of the amounts recorded in the 9 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

allowance for doubtful accounts. Actual write-offs historically have approximated management’s expectations.

The mix of gross receivables from significant third-party payors as of June 30, 2016 and September 30, 2015 was as follows:

-XQH 6HSWHPEHU   Medicare 41% 42% Medicaid 18 17 Private pay 5 5 Commercial and other payors 36 36

The mix of gross patient service revenue from significant third-party payors for the 9-month period ended June 30, 2016 and year ended September 30, 2015 was as follows: PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   Medicare 47% 48% Medicaid 23 21 Private pay 2 2 Commercial and other payors 28 29

Significant changes in payor mix, business office operations, economic conditions, or trends in federal and state governmental healthcare coverage could affect the Hospitals’ collection of accounts receivable, cash flows, and results of operations. The Hospitals’ patient responsibility write-offs were $19,433 and $28,824 during the 9-month period ended June 30, 2016 and year ended September 30, 2015. The Hospitals also maintain an allowance for doubtful accounts for third-party payors, which has been determined based on historical bad debt expense on those account types. As a result of the actual write-offs and estimated uncollectible amounts, total bad debt expense, which is a reduction in net patient service revenue, for the 9-month period ended June 30, 2016 and year ended September 30, 2015 was $19,389 and $26,595, respectively.

(d) SuppliesInventory Supplies inventory is stated at the lower of cost (as determined by the first-in, first-out method) or market.

(e) AssetsLimitedastoUse Assets limited as to use consist of investments designated by the Corporation’s Board of Trustees (the Board) for future capital acquisitions and other purposes, investments held by the Foundations 10 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

whose use has been restricted by donors, and assets held by a trustee under a bond indenture agreement (notes 5 and 13). Funds held by trustee are set aside in separate trust accounts for future capital projects and debt service reserve funds.

Investments in equity and debt securities are reported at fair value in the accompanying consolidated balance sheets. The fair values are based on quoted market prices at the reporting date for those or similar investments. Investment income or loss (including realized gains and losses on investments, unrealized gains and losses on investments for which the Corporation has designated the fair value option, interest, and dividends) is included in the excess of revenue over expenses unless the income or loss is restricted by the donor or law. All of the Corporation’s investments are classified as other-than-trading securities at June 30, 2016 and September 30, 2015 except those for which the fair value option was elected. The Corporation has elected the fair value option under FASB ASC 825-10 Financial Instruments for certain of its investment securities as discussed at note 13. Unrestricted unrealized gains and losses on other-than-trading investments for which the fair value option has not been elected are excluded from excess of revenue over expenses unless they are considered other-than-temporarily impaired.

For each of the investment categories for which the fair value option has not been elected, the Corporation continually monitors investment performance and the potential need for recording an impairment on investments. A number of criteria are considered during this process including, but not limited to: whether the Corporation intends to sell the security; the current fair value as compared to cost of the security; the length of time the security’s fair value has been below cost; the likelihood that the Corporation will be required to sell the security before recovery of its cost basis; objective information supporting recovery in a reasonable period of time; specific credit issues related to the issuer; and current economic conditions.

For debt securities that the Corporation does not intend to sell and more likely than not would not be required to sell prior to recovery of the cost basis, the Corporation recognizes other-than-temporary losses in accordance with the provisions of the ASC 320 –. The amount of the other-than-temporary loss is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security’s cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. The amount due to all other factors is recognized in other changes in net assets. For the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015, the Corporation recognized no other-than-temporary losses.

The Corporation holds investments in corporate bonds, fixed income mutual funds, U.S. Treasury and government agency securities, money market funds and equity mutual funds (note 13). Management believes that the Corporation’s credit risk with respect to these investments is minimized due to the diversity of the individual investments and the financial strength of the entities, which have issued the securities or instruments. However, due to changes in economic conditions, interest rates, and common stock prices, the market value of the Corporation’s investments can be volatile. Consequently, the fair value of the Corporation’s investments could change significantly in the near term as a result of such volatility.

11 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

(f) PropertyandEquipment Property and equipment (including acquisitions of rental and other property held for future development) are stated at cost. Donated property and equipment are recorded at estimated fair value on the date of donation. Improvements and replacements of property and equipment are capitalized. Routine maintenance and repairs are charged to expense as incurred.

Depreciation is computed using the straight-line method over the shorter of the lease term or estimated useful life of each class of depreciable asset. The estimated useful life of buildings and improvements is 5 to 50 years while the estimated useful life of equipment is 2 to 20 years. Net interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets.

(g) TemporarilyandPermanentlyRestrictedNetAssets Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Permanently restricted net assets are those whose use has been restricted by donors to be maintained in perpetuity.

(h) ConsolidatedStatementsofOperations Excess of revenue over expenses from operations includes amounts generated from direct patient care, other revenue related to the operation of the Hospitals’ facilities, unrestricted contributions received by the Foundations, and gains (losses) on disposals of property and equipment. Other activities that result in income or expenses unrelated to the Hospitals’ and the Foundations’ primary missions are excluded from excess of revenue over expenses from operations. Other income (loss) includes net investment income; change in unrealized gains and losses on investment securities for which the fair value option is elected; any other-than-temporary impairment losses on investment securities; rental income and expenses related to nonoperating real estate properties; gain (loss) on disposals of rental and other property held for future development; loss on extinguishment of debt; and other incidental transactions.

The consolidated statements of operations include the excess of revenue over expenses. Changes in unrestricted net assets that are excluded from the excess of revenue over expenses, consistent with industry practice, include the change in net unrealized gains (losses) on securities for which the fair value option was not elected; change in net benefit obligation related to postretirement benefits; change in fair value of interest rate swap agreement for an effective hedging relationship; contributions of long-lived assets (including assets acquired using contributions, which, by donor restriction, are to be used for the purpose of acquiring such assets); and discontinued operations.

(i) NetPatientServiceRevenue Services are rendered to patients under contractual arrangements with Medicaid and Medicare programs and various other payors including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), which provide for payment or reimbursement at amounts

12 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

different from established rates. Contractual adjustments represent the difference between established rates for services and amounts reimbursed by these third-party payors.

The Medicare program reimburses Salem at prospectively determined rates for the majority of inpatient and outpatient services rendered to patients, primarily on the basis of Medicare severity diagnosis-related groups (MS-DRGs) and Ambulatory Payment Classification Groups (APCs), respectively. West Valley is a “critical access hospital” (CAH) for Medicare program purposes. As a CAH, West Valley may not operate more than 25 beds and the average length of stay for acute care patients may not exceed 96 hours. The Medicare and Medicaid program reimburses West Valley on the basis of its current allowable costs. When paid under cost reimbursement, the Hospitals are reimbursed at an interim rate with final settlement determined after submission of annual cost reports and audits thereof by the fiscal intermediaries, subjecting the Hospitals to retroactive settlements for prior year cost reports. Actual settlements historically approximated management’s expectations.

Salem’s cost reports have both been audited and final settled by the Medicare fiscal intermediaries through September 30, 2014 and the Medicaid fiscal intermediaries through September 30, 2013. West Valley’s cost reports have both been audited and final settled by the Medicare fiscal intermediaries through September 30, 2014 and the Medicaid fiscal intermediaries through September 30, 2013.

The Hospitals have also entered into payment agreements with certain commercial insurance carriers, HMOs, and PPOs to provide medical services to subscribing participants. The basis for payment to the Hospitals under these agreements includes prospectively determined rates per discharge, actual charges, and fee schedules.

(j) ContributionsReceived Unconditional promises to give cash and other assets to the Corporation are recorded as other revenue and other receivables at fair value at the date the promise is received. Conditional promises to give and indications of intentions to give are reported at fair value at the date the gift is received or at which point the conditions have been substantially met. Gifts are reported as either temporarily or permanently restricted contributions if they are received with donor stipulations that limit the use of the donated assets. When the terms of a donor restriction are met, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of operations and consolidated statements of changes in net assets as net assets released from restrictions.

Contributions of long-lived assets such as property and equipment are reported as unrestricted, and are excluded from the excess of revenue over expenses. Contributions of long-lived assets with explicit restrictions that specify how the assets are to be used and contributions of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the Corporation reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service.

SHF is a beneficiary under various wills and trust agreements, the total realizable amounts of which are not presently estimable. SHF’s share of such bequests is recorded when the probate court has declared the testamentary instrument valid and the proceeds are measurable.

13 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

(k) IncomeTaxes The Corporation, Salem, West Valley, SHF, WVHF, WVPS, and WVIC are tax-exempt organizations pursuant to Internal Revenue Code (IRC) Section 501(c)(3). As such, only unrelated business income is subject to federal or state income taxes. The Corporation accounts for uncertainty in income taxes in accordance with FASB ASC 740-10, . Management has not recorded a provision as unrelated business income, if any, is immaterial to the consolidated financial statements.

Accounting principles generally accepted in the United States of America require the Corporation to evaluate tax positions taken by the Corporation and recognize a tax liability (or asset) if the Corporation has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. Management has analyzed tax positions taken by the Corporation and has concluded that as of June 30, 2016 there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements. The Corporation is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Corporation management believes it is no longer subject to income tax examinations for years prior to fiscal year 2010.

(l) Reclassifications Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to current period presentation. These reclassifications had no material effect on the results of operations or financial position for any period presented.

 %HQHILWVWRWKH&RPPXQLW\ The Corporation provides services to the community both for people in need and to enhance the health status of the broader community as part of its charitable mission.

(a) ServicesforPeopleinNeed The following represents the estimated cost of providing certain services to the community, along with a description of selected activities sponsored by the Hospitals during 2016 and 2015. The costs in the first table below represent the estimated cost of providing certain services to the community for the 9-month period ended June 30, 2016. Had the amounts been projected over twelve months, the amount

14 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

of services provided to people in need would have been comparable to those provided for the year ended September 30, 2015. PRQWKSHULRGHQGHG-XQH (VWLPDWHG FRVWVWR 2IIVHWWLQJ (VWLPDWHG SURYLGHFDUH UHYHQXH QHWFRVW Services for people in need: Charity care $ 7,583 — 7,583 Medicaid 131,509 101,130 30,379 Medicare 220,056 188,930 31,126 $ 359,148 290,060 69,088 Percentage of total operating expenses 13.2%

In support of its mission, the Hospitals voluntarily provide medically necessary patient care services that are discounted or free of charge to persons who have insufficient resources and/or who are uninsured. The criteria for charity care are determined based on eligibility for insurance coverage, household income, qualified assets, catastrophic medical events, or other information supporting a patient’s inability to pay for services provided. Specifically, the Hospitals provide an uninsured discount of 15% to all uninsured patients. Further discounts are available for patients, on a sliding scale, whose household income is less than 400% of the federal poverty level or roughly $97 for a family of four in Salem, Oregon. For patients whose household income is at or below 200% of the federal poverty level, a full subsidy is available. In addition to the household income criteria, the patients’ qualified assets (e.g., assets and investments excluding patient’s primary residence), and other catastrophic or economic circumstances are considered in determining eligibility for charity care.

15 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

In addition to charity care, the Hospitals provide services under various states’ Medicaid programs for financially needy patients and to Medicare beneficiaries. The aggregate cost of providing services to Medicaid and Medicare beneficiaries exceeds the aggregate reimbursements from these programs.

The cost of services provided to beneficiaries of the Medicaid and Medicare programs and cost of charity care is estimated based on the relationship of costs (excluding the provision for doubtful accounts and those costs associated with medical education, research, community health services, and other contributions) to billed charges for Medicaid and Medicare patient accounts and for patient charges written off as charity deductions.

The Hospitals also employ financial counselors and social workers, who assist patients in obtaining coverage for their healthcare needs. This includes assistance with workers compensation, motor vehicle accident policies, COBRA, veterans’ assistance, and public assistance programs, such as Medicaid. During 2016 and 2015, the Corporation assisted patients many of which received coverage through a third party, reducing the patients’ financial responsibility. The costs associated with this program were $242 and $318 during the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015, respectively.

(b) BenefitstoCommunity Community health services include classes provided to the community at minimal or no cost, health education for children and parents with young families, resource centers, support groups, health screenings, senior wellness, volunteer programs, caregivers respite, and support for parish nursing programs.

Community benefit activities include activities that develop community health programs and partnerships.

Donations to charitable organizations include direct support provided to community organizations through cash or in-kind donations that support organizations’ missions of supporting health and human services, civic and community causes, and business development efforts.

In-kind contributions provided by the Corporation include the following: facility space, staff availability for training and education opportunities, supplies, and professional services in collaboration with charitable, educational, and government organizations throughout the community.

(c) OtherBenefits In furtherance of its mission, the Corporation also commits significant time and resources to endeavors and critical services that meet unfilled community needs. Many of these activities are sponsored with the knowledge that they will not be self-supporting or financially viable. Such programs include hospice, mental and behavioral health, primary care clinics in underserved neighborhoods, free patient transportation, lodging, meals, and medications for transient patients when needed, participation in blood drives, and the provision of educational opportunities for students interested in pursuing medical-related careers.

16 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

The Corporation also provides additional benefits to the community through the advocacy of community service by employees. Employees of the Corporation serve numerous organizations through board representation, membership in associations, and other related activities.

 $VVHWV/LPLWHGDVWR8VH Assets limited as to use consisted of the following at June 30, 2016 and September 30, 2015:

-XQH 6HSWHPEHU   Board designated for capital acquisitions and other purposes: Cash and cash equivalents $ 32,623 17,121 Low duration fixed income 120,347 116,087 Core fixed income mutual funds 136,081 129,360 Domestic equity mutual funds 185,106 171,252 International equity mutual funds 50,376 49,524 Accrued interest receivable 347 402 Total internally designated for capital acquisitions and other purposes 524,880 483,746 Held by the Foundations: Cash and cash equivalents 135 74 Core fixed income mutual funds 2,433 2,614 Domestic equity mutual funds 3,733 3,942 International equity mutual funds 320 364 Accrued interest receivable 6 4 Total held by the Foundations 6,627 6,998 Held by trustee: Cash and cash equivalents 181 141 Low duration fixed income 5,994 5,952 Accrued interest receivable 17 13 Total held by trustee 6,192 6,106 Total assets limited as to use $ 537,699 496,850

Cash and short-term fixed income investments consist primarily of separately held U.S. Treasury and agency securities, corporate bonds, and money market funds with an average duration of one year or less.

Low duration fixed income investments consist primarily of separately held U.S. Treasury and agency securities, corporate bonds, money market funds, and fixed income focused mutual funds with an investment strategy to hold securities with an average duration of one to three years.

Core fixed income investments consist of fixed income mutual funds with investment strategies of holding securities with an average duration of three to five years.

17 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

Investment income (losses), net, consisted of the following for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015: PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   Investment income: Interest and dividend income $ 7,652 8,706 Realized gains on sales of investments, net 19,925 11,174 Net unrealized losses on fair value investments (9,250) (20,869) Investment expenses (120) (201) Investment (loss) income, net $ 18,207 (1,190) Changes in net assets: Change in net unrealized gain (loss) on other-than-trading securities $ 3,212 (3,358)

The following tables summarize the Corporation’s investments that are not accounted for under the fair value option and had unrealized losses as of June 30, 2016:

*URVV XQUHDOL]HG )RUOHVVWKDQPRQWKV )DLUYDOXH &RVWEDVLV ORVV Fixed income mutual funds $ 792 793 1 Total $ 792 793 1 *URVV XQUHDOL]HG )RUPRQWKVRUORQJHU )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 322 327 5 Fixed income mutual funds 55,086 57,471 2,385 U.S. government agency securities 2,898 2,900 2 Total $ 58,306 60,698 2,392

18 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

*URVV XQUHDOL]HG 7RWDO )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 322 327 5 Fixed income mutual funds 55,878 58,264 2,386 U.S. government agency securities 2,898 2,900 2 $ 59,098 61,491 2,393

The following tables summarize the Corporation’s investments that are not accounted for under the fair value option and had unrealized losses as of September 30, 2015:

*URVV XQUHDOL]HG )RUOHVVWKDQPRQWKV )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 3,380 3,435 55 Fixed income mutual funds 172,269 175,203 2,934 U.S. Treasury securities 97 103 6 U.S. government agency securities 59 59 — Total $ 175,805 178,800 2,995 *URVV XQUHDOL]HG )RUPRQWKVRUORQJHU )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 300 307 7 Fixed income mutual funds 38,848 39,202 354 U.S. government agency securities 5,951 5,990 39 Total $ 45,099 45,499 400 *URVV XQUHDOL]HG 7RWDO )DLUYDOXH &RVWEDVLV ORVV Corporate bonds $ 3,680 3,742 62 Fixed income mutual funds 211,117 214,405 3,288 U.S. Treasury securities 97 103 6 U.S. government agency securities 6,010 6,049 39 $ 220,904 224,299 3,395

The individual securities included in the above tables have been assessed by management and do not require an adjustment for other-than-temporary impairment because the Corporation does not intend to sell and do not believe they would be required to sell the securities prior to maturity or market recovery. The unrealized losses were primarily driven by changes in interest rates and overall market conditions.

19 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

 3URSHUW\DQG(TXLSPHQW1HW Property and equipment consisted of the following at June 30, 2016 and September 30, 2015:

-XQH 6HSWHPEHU   Land and improvements $ 43,004 42,933 Buildings and improvements 554,832 532,211 Equipment 338,642 339,497 936,478 914,641 Less accumulated depreciation (494,335) (487,017) 442,143 427,624 Construction in progress 33,398 27,296 Property and equipment, net $ 475,541 454,920

 ,QYHVWPHQWVLQ+HDOWK5HODWHG$FWLYLWLHV The following is a summary of the Corporation’s related-party investments which are included in other noncurrent assets in the accompanying consolidated balance sheets at June 30, 2016 and September 30, 2015:

The Corporation’s share of LQFRPH ORVVHV LQFOXGHGLQWKH ,QYHVWPHQWEDODQFHLQFOXGHG DFFRPSDQ\LQJFRQVROLGDWHG LQWKHDFFRPSDQ\LQJ VWDWHPHQWVRIRSHUDWLRQVIRU FRQVROLGDWHGEDODQFHVKHHWV WKHPRQWKSHULRGHQGHG DVRI-XQH -XQHDQGILVFDO\HDU %DVLVRI 2ZQHUVKLS DQG6HSWHPEHU HQGHG6HSWHPEHU (QWLW\ DFFRXQWLQJ SHUFHQWDJH    

PPP Equity method 0.25% $ 3,262 2,571 1,284 2,032 WVCH Cost method 18.20 545 545 1,726 — PHA Equity method 14.30 1,858 1,099 (46) (901)

(a) PremierPurchasingPartners,L.P.(PPP) PPP is a California limited partnership formed to allow its partners to obtain discounts by pooling certain purchases. Salem purchased 9,518 shares of PPP for $75. Premier is a public company and a portion of the Corporation’s shares vest into Class B stock each year. The Corporation’s investment in PPP is accounted for under the equity method of accounting as the original shares purchased become vested and converted into Class B stock. Salem also receives periodic distributions of its share of PPP’s profits.

20 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

(b) WillametteValleyCommunityHealth(WVCH) The Corporation, on behalf of the Hospitals, cofounded WVCH with nine other providers of healthcare in Marion and Polk Counties. WVCH is an Oregon limited liability company and is certified by the Oregon Health Authority as a coordinated care organization (CCO). Section 26 of H.B. 3650 provides that CCOs will be responsible for providing fully integrated physical health services, chemical dependency, mental health services, and beginning dental health services. CCOs will initially provide the foregoing health services to Medicaid beneficiaries. The Corporation’s investment in WVCH is accounted for under the cost method.

(c) PopulationHealthAllianceofOregon,LLC(PHA) The Corporation cofounded PHA with eight other organizations. PHA was established with the intent to be a third party provider of services to effectively manage the population health risks of its members. The Corporation’s investment in PHA is accounted for under the equity method due to the significant influence the Corporation has with the organization.

 /RQJ7HUP'HEW Long-term debt consisted of the following at June 30, 2016 and September 30, 2015:

-XQH 6HSWHPEHU   Hospital Revenue Bonds, Series 2006A; payable in installments from $1,780 to $17,040 beginning in 2014 through 2036; interest at rates ranging from 4.50% to 5.00% $ 113,724 113,823 Hospital Revenue Bonds, Series 2008A; payable in installments from $760 to $7,900 beginning in 2015 through 2023; interest rates ranging from 5.25% to 5.75% 39,376 39,417 Hospital Revenue Bonds, Series 2008B; payable in installments from $3,575 to $6,000 beginning in 2019 through 2034; interest at rates resetting every 7 days; the rates were 0.42% and 0.02% as of June 30, 2016 and September 30, 2015, respectively 75,000 75,000 Hospital Revenue Bonds, Series 2013A; payable in installments from $420 to $2,935 beginning in 2014 through 2036; interest rate is 2.30% through June 1, 2020 34,155 34,155 Hospital Revenue Bonds, Series 2013B; payable in installments from $415 to $2,935 beginning in 2014 through 2036; interest rate is 2.57% through June 1, 2020 34,160 34,160 Other 295 340 296,710 296,895 Less current portion (5,660) (5,661) $ 291,050 291,234

21 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

In November 2006, Salem entered into a Loan Agreement (the 2006 Agreement) with the Authority whereby the Authority issued $120,000 of paramount fixed-rate tax-exempt Revenue Bonds and $38,025 of paramount tax-exempt variable rate Revenue and Refunding Bonds (Salem Hospital Project), Series 2006A (2006A Bonds) and Series 2006B (2006B Bonds) (collectively, the 2006 Bonds), respectively. The proceeds from Series 2006A were used to finance various capital projects at Salem. The proceeds from Series 2006B were used to advance refund $36,175 of remaining Series 1998 Bonds. In April 2008, Salem purchased the 2006B Bonds in lieu of redemption and defeased the entire amount of the bonds. This transaction was financed by a nonrevolving taxable line of credit discussed below. The 2006A Bonds were issued at a premium in the amount of $3,123, of which $1,328 and $1,230 has been cumulatively amortized and recorded as a reduction of interest expense in the accompanying consolidated statements of operations for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015, respectively. The remaining amount of unamortized premium included in long-term debt was $1,794 and $1,893 at June 30, 2016 and September 30, 2015, respectively. In October 2008, Salem entered into a Loan Agreement (the October 2008 Agreement) with the Authority, whereby the Authority issued $59,710 of par amount fixed-rate tax-exempt Revenue Bonds, Series 2008A (the 2008A Bonds) with a final maturity of 2023. The proceeds from 2008A Bonds were used in part to refinance a portion of a nonrevolving line of credit that existed at that time, to finance various capital projects at Salem, and the remaining $5,971 was deposited into a debt service reserve fund. The 2008A Bonds were issued at a premium of $778, of which $587 and $545 have been cumulatively amortized and recorded as a reduction of interest expense in the accompanying consolidated statements of operations for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015, respectively. The remaining unamortized premium included in long-term debt was $191 and $233 at June 30, 2016 and September 30, 2015, respectively. The 2008A Bonds maturing in 2023 are subject to optional redemption on or before 2018; the bonds maturing prior to 2023 are not subject to this optional redemption. The 2008A Bonds are subject to annual mandatory sinking fund redemption prior to maturity, beginning in 2015 ranging from $760 to $7,900, to special sinking fund redemption and to optional and mandatory tender for purchase and remarketing in certain circumstances as described in the October 2008 Agreement. In November 2008, Salem entered into a Loan Agreement (the November 2008 Agreement) with the Authority, whereby the Authority issued $75,000 of par amount variable-rate tax-exempt Revenue Bonds (the 2008B Bonds) with a final maturity of 2034 and $50,000 of par amount variable-rate tax-exempt Revenue Bonds (the 2008C Bonds) with a final maturity of 2036. The 2008C Bonds were refinanced in 2014. The 2008B Bonds bear interest at rates that change weekly. The combined proceeds from the 2008B and 2008C Bonds were used to fully refund the remaining balance on a nonrevolving line of credit that existed at that time and to finance various capital projects at Salem. The Series 2008B Bonds are subject to purchase from time to time at the option of the owners thereof and are required to be purchased in certain events. In order to assure the availability of funds for the payment of the purchase price, Salem has provided for the purchase of such 2008B Bonds under a direct-pay letter-of-credit agreement (the Letter of Credit). The maximum commitment under this Letter of Credit is $76,048 for the 2008B Bonds. The 2008B Bonds are subject to annual mandatory sinking fund redemptions beginning in 2019 ranging from $3,575 to $6,000. The 2008B Bonds are subject to optional and special redemption prior to maturity at the direction of Salem under certain circumstances as described in the November 2008 Agreement. The 2008B Letter of Credit has an 18-month repayment term and expires in April 2018. A direct-pay letter-of-credit agreement (2008C

22 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

Letter of Credit) which provided for the purchase of the 2008C Bonds was terminated in 2014 upon refinance of the 2008C Bonds. In June 2013, Salem entered into a Loan Agreement (the June 2013 Agreement) with the Authority, whereby the Authority privately placed issuances to two banks a total of $70,000 of par amount fixed rate tax exempt Revenue Bonds in the amounts of $35,000 and $35,000 (the 2013A and 2013B Bonds) with final maturities of 2036 and 2036, respectively. The proceeds of the 2013A and 2013B Bonds were used in part to refinance the 2008C Bonds and to finance various capital projects at Salem. The 2013A and 2013B Bonds were issued at par value with stated interest rates of 2.30% and 2.57%, respectively that are fixed under an initial rate period until June 1, 2020. Subsequent to this initial rate period, the bonds are convertible to one of several different fixed or variable interest rate options based on market conditions at that time. The bonds are subject to combined annual mandatory sinking fund redemptions beginning in 2015 ranging from $835 to $5,870.

Additionally, Salem entered into an interest rate management transaction in November 2004 to hedge the 2004B Bonds. In 2008, Salem amended this swap to be a cash flow hedge of the 2008B Variable Rate Bonds. The swap agreement maintains the total notional amount of $75,000 and converts the variable interest rate to a fixed rate of approximately 3.541%. See note 9 for further information related to Salem’s interest rate management transactions.

Scheduled principal repayments of long-term debt are as follows: 5HYHQXH ERQGV 2WKHU 7RWDO 2017 $ 5,415 63 5,478 2018 9,645 68 9,713 2019 10,870 72 10,942 2020 11,270 78 11,348 2021 11,735 14 11,749 Thereafter 245,495 — 245,495 $ 294,430 295 294,725

Interest costs, including amortization of bond premium, in the amounts of $9,362 and $12,837 were charged to operations during the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015, respectively.

 'HULYDWLYH,QVWUXPHQWVDQG+HGJLQJ$FWLYLWLHV Salem has an interest-rate-related derivative instrument to manage its exposure on its debt instruments. The Corporation does not enter into derivative instruments for any purpose other than cash flow hedging purposes. The Corporation follows FASB ASC 815-10, . ASC 815-10 provides accounting and reporting standards for derivative instruments and hedging activities and requires that Salem recognize these as either assets or liabilities in the consolidated balance sheets and measure them at fair value.

23 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

In 2008, Salem entered into an interest rate swap transaction to effectively convert the 2008B variable rate debt to a fixed rate of 3.541% through August 15, 2034. The interest rate swap has a notional amount of $75,000. Salem evaluated the interest rate swap transaction and determined that it met the criteria to be classified as a cash flow hedge and the changes in fair value have been recorded as a change in unrestricted net assets in the accompanying consolidated financial statements.

The interest rate swap transaction allows Salem to terminate the financial instrument by requiring full settlement of any interest or termination value, upon five days’ written notice given to Salem’s bond insurer and counterparty. The fair value of the interest rate swap agreement is determined by or based on the spread in interest rates with consideration of credit risk to both Salem and its counterparty. The estimated fair value of the interest rate swap at June 30, 2016 and September 30, 2015 was a liability of $18,828 and $15,992, respectively. Salem was not required to post collateral against the liability of its interest rate swap during the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015 and has not been required to post any collateral to date for the life of the swap.

 7HPSRUDULO\5HVWULFWHG1HW$VVHWV Temporarily restricted net assets were restricted for the following purposes at June 30, 2016 and September 30, 2015:

-XQH 6HSWHPEHU   Acquisition or construction of property and equipment for the Hospitals $ 630 420 Specific programs of the Hospitals 2,351 2,263 Scholarships 713 558 Other 213 238 $ 3,907 3,479

 5HWLUHPHQWDQG3RVWUHWLUHPHQW3ODQV (a) DefinedContributionRetirementPlan The Hospitals have a contributory, defined contribution retirement plan (the Retirement Plan) covering substantially all full-time employees. All eligible employees are allowed to contribute to the Retirement Plan on the first day of the month following their date of hire. The Hospitals contribute 5.5% to 8.5% of participating employees’ annual compensation to the Retirement Plan. To receive the benefit of the Hospitals’ contributions, employees must have one year or more of service at one of the Hospitals and contribute at least 1.0% of their annual compensation to the Retirement Plan. Retirement Plan costs were $12,056 and $14,269 for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015, respectively, and are included in labor and benefits in the accompanying consolidated statements of operations.

24 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

(b) PostretirementHealthcarePlan The Hospitals also sponsor a postretirement healthcare plan (the Postretirement Plan) that provides healthcare benefits to certain retirees and their dependents until the retirees reach the age of Medicare eligibility. Generally, retirees are eligible to participate in the Postretirement Plan if they retire from one of the Hospitals at age 55 years or older with 10 years of service. Retirees can convert 25% of their unused extended illness bank (EIB) balance to an equivalent dollar amount, which may then be used to purchase medical, dental, or vision coverage for the retiree and/or dependents. Any unused balance will be forfeited when the retiree reaches the age of Medicare eligibility.

The Corporation accounts for the Postretirement Plan in accordance with FASB ASC 715, –, which requires the employer to recognize the overfunded or underfunded status of a plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through changes in unrestricted net assets. Under ASC 715 –, the measurement of the funded status is the difference between the fair value of the plan assets compared to the benefit obligation of the plan. ASC 715 also required the Corporation to recognize in unrestricted net assets any unrecognized net actuarial gains or losses and any unrecognized prior service costs or credits as they arise and disclose in the notes to the consolidated financial statements additional information about the effect on net periodic benefit cost on the next fiscal year that arises from the delayed recognition of these items. The Corporation’s measurement date for plan assets and benefit obligation is for the periods ended June 30, 2016 and September 30, 2015. For the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015 the Corporation utilized the RP-2014 mortality tables, for estimating the actuarial values.

25 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

The accrued liability for postretirement benefits at June 30, 2016 and September 30, 2015 was as follows:

-XQH 6HSWHPEHU   Change in benefit obligation: Benefit obligation at beginning of year $ 6,992 7,850 Service cost 169 318 Interest cost 152 229 Participants’ contributions 316 464 Actuarial loss (gain) (76) (957) Benefits paid (656) (912) Benefit obligation at end of year $ 6,897 6,992 Change in plan assets: Fair value of plan assets at beginning of year $ — — The Hospitals’ contributions 340 448 Participants’ contributions 316 464 Benefits paid (656) (912) Fair value of plan assets at end of year $ — —

A reconciliation of the Postretirement Plan’s funded status at June 30, 2016 and September 30, 2015 to the Hospitals’ accrued postretirement healthcare benefits at June 30, 2016 and September 30, 2015 was as follows:

-XQH 6HSWHPEHU   Funded status $(6,897) (6,992) Current portion of accrued postretirement healthcare benefits 444 457 Long-term portion of accrued postretirement healthcare benefits $ (6,453) (6,535)

The current portion of accrued postretirement healthcare benefits is included in accrued liabilities in the accompanying consolidated balance sheets.

26 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

The components of the Hospitals’ net periodic postretirement benefit cost (benefit) included in labor and benefits in the accompanying consolidated statements of operations for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015 were as follows:

PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   Service cost $169 318 Interest cost 152 229 Amortization of prior service credit (382) (539) Amortization of net gain (18) — Net periodic postretirement benefit cost (benefit) $ (79) 8

Gains accumulated in unrestricted net assets in the accompanying consolidated statements of changes of net assets through the 9-month period as of June 30, 2016 and fiscal year September 30, 2015 were $1,018 and $1,343, respectively. The components of the Hospitals’ other changes in plan assets and benefit obligations recognized in unrestricted net assets in the accompanying consolidated statements of changes of net assets for the 9-month period ended June 30, 2016 and fiscal year September 30, 2015 were as follows: PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   Net loss (gain) $ (76) (957) Amortization of net loss (gain) 19 — Amortization of prior service cost 382 539 Total recognized in unrestricted net assets $ 325 (418)

Weighted average assumptions used to determine benefit obligations for June 30, 2016 and September 30, 2015 were as follows: -XQH 6HSWHPEHU   Discount rate 2.25% 3.00% Rate of compensation increase 3.75 3.75

27 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

For actuarial measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2016 through 2017. Thereafter, the rate was assumed to decrease by approximately 0.5% percentage point on an annual basis to 5.6% in 2024 and then decrease gradually to 4.2%.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for postretirement healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015:

PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   One-percentage-point increase: Increase in total of service and interest cost components $ 23 43 Increase in postretirement benefit obligation 380 395 One-percentage-point decrease: Decrease in total of service and interest cost components $ (21) (39) Decrease in postretirement benefit obligation (357) (370)

Benefit payments funded by Salem Health, which reflect future service, as appropriate, are expected to be paid as follows for the future fiscal years ending June 30: 2017 $444 2018 477 2019 573 2020 621 2021 680 2022–2026 3,826

These estimates are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.

28 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

 )XQFWLRQDO&ODVVLILFDWLRQRI([SHQVHV Expenses on a functional basis for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015 were as follows:

PRQWKV PRQWKV HQGHG HQGHG -XQH 6HSWHPEHU   Healthcare services $ 457,580 569,310 General and administrative 64,042 70,447 $ 521,622 639,757

 )DLU9DOXH0HDVXUHPHQWVDQGWKH)DLU9DOXH2SWLRQ (a) FairValueofFinancialInstruments The carrying amounts for each class of financial instrument noted below are included in the consolidated balance sheets under the indicated captions.

The fair values of the financial instruments as discussed below at June 30, 2016 and September 30, 2015 represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at the measurement date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Corporation’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Corporation based on the best information available in the circumstances.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments: ; ; # ; ; ; ; : The carrying value of these financial instruments is equal to the carrying amounts, at face value or cost plus accrued interest, and approximates fair value because of the short maturity of these instruments.

$: All equity securities are classified as available-for-sale and measured using quoted market prices at the reporting date multiplied by the quantity held. Debt securities classified as available-for-sale are measured using quoted market prices multiplied by the quantity held when quoted market prices are available. If quoted market prices for those debt securities are not available, the fair value is determined using matrix pricing, which is based on quoted prices for securities with similar coupons, ratings, and maturities, rather than on specific bids and offers for the designated security.

29 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

%: The carrying value of the interest rate swap agreement is equal to the estimated fair value of the agreement. The fair value of interest rate swap is determined using pricing models developed based on the LIBOR swap rate and other observable market data. The value was determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and Salem.

&#: The carrying amount and fair value of long-term debt were $296,710 and $298,492, respectively, at June 30, 2016, and $296,895 and $300,866, respectively, at September 30, 2015. The fair value of the Corporation’s long-term debt is measured using quoted offered-side prices when quoted market prices are available. If quoted market prices are not available, the estimated fair value is determined by discounting the future cash flows of each instrument at rates that reflect, among other things, market interest rates and the Corporation’s credit standing. In determining an appropriate spread to reflect its credit standing, the Corporation considers credit default swap spreads, bond yields of other long-term debt offered by the Corporation, and interest rates currently offered to the Corporation for similar debt instruments of comparable maturities by the Corporation’s bankers as well as other banks that regularly compete to provide financing to the Corporation.

(b) FairValueHierarchy FASB ASC 820-10, '(), establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is significant to the fair value measurement in its entirety. There were no reclassification of securities between Level 1 and Level 2 during the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015. There were no Level 3 securities at June 30, 2016 or September 30, 2015.

30 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value and items for which the fair value option has been elected) at June 30, 2016:

)DLUYDOXHPHDVXUHPHQWVDW UHSRUWLQJGDWHXVLQJ 4XRWHGSULFHV LQDFWLYH 6LJQLILFDQW PDUNHWVIRU RWKHU LGHQWLFDO REVHUYDEOH -XQH DVVHWV LQSXWV  /HYHO /HYHO Assets: Corporate bonds $ 4,365 — 4,365 Fixed income mutual funds 248,108 248,108 — U.S. Treasury securities 4,111 — 4,111 Equity mutual funds 239,536 239,536 — U.S. government agency securities 8,270 — 8,270 Total $ 504,390 487,644 16,746

)DLUYDOXHPHDVXUHPHQWVDW UHSRUWLQJGDWHXVLQJ 4XRWHGSULFHV LQDFWLYH 6LJQLILFDQW PDUNHWVIRU RWKHU LGHQWLFDO REVHUYDEOH -XQH DVVHWV LQSXWV  /HYHO /HYHO Liabilities: Interest rate swap $ 18,828 — 18,828 Total $ 18,828 — 18,828

31 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value and items for which the fair value option has been elected) at September 30, 2015:

)DLUYDOXHPHDVXUHPHQWVDW UHSRUWLQJGDWHXVLQJ 4XRWHGSULFHV LQDFWLYH 6LJQLILFDQW PDUNHWVIRU RWKHU LGHQWLFDO REVHUYDEOH 6HSWHPEHU DVVHWV LQSXWV  /HYHO /HYHO Assets: Corporate bonds $ 5,351 — 5,351 Fixed income mutual funds 237,202 237,202 — U.S. Treasury securities 3,119 — 3,119 Equity mutual funds 225,082 225,082 — U.S. government agency securities 8,341 — 8,341 Total $ 479,095 462,284 16,811 Liabilities: Interest rate swap $ 15,992 — 15,992 Total $ 15,992 — 15,992

 &RPPLWPHQWVDQG&RQWLQJHQFLHV (a) GeneralandProfessionalLiabilityInsurance On a claims-made basis, WVIC provides excess insurance coverage up to a $1,000 self-insured retention limit per occurrence and $6,000 annual aggregate limit for healthcare professional liability ($1,000/$6,000 limits) for Salem effective November 1, 2004. WVIC provided insurance coverage for West Valley between May 1, 2005 and September 30, 2007 and for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015. In excess of the $1,000/$6,000 limits, the Hospitals annually purchase reinsurance coverage for claims up to $34,000 in aggregate on a claims-made basis. Reinsurance contracts do not relieve the Corporation from its obligations to claimants. Failure of reinsurers to honor their obligations could result in losses to the Corporation. The Corporation evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurer to manage its exposure to significant losses from reinsurer insolvencies.

General and professional liability costs are accrued based upon an actuarial determination with estimated future professional liability losses recorded at the expected, undiscounted level. The Corporation has recorded estimated liabilities for incurred but not reported professional liability claims and for deductibles on reported claims aggregating $7,703 and $6,991 as of June 30, 2016 and

32 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

September 30, 2015, respectively. The estimated liabilities for incurred but not reported medical claims are recorded on the Hospitals’ books. WVIC carries the estimated liabilities for deductibles on reported claims. Management believes that these estimated liabilities are adequate; however, the establishment of estimated liabilities for incurred but not reported medical malpractice claims and for deductibles on reported claims is an inherently uncertain process, and there can be no assurance that currently established reserves will prove adequate to cover actual ultimate expenses. Subsequent actual experience could result in reserves being too high or too low, which could positively or negatively impact operations in future periods.

The Corporation adheres to FASB ASU No. 2010-24, (Topic 954): * . ASU No. 2010-24 requires claim liabilities to be reported without consideration of insurance recoveries and receivables for insurance recoveries to be reported separately subject to a valuation allowance as appropriate. In accordance with ASU No. 2010-24, the Corporation recorded an asset for insurance recoveries receivable and estimated liabilities, which are not net of any estimated recoveries in amount, of $1,612 and $250, as of June 30, 2016 and September 30, 2015, respectively. The insurance recovery receivable and insured claims liability are included in other noncurrent assets and estimated medical malpractice claims liability in the accompanying consolidated balance sheets. No valuation allowance was recorded related to reinsurance receivables as of June 30, 2016 or September 30, 2015.

(b) Self­InsuredEmployeeBenefits The Corporation is self-insured for employee medical and dental claims. Claims are accrued as the incidents become known. The Corporation has recorded an accrual for the estimated claims including estimates of the ultimate costs for both reported claims and claims incurred but not reported of $2,920 and $2,303 as of June 30, 2016 and September 30, 2015, respectively. Management believes that these amounts, which have been included within other accrued liabilities in the accompanying consolidated balance sheets, are adequate to cover estimated employee medical and dental claims.

(c) RiskManagement In the ordinary course of business, the Corporation is exposed to various risks of loss from torts; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; and natural disasters. Management believes that adequate commercial insurance coverage has been purchased for claims arising from such matters. Settled claims have not exceeded this commercial coverage for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015. The Corporation is self-insured for workers’ compensation claims. The Corporation has recorded estimated liabilities for claims in the amount of $2,622 and $2,383 as of June 30, 2016 and September 30, 2015, respectively.

(d) RegulationandLitigation The healthcare industry is governed by various laws and regulations of federal, state, and local governments. These laws and regulations are subject to ongoing government review and interpretation, and include matters such as licensure, accreditation, reimbursement for patient services, and referrals for Medicare and Medicaid beneficiaries. Compliance with these laws and regulations is required for

33 (Continued) 6$/(0+($/7++263,7$/6$1'&/,1,&6 Notes to Consolidated Financial Statements June 30, 2016 and September 30, 2015 (In thousands)

participation in government healthcare programs and have become more complicated in recent years due to changes resulting from the Health Reform Law and the introduction of health benefit exchanges and coordinated care organizations into the local marketplace. Certain governmental agencies routinely investigate and pursue allegations concerning possible overpayments resulting from violation of fraud and abuse statutes by healthcare providers. These types of investigations may result in settlements involving fines and penalties as well as repayment of improper reimbursement. The Corporation has implemented procedures for monitoring and enforcing compliance with laws and regulations and is not aware of significant instances of noncompliance.

(e) OperatingLeases The Corporation has certain noncancelable operating leases for office space and equipment. The Corporation recorded lease expense of $1,865 and $2,305, which is included in purchased services and other in the consolidated statements of operations for the 9-month period ended June 30, 2016 and fiscal year ended September 30, 2015, respectively.

The following is a schedule of future minimum payments required under the Corporation’s operating leases at June 30, 2016: 2017 $ 2,091 2018 1,843 2019 1,626 2020 1,551 2021 1,005 Thereafter 1,600 $ 9,716   6XEVHTXHQW(YHQWV The Corporation evaluated subsequent events after the consolidated balance sheet date of June 30, 2016 through October 7, 2016, which was the date the consolidated financial statements were issued.

34 6FKHGXOH, 6$/(0+($/7++263,7$/6$1'&/,1,&6 Supplemental Schedule – Consolidating Balance Sheet June 30, 2016 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 3DUHQW 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO 6DOHP+HDOWK +RVSLWDO +ROGLQJ ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +HDOWK )RXQGDWLRQ :HVW9DOOH\ )RXQGDWLRQ &RPSDQ\ &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current assets: Cash and cash equivalents $ 3,435 712 278 18 126 844 — — 5,413 Patient accounts receivable, net 76,208 — 3,117 — — — — — 79,325 Intercompany and other receivables 19,845 122 1,571 3 2,108 711 — (3,441) 20,919 Supplies inventory 6,494 — 367 — — — — — 6,861 Prepaid expense and other 6,277 — 50 — — 2 — — 6,329 Total current assets 112,259 834 5,383 21 2,234 1,557 — (3,441) 118,847 Due from Salem Health West Valley, net — — — — — — — — — Due from Willamette Valley Professional Svc — — — — — — — — — Due from Parent Holding Company 545 — — — — — — (545) — Assets limited as to use, net of current portion 515,710 6,355 — 272 — 15,362 — — 537,699 Property and equipment, net 462,310 — 12,313 — 917 — 1 — 475,541 Rental and other property held for future development, net 12,788 692 — — — — — — 13,480 Other noncurrent assets 23,558 — 460 — 545 — — (14,381) 10,182 Total assets $ 1,127,170 7,881 18,156 293 3,696 16,919 1 (18,367) 1,155,749

See accompanying independent auditors’ report.

35 (Continued) 6FKHGXOH, 6$/(0+($/7++263,7$/6$1'&/,1,&6 Supplemental Schedule – Consolidating Balance Sheet June 30, 2016 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 3DUHQW 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO 6DOHP+HDOWK +RVSLWDO +ROGLQJ ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +HDOWK )RXQGDWLRQ :HVW9DOOH\ )RXQGDWLRQ &RPSDQ\ &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current liabilities: Accounts and intercompany payable $ 46,482 60 1,084 3 545 107 — (3,986) 44,295 Accrued liabilities: Payroll, payroll taxes, and withholdings 14,147 — 542 — — — — — 14,689 Paid time off 18,241 — 748 — — — — — 18,989 Other 10,029 — 230 — — — — — 10,259 Estimated third-party payor settlements, net 1,628 — 479 — — — — — 2,107 Current portion of long-term debt 5,660 — — — — — — — 5,660 Current portion of estimated medical malpractice claims liability 541 — 41 — — 1,252 — — 1,834 Total current liabilities 96,728 60 3,124 3 545 1,359 — (3,986) 97,833 Due to Salem Health, net — — — — — — — — — Long-term debt, net of current portion 291,050 — — — — — — — 291,050 Accrued postretirement healthcare benefits 6,150 — 303 — — — — — 6,453 Fair value of interest rate swap agreement 18,828 — — — — — — — 18,828 Other long-term liabilities 11 — 1 — — 559 — (559) 12 Estimated medical malpractice claims liability 3,343 — 133 — — 4,006 — — 7,482 Total liabilities 416,110 60 3,561 3 545 5,924 — (4,545) 421,658 Net assets: Unrestricted 707,715 1,710 14,554 217 3,151 10,995 1 (10,436) 727,907 Temporarily restricted 3,345 3,842 41 65 — — — (3,386) 3,907 Permanently restricted — 2,269 — 8 — — — — 2,277 Total net assets 711,060 7,821 14,595 290 3,151 10,995 1 (13,822) 734,091 Total liabilities and net assets $ 1,127,170 7,881 18,156 293 3,696 16,919 1 (18,367) 1,155,749

See accompanying independent auditors’ report.

36 6FKHGXOH, 6$/(0+($/7++263,7$/6$1'&/,1,&6 Supplemental Schedule – Consolidating Balance Sheet September 30, 2015 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 3DUHQW 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO 6DOHP+HDOWK +RVSLWDO +ROGLQJ ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +HDOWK )RXQGDWLRQ :HVW9DOOH\ )RXQGDWLRQ &RPSDQ\ &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current assets: Cash and cash equivalents $ 6,303 594 259 8 126 583 — — 7,873 Patient accounts receivable, net 71,163 — 2,847 — — — — — 74,010 Intercompany and other receivables 16,329 51 27 1 308 762 — (2,104) 15,374 Supplies inventory 6,153 — 369 — — — — — 6,522 Prepaid expense and other 7,619 — 109 — — — — — 7,728 Total current assets 107,567 645 3,611 9 434 1,345 — (2,104) 111,507 Due from Salem Health West Valley, net 1,391 — — — — — — (1,391) — Due from Willamette Valley Professional Svc — — — — — — — — — Due from Parent Holding Company 545 — — — — — — (545) — Assets limited as to use, net of current portion 474,160 6,755 — 243 — 15,692 — — 496,850 Property and equipment, net 441,518 — 12,483 — 917 — 2 — 454,920 Rental and other property held for future development, net 13,012 685 — — — — — — 13,697 Other noncurrent assets 19,960 — 487 — 545 — — (13,659) 7,333 Total assets $ 1,058,153 8,085 16,581 252 1,896 17,037 2 (17,699) 1,084,307

See accompanying independent auditors’ report.

37 (Continued) 6FKHGXOH, 6$/(0+($/7++263,7$/6$1'&/,1,&6 Supplemental Schedule – Consolidating Balance Sheet September 30, 2015 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 3DUHQW 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO 6DOHP+HDOWK +RVSLWDO +ROGLQJ ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +HDOWK )RXQGDWLRQ :HVW9DOOH\ )RXQGDWLRQ &RPSDQ\ &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Current liabilities: Accounts and intercompany payable $ 36,550 576 991 2 545 521 — (1,886) 37,299 Accrued liabilities: Payroll, payroll taxes, and withholdings 11,051 — 414 — — — — — 11,465 Paid time off 15,623 — 640 — — — — — 16,263 Other 8,422 — 187 — — — — (272) 8,337 Estimated third-party payor settlements, net 2,255 — 895 — — — — — 3,150 Current portion of long-term debt 5,661 — — — — — — — 5,661 Current portion of estimated medical malpractice claims liability 494 — 35 — — 1,135 — — 1,664 Total current liabilities 80,056 576 3,162 2 545 1,656 — (2,158) 83,839 Due to Salem Health, net — — 1,391 — — — — (1,391) — Long-term debt, net of current portion 291,234 — — — — — — — 291,234 Accrued postretirement healthcare benefits 6,247 — 288 — — — — — 6,535 Fair value of interest rate swap agreement 15,992 — — — — — — — 15,992 Other long-term liabilities 33 — 2 — — 752 — (751) 36 Estimated medical malpractice claims liability 1,582 — 110 — — 3,635 — — 5,327 Total liabilities 395,144 576 4,953 2 545 6,043 — (4,300) 402,963 Net assets: Unrestricted 660,390 1,825 11,583 179 1,351 10,994 2 (10,734) 675,590 Temporarily restricted 2,619 3,417 45 63 — — — (2,665) 3,479 Permanently restricted — 2,267 — 8 — — — — 2,275 Total net assets 663,009 7,509 11,628 250 1,351 10,994 2 (13,399) 681,344 Total liabilities and net assets $ 1,058,153 8,085 16,581 252 1,896 17,037 2 (17,699) 1,084,307

See accompanying independent auditors’ report.

38 6FKHGXOH,, 6$/(0+($/7++263,7$/6$1'&/,1,&6 Supplemental Schedule – Consolidating Statement of Operations 9 - month period ended June 30, 2016 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 3DUHQW 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO 6DOHP+HDOWK +RVSLWDO +ROGLQJ ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +HDOWK )RXQGDWLRQ :HVW9DOOH\ )RXQGDWLRQ &RPSDQ\ &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Operating revenue: Patient service revenue, net of contractual allowances and discounts $ 520,001 — 21,502 — — — — — 541,503 Provision for bad debts (17,902) — (1,487) — — — — — (19,389) Net patient service revenue, less provision for bad debts 502,099 — 20,015 — — — — — 522,114 Other revenue 31,358 600 586 36 1,726 2,415 893 (4,267) 33,347 Net assets released from restriction used for operations — 275 — 26 — — — — 301 Total operating revenue 533,457 875 20,601 62 1,726 2,415 893 (4,267) 555,762 Operating expenses: Labor and benefits 278,832 — 10,779 — — — 825 — 290,436 Medical and other supplies 76,597 4 2,183 1 — — 3 (24) 78,764 Purchased services and other 86,824 1,526 2,679 27 — 2,966 28 (5,348) 88,702 Depreciation 30,229 — 956 — — — — — 31,185 Professional fees 22,037 20 1,011 — — 69 36 — 23,173 Interest and amortization 9,362 — — — — — — — 9,362 Total operating expenses 503,881 1,550 17,608 28 — 3,035 892 (5,372) 521,622 Operating income (loss) 29,576 (675) 2,993 34 1,726 (620) 1 1,105 34,140 Other income (loss): Investment income (loss), net 17,689 81 2 2 — 433 — — 18,207 Other, net (604) — (8) — 74 — — (1) (539) Total other income (loss), net 17,085 81 (6) 2 74 433 — (1) 17,668 Excess (deficit) of revenue over (under) expenses 46,661 (594) 2,987 36 1,800 (187) 1 1,104 51,808 Change in net unrealized gain (loss) on other-than-trading securities 3,002 20 — 2 — 187 — — 3,211 Change in fair value of interest rate swap agreement (2,836) — — — — — — — (2,836) Change in postretirement benefit obligation (309) — (16) — — — — — (325) Contributions for property and equipment 807 — — — — — — (807) — Net assets released from restriction used for property and equipment — 459 — — — — — — 459 Change in unrestricted net assets $ 47,325 (115) 2,971 38 1,800 — 1 297 52,317

See accompanying independent auditors’ report.

39 6FKHGXOH,, 6$/(0+($/7++263,7$/6$1'&/,1,&6 Supplemental Schedule – Consolidating Statement of Operations Fiscal year ended September 30, 2015 (In thousands)

:LOODPHWWH :LOODPHWWH 6DOHP :HVW9DOOH\ 3DUHQW 9DOOH\ 9DOOH\ 6DOHP +RVSLWDO 6DOHP+HDOWK +RVSLWDO +ROGLQJ ,QVXUDQFH 3URIHVVLRQDO &RQVROLGDWLQJ +HDOWK )RXQGDWLRQ :HVW9DOOH\ )RXQGDWLRQ &RPSDQ\ &RUSRUDWLRQ 6HUYLFHV HQWULHV &RQVROLGDWHG Operating revenue: Patient service revenue, net of contractual allowances and discounts $ 656,073 — 27,814 — — — — — 683,887 Provision for bad debts (24,726) — (1,869) — — — — — (26,595) Net patient service revenue, less provision for bad debts 631,347 — 25,945 — — — — — 657,292 Other revenue 36,198 1,051 613 65 — 1,853 666 (4,282) 36,164 Net assets released from restriction used for operations — 265 — 15 — — — — 280 Total operating revenue 667,545 1,316 26,558 80 — 1,853 666 (4,282) 693,736 Operating expenses: Labor and benefits 343,843 — 13,586 — — — 1,374 — 358,803 Medical and other supplies 102,188 2 2,715 1 — — 10 (43) 104,873 Purchased services and other 92,204 1,613 3,259 154 — 789 79 (5,127) 92,971 Depreciation 38,469 — 1,217 — — — 1 — 39,687 Professional fees 28,897 24 1,532 3 — 72 58 — 30,586 Interest and amortization 12,837 — — — — — — — 12,837 Total operating expenses 618,438 1,639 22,309 158 — 861 1,522 (5,170) 639,757 Operating income (loss) 49,107 (323) 4,249 (78) — 992 (856) 888 53,979 Other income (loss): Investment income (loss), net (1,264) 19 3 17 — 35 — — (1,190) Other, net 431 (725) (1) — 84 — — (1,048) (1,259) Total other income (loss), net (833) (706) 2 17 84 35 — (1,048) (2,449) Excess (deficit) of revenue over (under) expenses 48,274 (1,029) 4,251 (61) 84 1,027 (856) (160) 51,530 Change in net unrealized gain (loss) on other-than-trading securities (3,306) (24) — 1 — 21 — — (3,308) Change in fair value of interest rate swap agreement (3,171) — — — — — — — (3,171) Change in postretirement benefit obligation 293 — 125 — — — — — 418 Contributions for property and equipment 525 — — 100 — — — (625) — Net assets released from restriction used for property and equipment — 16 — 5 — — — — 21 Change in unrestricted net assets $ 42,615 (1,037) 4,376 45 84 1,048 (856) (785) 45,490

See accompanying independent auditors’ report.

40

APPENDIX D

SUMMARY OF PRINCIPAL DOCUMENTS

[THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX D

SUMMARY OF PRINCIPAL DOCUMENTS

The following is a summary of certain provisions of the Master Indenture, Supplement No. 1, the Bond Indenture and the Loan Agreement that are not described elsewhere in this Official Statement. The Bonds are issued and secured pursuant to the Bond Indenture, the Loan Agreement and Supplement No. 1. References to the Master Indenture, Supplement No. 1, the Bond Indenture, or the Loan Agreement, or a fund or account refer to the related document, entity, fund or account with respect to the Bonds, as described in this Official Statement. Unless otherwise specified to the contrary in this Appendix C, all definitions and provisions summarized refer to the Master Indenture, Supplement No. 1, the Bond Indenture and the Loan Agreement. These summaries do not purport to be comprehensive and reference should be made to the Master Indenture, Supplement No. 1, the Bond Indenture and the Loan Agreement for a full and complete statement of their provisions.

DEFINITIONS OF CERTAIN TERMS

Unless the context otherwise requires, the terms defined in this summary shall, for all purposes of this summary, have the meanings herein specified, to be equally applicable to both singular and plural forms of any of the terms herein defined. Unless otherwise defined in this summary, all terms used herein or elsewhere in the Official Statement shall have the meanings assigned to such terms in the Master Indenture, Supplement No. 1, the Bond Indenture, or the Loan Agreement, as applicable.

“Accountant” means any independent certified public accountant or firm of such accountants selected by the Corporation.

“Act” means Oregon Revised Statutes Sections 441.525 to 441.595, inclusive, as now in effect and as it may from time to time hereafter be amended or supplemented.

“Additional Indebtedness” means any Indebtedness (including all Master Indenture Obligations) incurred subsequent to the effectiveness of this Master Indenture.

“Additional Payments” means the payments so designated and required to be made by the Corporation pursuant to the Loan Agreement.

“Administrative Fees and Expenses” means any application, commitment, financing, administration, investment or similar fee charged, or reimbursement for administrative or other expenses incurred, by the Authority or the Bond Trustee, including Additional Payments.

“Affiliate” means a corporation, partnership, joint venture, limited liability company, limited liability partnership, association, business trust or similar entity organized under the laws of the United States of America or any state thereof which is directly or indirectly controlled by any Member of the Obligated Group or Designated Affiliate, by any other Affiliate or by any Person which controls any Member of the Obligated Group or Designated Affiliate or which controls any other Affiliate; provided, however, the term “Affiliate” shall not include any Member of the Obligated Group or Designated Affiliate. For purposes of this definition, control means the power to direct the management and policies of a Person through the ownership of not less than a majority of its voting securities or the right to designate or elect not less than a majority of the Members of its board of directors or other governing board or body by law, contract or otherwise.

“Aggregate Principal Amount” means, when used with respect to Obligations, the principal amount of such Obligation, or, in the case of a Financial Products Agreement, the notional amount, or, in the case of any other Obligation which does not represent or secure Indebtedness, the aggregate amount of Master Indenture Obligation Payments.

D-1 “Annual Debt Service” means for each Fiscal Year the sum (without duplication) of the aggregate amount of principal and interest scheduled to become due and payable in such Fiscal Year on all Long-Term Indebtedness of the Credit Group then Outstanding (by scheduled maturity, acceleration, mandatory redemption or otherwise, but not including purchase price coming due as a result of a mandatory or optional tender or put), less any amounts of such principal or interest to be paid during such Fiscal Year from (a) the proceeds of Indebtedness or (b) moneys or Government Obligations deposited in trust for the purpose of paying such principal or interest; provided that if an Identified Financial Products Agreement has been entered into by any Credit Group Member with respect to Long-Term Indebtedness, interest on such Long-Term Indebtedness shall be included in the calculation of Annual Debt Service by including for each Fiscal Year an amount equal to the amount of interest payable on such Long-Term Indebtedness in such Fiscal Year at the rate or rates stated in such Long-Term Indebtedness plus any Financial Products Payments under an Identified Financial Products Agreement payable in such Fiscal Year minus any Financial Products Receipts under an Identified Financial Products Agreement receivable in such Fiscal Year; provided that in no event shall any calculation made pursuant to this clause result in a number less than zero being included in the calculation of Annual Debt Service. For purposes of determining compliance with the Master Indenture, if interest on Long-Term Indebtedness is payable pursuant to a variable rate interest formula, the interest rate on such Long-Term Indebtedness shall be assumed to be, at the option of the Corporation, (i) actual interest due and payable on such Long-Term Indebtedness during the applicable period, (ii) with respect to Tax-Exempt Indebtedness, (a) an average of the SIFMA Index during the twelve (12) calendar months immediately preceding the date of calculation or (b) an average of the SIFMA Index during the five (5) calendar years immediately preceding the date of calculation, or (iii) with respect to Taxable Indebtedness, (a) an average of the LIBOR Index during the twelve (12) calendar months immediately preceding the date of calculation or (b) an average of the LIBOR Index during the five (5) calendar years immediately preceding the date of calculation.

“Authority” means the Hospital Facility Authority of the City of Salem, Oregon, or its successors and assigns created by the City of Salem, Oregon pursuant to the Act.

“Authorized Representative” means, as used in the Master Indenture, with respect to the Corporation and each other Member of the Obligated Group and any Designated Affiliates, its respective chief executive officer or president, chief financial officer or any other individual or individuals designated as an Authorized Representative thereof by the Governing Body or a current Authorized Representative in a writing filed with the Master Trustee and Related Bond Trustee. As used in the Bond Indenture, “Authorized Representative” means, with respect to the Corporation, the President and Chief Executive Officer, the Chief Financial Officer and such other officer of the Corporation that may be designated in writing by the Chairperson, the President and Chief Executive Officer or the Chief Financial Officer, and filed with the Bond Trustee.

“Balloon Indebtedness” means Long-Term Indebtedness, twenty-five percent (25%) or more of the principal of which (calculated as of the date of issuance) becomes due during any period of twelve (12) consecutive months if such maturing principal amount is not required to be amortized below such percentage by mandatory redemption prior to such 12-month period.

“Bond Fund” means the fund by that name established pursuant to the Bond Indenture.

“Bond Indenture” means the Bond Indenture relating to the Bonds, by and between the Authority and the Bond Trustee, as originally executed and as it may from time to time be supplemented, modified or amended by any Supplemental Indenture.

“Bond Trustee” means U.S. Bank National Association, a national banking association organized and existing under the laws of the United States of America, acting in its capacity as Bond Trustee or its successor as trustee, as provided in the Bond Indenture.

“Bonds” means the Hospital Facility Authority of the City of Salem, Oregon Revenue Refunding Bonds (Salem Health Projects), Series 2016A, authorized by, and at any time Outstanding pursuant to, the Bond Indenture.

D-2 “Book Value” means, when used in connection with Property, Plant and Equipment or other Property of any Credit Group Member, the value of such property, net of accumulated depreciation, as it is carried on the books of the Credit Group Member and in conformity with GAAP, and when used in connection with Property, Plant and Equipment or other Property of the Credit Group, means the aggregate of the values so determined with respect to such Property of each Credit Group Member determined in such a way that no portion of such value of Property of any Credit Group Member is included more than once.

“Business Day” means a day which is not (a) a Saturday, Sunday or legal holiday on which banking institutions in the state where the principal corporate office of the Corporation or the city where the Bond Trustee are located are authorized by law to close or (b) a day on which the New York Stock Exchange is closed.

“Certificate,” “Statement,” “Request,” “Requisition” and “Order” of the Authority or the Corporation mean, respectively, a written certificate, statement, request, requisition or order signed in the name of the Authority by its Chairman, Vice Chairman, Secretary/Treasurer or any Member of its Board of Directors thereof or such other person as may be designated and authorized to sign for the Authority in writing to the Bond Trustee, or in the name of the Corporation by an Authorized Representative of the Corporation. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument. If and to the extent required by the Bond Indenture, each such instrument shall include the statements provided for in the Bond Indenture.

“Code” means the Internal Revenue Code of 1986, as amended from time to time. Each reference to a section of the Code shall be deemed to include the United States Treasury Regulations, including temporary and proposed regulations, relating to such section which are applicable to the Bonds or the use of the proceeds thereof.

“Commitment Indebtedness” means an obligation or obligations of any Member of the Credit Group to repay amounts disbursed pursuant to a commitment from a Person to refinance when due other Indebtedness of such Member or purchase when tendered for purchase by the holder thereof in accordance with the terms thereof other Indebtedness of such Member, which other Indebtedness was incurred in accordance with the provisions of the Master Indenture.

“Completion Indebtedness” means any Long-Term Indebtedness incurred for the purpose of financing the completion of construction or equipping of any project for which Long-Term Indebtedness has theretofore been incurred in accordance with the provisions hereof, to the extent necessary to provide a completed and fully equipped facility of the type and scope contemplated at the time said Long-Term Indebtedness was incurred, and in accordance with the general plans and specifications for such facility as originally prepared and approved in connection with the related financing, modified or amended only in conformance with the provisions of the documents pursuant to which the related financing was undertaken.

“Consultant” means a firm which is not, and no Member, stockholder, director, officer or employee of which is, an officer, director, trustee or employee of any Member of the Credit Group or any Affiliate, and which is a professional management consultant or accounting firm having the skill and experience necessary to render the particular report required by any provision of the Master Indenture in which such requirement appears and which is selected by the Obligated Group Representative.

“Controlling Member” means the Member designated by the Obligated Group Representative to establish and maintain control over a Designated Affiliate as provided by the Master Indenture.

“Corporation” means Salem Health (formerly known as Salem Hospital), a nonprofit corporation duly organized and existing under the laws of the State of Oregon, or any entity which is the surviving, resulting or transferee entity in any merger, consolidation or transfer of assets permitted under the Master Indenture.

“Costs of Issuance” means issuance costs with respect to the Bonds described in Section 147(g) of the Code and any regulations thereunder, including but not limited to the following: (a) underwriters’ spread (whether

D-3 realized directly or derived through purchase of Bonds at a discount below the price at which they are expected to be sold to the public); (b) counsel fees (including bond counsel, underwriters’ counsel, the Authority’s counsel, Corporation’s counsel, as well as any other specialized counsel fees incurred in connection with the issuance of the Bonds); (c) financial advisor fees incurred in connection with the issuance of the Bonds; (d) rating agency fees; (e) trustee, escrow agent and paying agent fees; (f) accountant fees and other expenses related to issuance of the Bonds; (g) printing costs (for the Bonds and of the Official Statement relating to the Bonds); and (h) fees and expenses of the Authority incurred in connection with the issuance of the Bonds.

“Costs of Issuance Fund” means the fund by that name established pursuant to the Bond Indenture.

“Credit Facility” means any insurance policy, letter of credit or similar credit facility issued by a Credit Facility Provider insuring or providing for the payment when due of the principal of and interest on the Bonds, delivered to the Bond Trustee pursuant to the Loan Agreement.

“Credit Facility Provider” means an insurer, commercial bank or other financial institution issuing a Credit Facility, and its successors.

“Credit Group” means, collectively, the Corporation and the other Members of the Obligated Group and the Designated Affiliates.

“Debt Service Coverage Ratio” means, for any period of time, the ratio determined by dividing Income Available for Debt Service by Maximum Annual Debt Service.

“Defeasance Securities” means direct obligations of (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America).

“Designated Affiliate(s)” means the Designated Affiliates of the Credit Group as designated by the Obligated Group Representative pursuant to the Master Indenture but excluding any Designated Affiliate which has been terminated as such under the Master Indenture.

“Escrow Agent” means U.S. Bank National Association, in its capacity as escrow agent under the Escrow Agreement.

“Escrow Agreement” means that certain Escrow Deposit Agreement, among the Corporation, the Authority and the Escrow Agent entered into in connection with the defeasance and redemption of the Refunded Bonds.

“Event of Default” means any of the events described herein under the headings “THE MASTER INDENTURE—Events of Default” and “THE BOND INDENTURE—Events of Default; Remedies Upon Default.”

“Existing Master Indenture Obligations” means Obligation No. 10 issued pursuant to the Third Supplement, Obligation No. 15 issued pursuant to the Seventh Supplement, Obligation No. 16 issued pursuant to the Seventh Supplement and Obligation No. 25 issued pursuant to the Twelfth Supplement.

“Financial Products Agreement” means an interest rate swap, cap, collar, option, floor, forward or other hedging agreement, arrangement or security, however denominated, identified to the Master Trustee in an Officer’s Certificate as having been entered into by a Member or the Credit Group with a Qualified Provider not for investment purposes but with respect to Indebtedness (which Indebtedness shall be specifically identified in the Officer’s Certificate) for the purpose of (1) reducing or otherwise managing the Member’s risk of interest rate changes, or (2) effectively converting the Member’s interest rate exposure, in whole or in part, from a fixed rate exposure to a variable rate exposure, or from a variable rate exposure to a fixed rate exposure.

D-4 “Financial Products Extraordinary Payments” means any payments required to be paid to a counterparty by a Member pursuant to a Financial Products Agreement in connection with the termination thereof, tax gross-up payments, expenses, default interest and any other payments or indemnification obligations to be paid to a counterparty by a Member of the Credit Group under a Financial Products Agreement, with payments are not Financial Products Payments.

“Financial Products Payments” means regularly scheduled payments required to be paid to a counterparty by a Member pursuant to a Financial Products Agreement and excluding Financial Products Extraordinary Payments.

“Financial Products Receipts” means payments periodically required to be paid to a Member by a counterparty pursuant to a Financial Products Agreement.

“Financial Statements” means the Financial Statements, described in the Master Indenture.

“Fiscal Year” means any 12-month period beginning on July 1 of such year or such other consecutive 12- month period, selected by the Obligated Group Representative as the fiscal year for any Member of the Obligated Group or any Designated Affiliate.

“Fitch” means Fitch, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Corporation by written notice to the Authority and the Bond Trustee.

“GAAP” means generally accepted accounting principles in the United States. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation, combination or other accounting computation is required to be made, for the purposes of the Master Indenture or any agreement, document or certificate executed and delivered in connection with or pursuant to the Master Indenture, such determination or computation shall be done in accordance with GAAP in effect on, at the sole option of the Obligated Group Representative, (i) the date such determination or computation is made for any purpose of the Master Indenture or (ii) the date of execution and delivery of the Master Indenture if the Obligated Group Representative delivers an Officer’s Certificate to the Master Trustee describing why then current GAAP is inconsistent with the intent of the parties on the date of execution and delivery of the Master Indenture.

“Governing Body” means, when used with respect to the Obligated Group Representative or any other Member of the Credit Group, the board of directors, the board of trustees, or other board or group of individuals in which the powers of governance of the Obligated Group Representative or the Member of the Credit Group are vested.

“Government Obligations” means (i) direct obligations of, or obligations the principal of and interest on which are guaranteed by the United States of America, (ii) evidences of a direct ownership in future interest or principal payments on obligations issued or guaranteed by the United States of America, which obligations are held in a custody account by a custodian satisfactory to the Master Trustee and any Related Bond Trustee pursuant to the terms of a custody agreement or (iii) obligations issued by any state of the United States or any political subdivision, public instrumentality or public authority of any state, which obligations are fully secured by and payable solely from direct obligations of, or obligations the principal of and interest on which are fully guaranteed by, the United States of America which are held in trust.

“Governmental Restrictions” means federal, state or other applicable governmental laws or regulations affecting any Member of the Credit Group and its health care facilities, adult congregate living facilities or other facilities placing restrictions and limitations on the (i) fees and charges to be fixed, charged or collected by any Member of the Credit Group or (ii) the timing of the receipt of such revenues.

D-5 “Gross Receivables” means all of the accounts, chattel paper, instruments and general intangibles (all as defined in the UCC) of each Member of the Credit Group, as are now in existence or as may be hereafter acquired and the proceeds thereof; excluding, however, (i) all Restricted Moneys and (ii) all accounts or general intangibles consisting of or arising from patents and royalties.

“Guaranty” means any obligation of any Member of the Credit Group guaranteeing in any manner, directly or indirectly, any obligation of any other Person which obligation of such other Person would, if such obligation were the obligation of a Member of the Credit Group, constitute Indebtedness under the Master Indenture.

“Holder,” “Bondholder” or “Owner” whenever used with respect to a Bond, means the person in whose name such Bond is registered, and whenever used with respect to an Obligation, means the owner of any Obligation issued in registered form.

“Identified Financial Products Agreement” means a Financial Products Agreement identified to the Master Trustee in an Officer’s Certificate as having been entered into by an Obligated Group Member with a Qualified Provider with respect to Indebtedness (which is either then-Outstanding or to be issued after the date of such Officer’s Certificate) identified in such Officer’s Certificate.

“Immaterial Affiliate” shall mean any Affiliate whose total unrestricted net assets, as shown on its financial statements or on consolidated financial statements of an entity for which it is a part for its most recently completed fiscal year, were less than 5% of the combined or consolidated unrestricted net assets of the Credit Group; provided, however, that the total unrestricted net assets of all such Immaterial Affiliates shall not, at any one time, exceed 10% of the combined or consolidated unrestricted net assets of the Credit Group, in which case they will be treated as Material Affiliates.

“Income Available for Debt Service” means, unless the context provides otherwise, with respect to the Credit Group as to any period of time, excess of revenues over expenses before depreciation, amortization, and interest expense, as determined in accordance with GAAP and as shown on the Financial Statements; provided, that no determination thereof shall take into account: (a) any revenue or expense of a Person which is not a Member of the Credit Group; (b) revenues or expenses relating to gifts, grants, bequests, donations or contributions, to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of principal of, redemption premium and interest on Indebtedness or the payment of operating expenses; (c) the net proceeds of insurance (other than business interruption insurance) and condemnation awards; (d) any gain or loss resulting from the extinguishment of Indebtedness; (e) any gain or loss resulting from the sale, exchange or other disposition of assets not in the ordinary course of business; (f) any gain or loss resulting from any discontinued operations; (g) any gain or loss resulting from pension terminations, settlements or curtailments; (h) any unusual charges for employee severance; (i) adjustments to the value of assets or liabilities resulting from changes in GAAP; (j) unrealized gains or losses on investments, including “other than temporary” declines in Book Value; (k) gains or losses resulting from changes in valuation of any hedging, derivative, interest rate exchange or similar contract; (l) (i) any Financial Products Extraordinary Payments or (ii) similar payments on any hedging, derivative, interest rate exchange or similar contract that does not constitute a Financial Products Agreement; (m) unrealized gains or losses from the write-down, reappraisal or revaluation of assets; (n) income from all Irrevocable Deposits; or (o) other nonrecurring items of any extraordinary nature which do not involve the receipt, expenditure or transfer of assets.

“Indebtedness” means (i) all indebtedness of Members of the Credit Group for borrowed money, (ii) all installment sales, conditional sales and leases required to be capitalized in accordance with generally accepted accounting principles of any Member of the Credit Group and (iii) any Guaranty for which the guarantor has made payments under the terms thereof during any period of calculation (other than any Guaranty by any Member of the Credit Group of Indebtedness of any other Member of the Credit Group), whether constituting Long-Term Indebtedness or Short-Term Indebtedness. Indebtedness shall not include obligations of any Member of the Credit Group to any other Member of the Credit Group.

D-6 “Investment Securities” means any of the following obligations that are legal investments under the laws of the State for moneys held hereunder subject to the limitations described below:

(a) for all purposes, including defeasance investments in refunding escrow accounts:

(1) Cash,

(2) Obligations of, or obligations guaranteed as to principal and interest by, the U.S. or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the U.S. including: U.S. treasury obligations; All direct or fully guaranteed obligations; Farmers Home Administration; General Services Administration; Guaranteed Title XI financing; Government National Mortgage Association (GNMA); State and Local Government Series; provided that any security used for defeasance must provide for the timely payment of principal and interest and cannot be callable or prepayable prior to maturity or earlier redemption on the rated debt (excluding securities that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date).

(b) for all purposes other than defeasance investments in refunding escrow accounts:

(1) Obligations of any of the following federal agencies which obligations represent the full faith and credit of the United States of America, including: Export-Import Bank; Rural Economic Community Development Administration; U.S. Maritime Administration; Small Business Administration; U.S Department of Housing & Urban Development (PHAs); Federal Housing Administration; Federal Financing Bank;

(2) Direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United State of America: Senior debt obligations issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC); Obligations of the Resolution Funding Corporation (REFCORP); Senior debt obligations of the Federal Home Loan Bank System; Senior debt obligations of other Government Sponsored Agencies approved by the Credit Facility Provider;

(3) U.S. dollar denominated deposit accounts, federal funds and bankers’ acceptances with domestic commercial banks which have a rating on their short term certificates of deposit on the date of purchase of “P-1” by Moody’s and “A-1” or “A-1+” by S&P and maturing not more than 360 calendar days after the date of purchase;

(4) Commercial paper which is rated at the time of purchase in the single highest classification, “P-1” by Moody’s and “A-1+” by S&P and which matures not more than 270 calendar days after the date of purchase;

(5) Investments in a money market fund rated “AAAm” or “AAAm-G” or better by Rating Agency, including money market mutual funds from which the Trustee or its affiliates derive a fee for investment advisory or other services to the fund;

(6) Pre-refunded municipal obligations defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and

(A) which are rated, based on an irrevocable escrow account or fund (the “escrow”), in the highest rating category of Moody’s or S&P or any successors thereto; or

(B) (i) which are fully secured as to principal and interest and redemption premium, if any, by an escrow consisting only of cash or obligations described in paragraph (A)(2) above,

D-7 which escrow may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate;

(7) Municipal Obligations rated “Aaa/AAA” or general obligations of states with a rating of “A2/A” or higher by both Moody’s and S&P;

(8) Investment Agreements approved in writing by the Credit Facility Provider (supported by appropriate opinions of counsel); and

(9) other forms of investments (including repurchase agreements) approved in writing by the Credit Facility Provider.

(c) The value of the above instruments shall be determined as follows:

(1) For the purpose of determining the amount in any fund, all Investment Securities credited to such fund shall be valued at fair market value. The Bond Trustee shall determine the fair market value based on accepted industry standards and from accepted industry providers.

(2) As to certificates of deposit and bankers’ acceptances: the face amount thereof, plus accrued interest thereon; and

(3) As to any investment not specified above: the value thereof established by prior agreement among the Authority, the Bond Trustee and the Credit Facility Provider.

“Irrevocable Deposit” means the irrevocable deposit in trust of cash, or Government Obligations, or other securities permitted for such purpose pursuant to the terms of the documents governing the payment of or discharge of Indebtedness, the principal of and interest on which will be in an amount, and under terms sufficient to pay all or a portion of the principal of, premium, if any, and interest on, as the same shall become due, any such Indebtedness which would otherwise be considered Outstanding. The trustee of such deposit may be the Master Trustee, a Related Bond Trustee or any other trustee or escrow agent authorized to act in such capacity.

“Lien” means any mortgage, deed of trust or pledge of, security interest in or encumbrance on any Property of any Member of the Credit Group which secures any Indebtedness or any other obligation the Credit Group, any Member of the Credit Group or any other Person, other than an obligation to any Member of the Credit Group.

“Loan Agreement” means the Loan Agreement relating to the Bonds, by and between the Authority and the Corporation, as originally executed and as it may from time to time be supplemented, modified or amended in accordance with the terms thereof and of the Bond Indenture.

“Loan Default Event” means any of the events described herein under the headings “THE LOAN AGREEMENT—Events of Default.”

“Loan Repayments” means the payments so designated and required to be made by the Corporation pursuant to the Loan Agreement.

“Long-Term Indebtedness” means all Indebtedness having a maturity longer than one year incurred or assumed by any Member of the Credit Group including: (i) money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred, longer than one year, (ii) leases which

D-8 are required to be capitalized in accordance with generally accepted accounting principles having an original term, or renewable at the option of the lessee for a period from the date originally incurred, longer than one year, (iii) installment sale or conditional sale contracts having an original term in excess of one year, and (iv) Short-Term Indebtedness if Commitment Indebtedness exists to provide financing to retire such Short-Term Indebtedness and such Commitment Indebtedness provides for the repayment of principal on terms which would, if such commitment were implemented, constitute Long-Term Indebtedness.

“Master Indenture” means that certain Amended and Restated Master Trust Indenture dated as of November 1, 2016, among the Corporation, the other Members of the Obligated Group named therein and the Master Trustee, as originally executed and as it may from time to time be supplemented, modified or amended in accordance with the terms thereof.

“Master Indenture Obligation Payments” means payments (however designated) required under any Outstanding Obligation which does not constitute Indebtedness.

“Master Trustee” means U.S. Bank National Association, or its successor, as master trustee under the Master Indenture.

“Material Affiliate” shall mean any Affiliate, which is not a Member or a Designated Affiliate, whose total unrestricted net assets, as shown on its financial statements or on consolidated financial statements of an entity for which it is a part for its most recently completed Fiscal Year, were equal to or greater than 5% of the combined or consolidated unrestricted net assets of the Credit Group, provided, however that if the total unrestricted net assets of all Affiliates that are not individually determined to be Material Affiliates is equal to or greater than 10% of the combined or consolidated unrestricted net assets of the Credit Group then these Affiliates as a group will be deemed Material Affiliates for purposes of the Master Indenture.

“Maximum Annual Debt Service” means the greatest amount of Annual Debt Service becoming due and payable in any Fiscal Year including the Fiscal Year in which the calculation is made or any subsequent Fiscal Year; provided, however that for the purposes of computing Maximum Annual Debt Service:

(a) with respect to a Guaranty, there shall be included in the Annual Debt Service of the Obligated Group Members one hundred percent (100%) of the Obligated Group Members’ monetary liability under the Guaranty provided, however, that if the applicable guarantor has not been required, by reason of its guaranty, to make any payment in respect of the Guaranty within the immediately preceding twelve (12) months, there shall be included zero debt service with respect to such Guaranty in the Annual Debt Service of the Obligated Group Members;

(b) if interest on Long-Term Indebtedness is payable pursuant to a variable interest rate formula (or if Financial Products Payments under an Identified Financial Products Agreement or Financial Products Receipts under an Identified Financial Products Agreement are determined pursuant to a variable rate formula), the interest rate on such Long-Term Indebtedness (or the variable rate formula for such Financial Products Payments under an Identified Financial Products Agreement or Financial Products Receipts under an Identified Financial Products Agreement) for periods when the actual interest rate cannot yet be determined shall be assumed to be equal to (i) if such Long-Term Indebtedness (or Identified Financial Products Agreement) was Outstanding during the twelve (12) calendar months immediately preceding the date of calculation, an average of the interest rates per annum which were in effect, and (ii) if such Long-Term Indebtedness (or Identified Financial Products Agreement) was not Outstanding during the twelve (12) calendar months immediately preceding the date of calculation, at the option of the Corporation, (a) with respect to Tax-Exempt Indebtedness, (A) an average of the SIFMA Index during the twelve (12) calendar months immediately preceding the date of calculation or (B) an average of the SIFMA Index during the five (5) calendar years immediately preceding the date of calculation, or (b) with respect to Taxable Indebtedness, (A) an average of the LIBOR Index during the twelve (12) calendar months immediately preceding the date of calculation or (B) an average of the LIBOR Index during the five (5) calendar years immediately preceding the date of calculation, all as specified in either, at the election of the Obligated Group

D-9 Representative, an Officer’s Certificate or a written statement from an investment banking or financial advisory firm;

(c) if moneys or Government Obligations have been deposited with a trustee or escrow agent in an amount, together with earnings thereon, sufficient to pay all or a portion of the principal of or interest on Long- Term Indebtedness as it comes due, such principal or interest, as the case may be, to the extent provided for, shall not be included in computations of Maximum Annual Debt Service;

(d) debt service on Long-Term Indebtedness incurred to finance capital improvements shall be included in the calculation of Maximum Annual Debt Service only in proportion to the amount of interest on such Long-Term Indebtedness which is payable in the then current Fiscal Year from sources other than proceeds of such Long-Term Indebtedness (other than proceeds deposited in debt service reserve funds) held by a trustee or escrow agent for such purpose; and

(e) with respect to Balloon Indebtedness, at the option of the Obligated Group Representative, such Balloon Indebtedness shall be treated as Long-Term Indebtedness with substantially level debt service over a period of thirty (30) years from the date of calculation of such Balloon Indebtedness at an interest rate equal to, at the option of the Corporation, (i) the average of the interest rates per annum which were in effect during the twelve (12) calendar months immediately preceding the date of calculation or (ii) a fixed rate equal to the Thirty- Year Revenue Bond Index most recently published in The Bond Buyer.

“Member of Credit Group,” or “Credit Group Member,” means each Member of the Obligated Group and any other Person designated as a Designated Affiliate pursuant to the Master Indenture but excluding any Designated Affiliate which has been terminated pursuant to the provisions of the Master Indenture.

“Member of the Obligated Group,” or “Obligated Group Member,” means the Obligated Group Representative and any other Person becoming a Member of the Obligated Group pursuant to the Master Indenture but excluding any Member of the Obligated Group which has withdrawn from the Obligated Group pursuant to the Master Indenture. The Corporation is the only initial Member of the Obligated Group.

“Moody’s” means Moody’s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Corporation by written notice to the Authority and the Bond Trustee.

“Non-Recourse Indebtedness” means any Indebtedness incurred to finance the acquisition of Property secured by a Lien on such Property, liability for which is effectively limited to the Property subject to such Lien with no recourse, directly or indirectly, to any other Property of the Credit Group.

“Obligated Group” means, collectively, the Members of the Obligated Group.

“Obligated Group Representative” means, initially, the Corporation and thereafter any Person as may be designated pursuant to written notice to the Master Trustee executed by all of the Members of the Obligated Group.

“Obligation” means the Existing Master Indenture Obligations and any obligation of the Obligated Group issued under the Master Indenture, as a joint and several obligation of each Obligated Group Member, which may be in the form set forth in a Supplement, including but not limited to bonds, obligations, debentures, reimbursement agreements, Financial Products Agreements, loan agreements, guaranties or leases.

“Obligation No. 26” means Obligation No. 26, which will be issued pursuant to the terms of the Master Indenture and Supplement No. 1, with respect to the Bonds.

D-10 “Officer’s Certificate” when used with reference to the Master Indenture means a certificate signed by the chairman of the Governing Body of the Obligated Group Representative, or the president or chief executive officer, or the chief financial officer of the Obligated Group Representative.

“Opinion of Bond Counsel” means a written opinion of Orrick, Herrington & Sutcliffe LLP or another attorney or firm of attorneys experienced in the field of municipal bonds whose opinions are generally accepted by purchasers of municipal bonds and acceptable to and appointed by the Authority.

“Opinion of Counsel” means a written opinion of counsel (who may be counsel for the Authority) selected by the Authority. If and to the extent required by the provisions of the Bond Indenture, each Opinion of Counsel will include the statements provided for in the Bond Indenture.

“Outstanding” when used in the Master Indenture with reference to Obligations and other Indebtedness means, as of any date of determination, all Obligations and Indebtedness theretofore issued or incurred and not paid and discharged other than (i) Obligations theretofore canceled by the Master Trustee or delivered to the Master Trustee for cancellation, (ii) Indebtedness deemed paid and no longer Outstanding pursuant to the terms thereof, whether by payment, prepayment, defeasance or otherwise, (iii) Obligations in lieu of which other Obligations have been authenticated and delivered or have been paid pursuant to the provisions hereof regarding mutilated, destroyed, lost or stolen Obligations unless proof satisfactory to the Master Trustee has been received that any such Obligation is held by a bona fide purchaser, (iv) Obligations owned by any Obligated Group Member as provided in the Master Indenture, and (v) Obligation or Indebtedness for which there has been made an Irrevocable Deposit, but only to the extent that payment of debt service on such Obligation or Indebtedness is payable from such Irrevocable Deposit; provided, however, that if two or more obligations which constitute Indebtedness represent the same underlying obligation (as when, for example, an Obligation secures an issue of Related Bonds and another Obligation secures current repayment obligations to a bank under a reimbursement agreement with respect to such Related Bonds) for purposes of the various financial covenants contained in the Master Indenture, but only for such purposes, only one of such obligations shall be deemed Outstanding and the obligation so deemed to be Outstanding shall be that one which produces the greater amount to be included in the Annual Debt Service to be included in the calculation of such covenants. “Outstanding” when used in the Bond Indenture as of any particular time (subject to the provisions of the Bond Indenture) with reference to the Bonds, means all Bonds theretofore, or thereupon being, authenticated and delivered by the Bond Trustee under the Bond Indenture except (a) Bonds theretofore canceled by the Bond Trustee or delivered to the Bond Trustee for cancellation; (b) Bonds with respect to which all liability of the Authority shall have been discharged in accordance with the Bond Indenture; and (c) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Bond Trustee pursuant to the Bond Indenture.

“Permitted Liens” has the meaning described herein under the heading “THE MASTER INDENTURE— Limitations on Creation of Liens.”

“Person” means an individual, association, unincorporated organization, corporation, partnership, joint venture, limited liability company, limited liability partnership, business trust or a government or an agency or a political subdivision thereof, or any other entity.

“Principal Payment Date” means each date on which principal of the Bonds is required to be paid (whether by reason of maturity, redemption or acceleration).

“Project” has the meaning given to such term in this Official Statement.

“Property” means any and all rights, titles and interests in and to any and all assets whether real or personal, tangible or intangible and wherever situated, other than donor restricted funds as determined in accordance with generally accepted accounting principles.

D-11 “Property, Plant and Equipment” means all Property owned by the Members of the Credit Group which is property, plant and equipment under generally accepted accounting principles.

“Qualified Provider” means any financial institution or insurance company which is a party to a Financial Products Agreement if the unsecured long-term debt obligations of such financial institution or insurance company (or of the parent or a subsidiary of such financial institution or insurance company if such parent or subsidiary guarantees the performance of such financial institution or insurance company under such Financial Products Agreement), or obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance policy or surety bond issued by such financial institution or insurance company (or such guarantor parent or subsidiary) are rated in one of the three highest Rating Categories of a national rating agency at the time of the execution and delivery of the Financial Products Agreement.

“Rating Agency” means Moody’s, Fitch or S&P and their respective successors and assigns and any other Person now or hereafter created meeting the criteria established by the Securities and Exchange Commission as a “rating agency.”

“Rating Category” means one of the general rating categories of any Rating Agency, without regard to any refinement or graduation of such Rating Category by a numerical modifier or otherwise.

“Rebate Fund” means the fund by that name established pursuant to the Bond Indenture.

“Redemption Price” means, with respect to any Bond (or portion thereof), the principal amount of such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Bond Indenture.

“Refunded Bonds” means, collectively, the Series 2006A Bonds, the Series 2008A Bonds and the Series 2013 Bonds.

“Refunding Fund” means the fund by that name established pursuant to the Bond Indenture.

“Related Bond Authority” means the Authority and any other issuer of any issue of Related Bonds.

“Related Bond Indenture” means any indenture, bond resolution or other comparable instrument pursuant to which a series of Related Bonds is issued.

“Related Bond Trustee” means the initial trustee and its successors in the trusts created under any Related Bond Indenture.

“Related Bonds” means the revenue bonds or other obligations issued or incurred by any state, territory or possession of the United States or any municipal corporation or political subdivision formed under the laws thereof or any constituted authority or agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof (“governmental authority”), the proceeds of which are loaned or otherwise made available to (i) a Member of the Obligated Group in consideration of the execution, authentication and delivery of an Obligation to or for the order of such governmental authority, or (ii) any Designated Affiliate in consideration of the issuance to such governmental authority (A) by such Designated Affiliate of any evidence of indebtedness or other obligation of such Designated Affiliate, and (B) by a Member of the Obligated Group of a Guaranty in respect of such indebtedness or other obligation, which Guaranty is represented by an Obligation.

“Required Payment” means any payment, whether at maturity, by acceleration, upon proceeding for redemption or otherwise, including without limitation, Financial Products Payments, Financial Products Extraordinary Payments and the purchase price of Related Bonds tendered or deemed tendered for purchase pursuant to the terms of a Related Bond Indenture and including any Master Indenture Obligation Payments required to be made by any Member of the Obligated Group under the Master Indenture, any Supplement or any Obligation.

D-12 “Revenues” means all amounts received by the Authority or the Bond Trustee pursuant to or with respect to the Loan Agreement or Obligation No. 26, including, without limiting the generality of the foregoing, (a) Loan Repayments (including both timely and delinquent payments and any late charges, and whether paid from any source), (b) prepayments of all or any part of the Loan Repayments, and (c) all interest, profits or other income derived from the investment of amounts in any fund or account established pursuant to the Bond Indenture, but not including any Administrative Fees and Expenses, proceeds of any right of indemnification under the Loan Agreement, any other Additional Payments or any moneys required to be deposited in the Rebate Fund.

“Securities Depository” means The Depository Trust Company and its successors and assigns or if the then Securities Depository ceases to act in such function as described in the Bond Indenture, any other securities depository which agrees to follow the procedures required to be followed by a securities depository in connection with the Bonds and which is selected by the Authority with the consent of the Corporation.

“Series 2006A Bonds” means The Hospital Facility Authority of the City of Salem, Oregon Revenue Bonds (Salem Health Project), Series 2006A.

“Series 2008A Bonds” means The Hospital Facility Authority of the City of Salem, Oregon Revenue Bonds (Salem Health Project), Series 2008A.

“Series 2013 Bonds” means The Hospital Facility Authority of the City of Salem, Oregon Revenue Bonds (Salem Health Projects), Series 2013A and Series 2013B.

“Short-Term Indebtedness” means all Indebtedness having a maturity of one year or less, other than the current portion of Long-Term Indebtedness, incurred or assumed by one or more Members of the Credit Group, including (i) money borrowed for an original term, or renewable at the option of the borrower for a period from the date originally incurred, of one year or less, (ii) leases which are required to be capitalized in accordance with generally accepted accounting principles having an original term, or renewable at the option of the lessee for a period from the date originally incurred, of one year or less, and (iii) installment purchase or conditional sale contracts having an original term of one year or less.

“Special Record Date” means the date established by the Bond Trustee pursuant to the Bond Indenture as the record date for the payment of defaulted interest on the Bonds.

“S&P” means S&P Global Ratings, a corporation organized and existing under the laws of the State of New York, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Corporation by notice to the Authority and the Bond Trustee.

“State” means the State of Oregon.

“Supplement” means an indenture supplemental to, and authorized and executed pursuant to the terms of, the Master Indenture.

“Supplement No. 1” means the Supplemental Master Trust Indenture No. 1, between the Corporation, as the Obligated Group Representative and the Master Trustee, pursuant to which Obligation No. 26 is issued in connection with the Bonds.

“Supplemental Indenture” means any indenture hereafter entered into between the Authority and the Bond Trustee, supplementing, modifying or amending the Bond Indenture in accordance with the Bond Indenture.

“Tax Agreement” means the Tax Certificate and Agreement, concerning certain matters pertaining to the use and investment of proceeds of the Bonds, between the Corporation and the Authority, including any and all exhibits attached thereto, as originally executed and as it may be amended or supplemented from time to time in accordance with its terms.

D-13 “Tax-Exempt Organization” means a Person organized under the laws of the United States of America or any state thereof which is an organization described in Section 501(c)(3) of the Code and exempt from federal income taxes under Section 501(a) of the Code, or corresponding provisions of federal income tax laws from time to time in effect.

“Total Revenues” means, for the period of calculation in question, the sum of operating revenue (including (i) net patient service revenue, (ii) gifts, grants and contracts, (iii) revenues of auxiliary enterprises and (iv) other revenue) and nonoperating revenues (net) as shown on the Financial Statements for the most recent Fiscal Year.

“UCC” means the Uniform Commercial Code of the State, as amended from time to time.

“Unassigned Rights” means the right of the Authority to receive payment of its fees and expenses, the Authority’s right to indemnification in certain circumstances, the Authority’s right to execute and deliver supplements and amendments to the Loan Agreement, Authority’s right to grant consents under the Loan Agreement and the Authority’s right to receive notices delivered to the Master Trustee.

THE MASTER INDENTURE

The Master Indenture authorizes the issuance of Obligations by the Obligated Group, which may be unsecured general obligations or, to the extent permitted by the Master Indenture, secured by a claim on Property. An Obligation is stated in the Master Indenture to be a joint and several obligation of the Corporation and each other Member of the Obligated Group. The following are summaries of certain provisions of the Master Indenture. Other provisions are summarized in this Official Statement under the caption “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS.” This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Master Indenture. See also “SUPPLEMENT NO. 1” below for certain amendments to the Master Indenture.

General

Under the Master Indenture, the Corporation is authorized pursuant to Supplemental Master Indentures to incur, for itself and on behalf of the other Members of the Obligated Group, if any, Obligations to evidence or secure indebtedness.

Amount of Obligations

Each Member of the Obligated Group authorizes the issuance of Obligations without limitations as to amount, except as expressly limited by the provisions of the Master Indenture or any Supplement. Each Obligation issued under the Master Indenture shall, unless expressly provided otherwise, be secured on a parity basis; provided, however, that the provision of bond insurance, a letter or line of credit, standby bond purchase agreement or other similar instrument or obligation issued by a financial institution or the establishment of a debt service reserve fund or account for the benefit of the Holders of certain Obligations shall not be considered as the providing of security for such Obligations.

Supplement Creating Obligations

The Obligated Group Representative (on behalf of the Members of the Obligated Group) and the Master Trustee may from time to time enter into a Supplement to create Obligations thereunder. Each Supplement authorizing the issuance of Obligations shall specify and determine the date of the Obligations, the Aggregate Principal Amount thereof, the purposes for which such Obligations are being issued, the form, title, designation and the manner of numbering and denominations, if applicable, of such Obligations, the date or dates of maturity or other final expiration of the term of such Obligations, the rate or rates of interest (or method of determining the rate or rates of interest) and premium, if any, borne by such Obligations, if applicable, the arrangement for place and medium of payment and any other provisions deemed advisable or necessary. Each Obligation shall be

D-14 issuable, shall be transferable and exchangeable and shall be subject to redemption as specified in the Master Indenture and in the Supplement. Unless an Obligation has been registered under the Securities Act of 1933, as amended (or similar legislation subsequently enacted), such Obligation shall be endorsed with a legend which shall read substantially as follows: “This [describe Obligation] has not been registered under the Securities Act of 1933 or any state securities law (or any such similar subsequent legislation),” provided, however, such legend shall not be required if the Master Trustee is provided with an Opinion of Counsel to the effect that such legend is not required.

Conditions to Issuance of Obligations

Except as provided under the Master Indenture, simultaneously with or prior to the execution, authentication and delivery of Obligations pursuant to the Master Indenture: (1) an Officer’s Certificate shall have been delivered to the Master Trustee to the effect that no Event of Default has occurred and is continuing; and (2) the Obligated Group Representative (on behalf of the Members of the Obligated Group) and the Master Trustee shall have entered into a Supplement as provided in the Master Indenture, and all requirements and conditions to the issuance of such Obligations, if any, set forth in the Supplement or in the Master Indenture shall have been complied with and satisfied, as provided in an Officer’s Certificate, a copy of which shall be delivered to the Master Trustee.

Substitution of Obligations

All Obligations issued pursuant to the Master Indenture shall, upon the request of the Obligated Group Representative, be substituted with an original replacement obligation issued by or on behalf of any Member (the “Substitute Obligations”) under and pursuant to and secured by a Master Indenture (the “Replacement Master Indenture”) executed by all current Members of the Obligated Group and any other entities which are parties to and obligated with respect to indebtedness issued under such Replacement Master Indenture (collectively, the “New Group”) and an independent corporate trustee (the “New Trustee”) meeting the eligibility requirements of the Master Trustee as set forth in the Master Indenture, which Substitute Obligations have been duly authenticated by the New Trustee, upon receipt by the Master Trustee of the following:

(a) An Opinion of Bond Counsel that the surrender of the Obligations and the acceptance by the Master Trustee of the Substitute Obligations will not adversely affect the validity of the Related Bonds or any exemption for the purposes of federal income taxation to which interest on any Obligations or any Related Bonds would otherwise be entitled;

(b) An executed counterpart of the Replacement Master Indenture;

(c) An Opinion of Counsel to the Obligated Group addressed to the Master Trustee to the effect that:

(i) The Replacement Master Indenture has been duly authorized, executed and delivered by each Member of the New Group, each Substitute Obligation has been duly authorized, executed and delivered by or on behalf of a Member and each of the Replacement Master Indenture and each Substitute Obligation is a legal, valid and binding obligation of each Member of the New Group, subject in each case to customary exceptions for bankruptcy, insolvency and other laws generally affecting enforcement of creditors’ rights and application of general principles of equity;

(ii) All requirements and conditions to the issuance of the Substitute Obligations set forth in the Replacement Master Indenture have been complied with and satisfied; and

(iii) Registration of the Substitute Obligations under the Securities Act of 1933, as amended, is not required or, if such registration is required, the New Group has complied with all applicable provisions of said Act;

D-15 (d) An Officer’s Certificate stating that, upon delivery of the Substitute Obligations, (i) each Rating Agency then maintaining a rating on any of the applicable Related Bonds has confirmed or acknowledged to the Obligated Group Representative that the long-term rating(s) assigned to such Related Bonds by such Rating Agency will be no less than the then-current rating(s) assigned to such Related Bonds (without regard to gradations within a Rating Category or outlook) after giving effect to the delivery of the Substitute Obligation; and (ii) no Event of Default then exists;

(e) The Replacement Master Indenture containing the agreement of each Member of the New Group (1) to become a Member of the New Group and thereby to become subject to compliance with all provisions of the Replacement Master Indenture and (2) unconditionally and irrevocably (subject to the right of such Person to cease its status as a Member of the New Group pursuant to the terms and conditions of the Replacement Master Indenture), jointly and severally to make payments upon each obligation (including the Substitute Obligations) issued under the Replacement Master Indenture at the times and in the amounts provided in each such obligation; and

(f) Such other opinions and certificates as the Master Trustee may reasonably require, together with payment of all outstanding fees and expenses of the Master Trustee and with such indemnities as are satisfactory to it.

In connection with the delivery of a Replacement Master Indenture and the substitution of an Obligation with a Substitute Obligation, the provisions of the Master Indenture do not permit, and should not be construed as permitting, (1) a change in the times, amounts or currency of each payment of the principal of, premium, if any, and interest on any of the applicable Related Bonds, (2) a reduction in the principal amount of any such Related Bonds or (3) a change in the redemption premiums, if any, or rates of interest on any such Related Bonds, unless the trustee of such Related Bonds receives the prior written consent of the beneficial owners of each such Related Bond so affected. A Substitute Obligation will have the same terms as the Obligation it replaces with respect to (A) the times, amounts or currency of each payment of principal of, premium, if any, and interest on such obligation, (B) a reduction in the principal amount of such obligation, and (C) a change in the redemption premiums, if any, or rates of interest on such obligation; provided, however, such terms may be modified to conform to the terms of any consent provided by beneficial owners of the applicable Related Bonds in accordance with the immediately preceding sentence.

Notice to Holders of Obligations

The Master Trustee shall, within five (5) days after receipt of the items set forth in the Master Indenture, mail to all Holders of Obligations, as the names and addresses of such Holders appear upon the register or registers maintained by the Master Trustee, notice that the requirements of the Master Indenture have been satisfied and that all Obligations issued thereunder have been replaced with the Substitute Obligations, and directing such Holders to surrender all Obligations to the Master Trustee for cancellation.

Surrender of Obligations: Delivery of Substitute Obligations

Each Holder of Obligations shall surrender its Obligations to the Master Trustee, at the principal operations office of the Master Trustee, within ten (10) days of receipt from the Master Trustee of the notice required by the Master Indenture. Upon receipt by the Master Trustee of such Obligations, the Master Trustee shall, within five (5) days of such receipt, deliver the Substitute Obligations to such Holders and thereupon the Master Trustee shall be discharged thereunder. Upon delivery of the Substitute Obligations, the Master Trustee shall cancel the Surrendered Obligation in accordance with the Master Indenture.

Security; Payment of Required Payments

All Obligations issued pursuant to the Master Indenture shall be joint and several general obligations of each Member of the Obligated Group. The Master Indenture shall be construed and applied so that any money judgment entered against any Member of the Obligated Group arising from the terms of the Master Indenture or

D-16 any Supplement or Obligation and not otherwise arising by virtue of application of the laws of the State shall be payable from the Property of any and all Members of the Obligated Group; provided, however, that nothing shall preclude the application of appropriate legal and equitable principles of State law in the enforcement of the covenants and provisions of the Master Indenture.

Each Member of the Obligated Group jointly and severally covenants to (a) promptly pay or cause to be paid all Required Payments on the dates and in the manner provided therein, in any Supplement and in any Obligation according to the terms thereof, and (b) to faithfully observe and perform all of the conditions, covenants and requirements of the Master Indenture, any Supplement and any Obligation. Each Member acknowledges and agrees that the time of such payment and performance is of the essence of the obligations thereunder.

The obligation of each Member to pay the Required Payments on Obligations and to perform its other agreements contained in the Master Indenture shall be absolute and unconditional, irrespective of any defense or any rights of set-off, recoupment or counterclaim it might otherwise have against the Master Trustee, any Related Bond Trustee, or any Related Bond Authority. Until all Obligations have been paid in full, or provision for the payment thereof shall have been made in accordance with the provisions of the Master Indenture, each Member of the Obligated Group (a) will cause all Required Payments on each Obligation to be made as and when due, (b) will perform and observe all of its other covenants contained in the Master Indenture, and (c) except as set forth in the Master Indenture, will not terminate the Master Indenture or any of the Obligations issued thereunder for any cause, including without limitation, the occurrence of any act or circumstances that may constitute failure of consideration, destruction or damage to any of its property or facilities, commercial frustration of purpose, any change in the tax or other laws of the United States of America or of the State, or any political subdivision thereof, or any failure of the Master Trustee to perform and observe any covenant (whether express or implied) or any duty, liability or obligation arising out of or connected with the Master Indenture.

The obligation of each Member to make Required Payments is a continuing one and is to remain in effect until all Required Payments have been paid in full in accordance with the Master Indenture. All moneys from time to time received by the Obligated Group Representative or the Master Trustee to reduce amounts owing on Obligations, whether from or on account of the Members or otherwise, shall be regarded as payments in gross without any right on the part of any one or more of the Members to claim the benefit of any moneys so received until the whole of the amounts owing on Obligations has been paid or satisfied and so that, in the event of any such Member’s filing for bankruptcy, the Obligated Group Representative or the Master Trustee shall be entitled to prove up the total Indebtedness on Obligations Outstanding as to which the liability of such Member has become fixed.

Each Obligation shall be a primary obligation and shall not be treated as ancillary to or collateral with any other obligation and shall be independent of any other security so that the obligation of each Member shall be enforceable without first having recourse to any such security or source of payment and without first taking any steps or proceedings against any other Person. The Master Trustee is empowered to enforce each such Obligation, as thereinbefore provided, and to enforce the making of Required Payments on the Obligations; and each Member authorizes the Master Trustee to enforce or refrain from enforcing any Obligation and to make any arrangement or compromise with any particular Member or Members as the Master Trustee may deem appropriate and consistent with the Master Indenture and any Supplement, and waives all rights against the Master Trustee and any other Member, insofar as is necessary to give effect to any of the provisions of the Master Indenture. The Obligated Group authorizes the Obligated Group Representative to enforce payment of any Obligation against Members of the Obligated Group so long as such enforcement is not in conflict with actions taken or to be taken by the Master Trustee.

Control of Designated Affiliates

Each Controlling Member covenants that it will cause, pursuant to the Master Indenture, each of its Designated Affiliates to comply with the terms and conditions of the Master Indenture which are applicable to such Designated Affiliate and of the Related Bond Indenture, if any, to which such Designated Affiliate is a party.

D-17 The Obligated Group Representative or a Controlling Member shall cause each Designated Affiliate (subject to contractual and organizational limitations) to pay or otherwise transfer to the Obligated Group Representative or a Controlling Member such amounts as are necessary to duly and punctually pay the Required Payments on all Outstanding Obligations and any other payments at the place, on the dates, at the times and in the manner provided in the Master Indenture, in the applicable Supplement and in said Obligations, when and as the same become payable, whether at maturity, upon call for redemption, by acceleration of maturity or otherwise, all in accordance to the true intent and meaning thereof.

Selection of Designated Affiliates

The Obligated Group Representative shall at all times maintain an accurate and complete list of all Designated Affiliates. The Obligated Group Representative, by a resolution of its Governing Body, may designate any Person as a Designated Affiliate thereunder. The Obligated Group Representative, by a resolution of its Governing Body, shall also designate for each Designated Affiliate a Member of the Obligated Group to serve as the Controlling Member for such Designated Affiliate. Each Controlling Member shall cause each of its Designated Affiliates to provide the Obligated Group Representative a resolution of its Governing Body accepting its status as a Designated Affiliate and acknowledging the provisions of the Master Indenture affecting the Designated Affiliate. So long as a Person is designated as a Designated Affiliate, the Obligated Group Representative or such Controlling Member shall either (i) maintain, directly or indirectly, control of such Designated Affiliate, including the power to direct the management, policies, disposition of assets and actions of such Designated Affiliate to the extent required to cause such Designated Affiliate to comply with the terms and conditions of the Master Indenture, whether through the ownership of voting securities, partnership interests, membership, reserved powers, or the power to appoint Members, trustees or directors or otherwise, or (ii) execute and have in effect such contracts or other agreements that the Obligated Group Representative and the Controlling Member, which in the sole judgment of their respective Governing Body, deem sufficient for the Controlling Member to cause such Designated Affiliate to comply with the terms and conditions of the Master Indenture. The Obligated Group Representative shall deliver to the Master Trustee a resolution of its Governing Body designating a Designated Affiliate and the Controlling Member of such Designated Affiliate, together with evidence of compliance with the requirements of the Master Indenture.

Termination of Designated Affiliates

No Designated Affiliate may withdraw or be terminated from the Credit Group unless, prior to the taking of such action there shall have been delivered to the Master Trustee a resolution of the Governing Body of the Obligated Group Representative directing such termination.

Upon the withdrawal or termination of any Designated Affiliate from the Credit Group pursuant to the provisions of the Master Indenture, all liability of such Designated Affiliate under the Master Indenture shall cease.

Gross Receivables Pledge

To secure its obligation to make Required Payments under the Master Indenture and its other obligations, agreements and covenants to be performed and observed thereunder, each Obligated Group Member grants to the Master Trustee security interests in the Gross Receivables to the extent the same may be pledged and a security interest granted therein under the UCC. The Master Indenture shall be deemed a “security agreement” for purposes of the UCC.

The Master Trustee’s security interest in the Gross Receivables shall be perfected, to the extent that such security interest may be so perfected, by the filing of financing statements which comply with the requirements of the UCC. Each Obligated Group Member agrees to execute and cause to be filed, in accordance with the requirements of the UCC, financing statements; and, from time to time thereafter, shall execute and cause to be filed such other documents (including, but not limited to, continuation statements as required by the UCC) as may

D-18 be necessary or reasonably requested by the Master Trustee in order to perfect or maintain perfected such security interests or give public notice thereof.

Upon written request from the Obligated Group Representative, the Master Trustee agrees to take all procedural steps necessary to effect the subordination of its security interest in the Gross Receivables granted in the Master Indenture to security interests constituting Permitted Liens.

Each Obligated Group Member agrees to notify the Master Trustee of any change of name and change of address of its chief executive office and each Obligated Group Member shall execute and cause to be filed a new appropriate financing statement or an amendment in accordance with the requirements of the UCC, in order to maintain the perfected security interest granted in the Master Indenture.

Limitations on Creation of Liens

Each Member of the Obligated Group agrees, and the Obligated Group Representative agrees that it will cause each Designated Affiliate, not to create or suffer to be created or permit the existence of any Lien upon Property now owned or thereafter acquired by it other than Permitted Liens. Permitted Liens shall consist of the following:

(a) Liens arising by reason of good faith deposits with any Member of the Credit Group in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by any Member of the Credit Group to secure public or statutory obligations, or to secure, or in lieu of surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

(b) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Member of the Credit Group to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers’ compensation, unemployment insurance, pension or profit sharing plans or other social security arrangements, or to share in the privileges or benefits required for companies participating in such arrangements;

(c) Any judgment lien or award against any Member of the Credit Group so long as such judgment is being contested in good faith and execution thereon is stayed or while the period for responsive pleading has not lapsed;

(d) (i) Rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law affecting any Property; (ii) any liens on any Property for taxes, assessments, levies, fees, water and sewer charges and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or goods or materials furnished in connection with such Property, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or, with respect to liens of mechanics, materialmen, laborers, suppliers or vendors which have been due for less than 90 days; (iii) easements, rights-of-way, servitudes, restrictions, oil, gas or other mineral reservations and other minor defects, encumbrances and irregularities in the title to any Property, Plant and Equipment which do not materially impair the use of such Property, Plant and Equipment; and (iv) statutory landlord’s liens;

(e) Leases whereunder any Member of the Credit Group is lessor which relate to Property which is of a type that is customarily the subject of such leases, including without limitation office space for physicians and educational institutions, food service facilities, research and development facilities, parking facilities, barber shops, beauty shops, flower shops, gift shops, radiology, pathology or other hospital based specialty services and pharmacy and similar departments; leases, licenses or similar rights to use Property whereunder any Member of the Credit Group is lessor, lessee, licensor, licensee or the equivalent thereof existing as of the date of the Master

D-19 Indenture and any renewals and extensions if payment is not yet due under the contract in question or if such Lien is being contested in accordance with the Master Indenture;

(f) Such minor defects and irregularities of title as normally exist with respect to Property similar in character to the Property involved and which do not materially adversely affect the value of, or materially impair, the Property affected thereby for the purpose for which it was acquired or is held by the owner thereof;

(g) Any Lien on pledges, gifts or grants to be received in the future including any income derived from the investment thereof and Liens on or in Property given, bequeathed or devised by the owner thereof existing at the time of such gift, bequest or devise, provided that such Liens attach solely to the Property which is the subject of such gift, bequest or devise, and any Indebtedness secured by such Liens is not assumed by any Member of the Credit Group;

(h) Any Lien on inventory which, together with all other such Liens on inventory, do not, in the aggregate, exceed 25% of the Book Value thereof;

(i) Any Lien created by the Master Indenture so long as all Obligations under the Master Indenture shall be secured on a parity basis;

(j) Any Liens subordinate to the Lien securing all Obligations on a parity basis required by a statute under which a Related Bond is issued;

(k) Liens on Property due to rights of third-party payors for recoupment of amounts paid to any Member of the Credit Group;

(l) Any Lien existing for not more than 10 days after the Member of the Credit Group shall have received notice thereof;

(m) Rights of the United States of America under Title 42, United States Code;

(n) Liens on moneys deposited by patients or others with any Member of the Credit Group as security for or as prepayment for the cost of patient care or any rights of residents of life care or similar facilities to endowment or similar funds, any rights of students to fees or tuition, deposited by or on behalf of such patients, residents or students;

(o) Any security interest in any rebate fund, any depreciation reserve, debt service reserve, debt service or similar fund established pursuant to the terms of any Supplement, Related Bond Indenture or loan agreement in favor of the Master Trustee, any Related Bond Trustee, any Related Bond Authority or the Holder of the Indebtedness issued pursuant to such Supplement or Related Bond Indenture or any related Indebtedness;

(p) Any Liens on Property of any Person existing at the date such Person becomes a Member of the Obligated Group pursuant to the Master Indenture or becomes a Designated Affiliate pursuant to the Master Indenture, or is merged into an Obligated Group Member or Designated Affiliate pursuant to the Master Indenture;

(q) The rights of sellers under hospital or other facility acquisition agreements other than Liens securing the payment of the sale price or any reversion rights;

(r) Any Lien arising by reason of any escrow established to pay debt service with respect to Obligations;

(s) Any Lien in favor of a creditor or a trustee on the proceeds of Indebtedness and any earnings thereon prior to the application of such proceeds and such earnings;

D-20 (t) Liens securing Non-Recourse Indebtedness;

(u) Any Lien on any Related Bond or any evidence of Indebtedness acquired by or on behalf of any Member of the Credit Group which secures only Commitment Indebtedness;

(v) Any Lien on accounts receivable;

(w) Liens arising by virtue of a lease and leaseback or similar arrangements entered into by any Obligated Group Member with a Related Bond Authority to the extent required in connection with the issuance of a series of Related Bonds:

(x) Notwithstanding any other subsection of the Master Indenture, any other Lien on Property securing Indebtedness; provided, however, that the aggregate outstanding balance of Indebtedness secured by a Lien pursuant to this subsection (x) shall not exceed 15% of the Book Value of the net assets of the Credit Group as shown in the “Liabilities and Net Assets of the Combined Balance Sheets” of the Financial Statements for the most recent Fiscal Year or 12-month period for which Financial Statements are available;

(y) Any Lien described in Schedule I of the Master Indenture which is existing on the date of execution of the Master Indenture including those listed on Schedule I provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased, extended, renewed or modified to apply to any Property of any Credit Group Member not subject to such Lien on such date unless such Lien as so increased, extended, renewed or modified otherwise qualifies as a Permitted Lien under the Master Indenture;

(z) Zoning laws and similar restrictions that are not violated by the Property affected thereby;

(aa) All right, title and interest of the state where the Property involved is located, municipalities and the public in and to tunnels, bridges and passageways over, under or upon a public way;

(bb) Such Liens, covenants, conditions and restrictions, if any, which do not secure Indebtedness and which are other than those of the type referred to above, and which (i) in the case of Property of any Member of the Credit Group on November 1, 2016, do not and will not in aggregate, so far as can reasonably be foreseen materially adversely affect the value of the Property currently affected thereby or materially impair the same, and (ii) in the case of any other Property, do not materially impair or materially interfere with the operation or usefulness thereof for the purpose for which such Property was acquired or is held by a Member of the Credit Group;

(cc) Liens on any Property of any Member to secure any Indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of constructing or improving the Property subject to such Lien;

(dd) Any Lien or encumbrance created or incurred by any Member of the Credit Group in the ordinary course of business that does not secure, directly or indirectly, the repayment of borrowed money or the payment of installment sales contracts or capital leases individually or in the aggregate, and which does not materially impair the value or the utility of the Property subject to such Lien;

(ee) Any Lien on any Property acquired by any Member of the Credit Group, which Lien secures (i) Indebtedness issued, incurred or assumed by any Member in connection with and to effect such acquisition or (ii) existing Indebtedness which will remain outstanding after such acquisition but will not be assumed by any Member of the Credit Group, if in each such case the aggregate principal amount of such Indebtedness does not exceed the fair market value of the Property subject to such Lien as determined in good faith by the Governing Body of the Member of the Credit Group;

(ff) Leases, licenses or similar rights to use Property (i) between or among Members of the Credit Group, or (ii) whereunder any Member of the Credit Group is lessor, lessee, licensor, licensee or the equivalent

D-21 thereof upon fair and reasonable terms no less favorable to the Member of the Credit Group than it would obtain in a comparable arm’s-length transaction;

(gg) Liens on Property due to rights of third-party payors for recoupment of excess reimbursement paid to any Member of the Credit Group; and

(hh) Purchase money security interests in equipment and lessors’ interests in equipment, lessors’ interests in equipment acquired by the Corporation under operating leases, and bailors’ interests in equipment in the possession of the Corporation as a bailee.

Limitation on Indebtedness

Each Obligated Group Member covenants that it will not, and each Controlling Member covenants that it will not permit its Designated Affiliates to, incur any Indebtedness except that the Obligated Group Members and Designated Affiliates may incur the following Indebtedness:

(a) Long-Term Indebtedness may be incurred if prior to incurrence of such Indebtedness an Officer’s Certificate is filed with the Master Trustee to the effect that:

(1) for the two most recent periods of 12 full consecutive calendar months preceding the date of delivery of such Officer’s Certificate for which Financial Statements are available, the Debt Service Coverage Ratio, taking into account all Outstanding Long-Term Indebtedness and the Long-Term Indebtedness then to be incurred as if it had been incurred at the beginning of each of such periods, is not less than 1.20; or

(2) (A) for the most recent period of 12 full consecutive calendar months preceding the date of delivery of such Officer’s Certificate for which Financial Statements are available, the Debt Service Coverage Ratio, taking into account all Outstanding Long-Term Indebtedness, but not the Long-Term Indebtedness then to be incurred, is not less than 1.20; and (B) the prospective Debt Service Coverage Ratio, taking the proposed Long-Term Indebtedness into account, for the full Fiscal Year next succeeding the date on which the Indebtedness is to be incurred, is not less than 1.20, as shown by prospective financial statements for such period prepared by the Obligated Group Representative, accompanied by a statement of the relevant assumptions upon which such prospective statements are based; or

(3) immediately after giving effect to any Long-Term Indebtedness incurred as described in this subparagraph, the aggregate of Long-Term Indebtedness Outstanding under this subparagraph (3) does not exceed 10% of Total Revenues of the Credit Group for the most recent period of 12 full consecutive calendar months for which Financial Statements are available; provided, however, that the aggregate principal amount of Indebtedness Outstanding described under this subparagraph and under subsection (f) below shall not at any time exceed 25% of Total Revenues of the Credit Group for the most recent period of 12 full consecutive calendar months for which Financial Statements are available.

The Obligated Group shall be deemed to be in compliance with the test for the incurrence of Long-Term Indebtedness set forth in either subparagraph (1) or (2) above without attaining the Debt Service Coverage Ratio required by such subparagraph if a Consultant files a report with the Master Trustee (i) stating that in his or her opinion the failure to generate sufficient Income Available for Debt Service to attain the required Debt Service Coverage Ratio is caused by compliance with Governmental Restrictions or changes in public or private third- party reimbursement programs and the Obligated Group has generated Income Available for Debt Service at the highest levels practicable and (ii) reporting on prospective financial statements that demonstrate that the Debt Service Coverage Ratio was, for the tests set forth in subparagraphs (1) and (2)(A) above, and is projected to be, for the test set forth in subparagraph (2)(B) above, as the case may be, not less than 1.00.

(b) Completion Indebtedness may be incurred without limitation provided there is filed with the Master Trustee a certificate of an independent architect setting forth the amount reasonably expected to be

D-22 required to complete the capital improvement for which the Indebtedness was incurred and an Officer’s Certificate stating that the proceeds of the Completion Indebtedness and other moneys available therefor, including estimated investment earnings, will be sufficient to complete the capital improvement; provided, however, that if such work is to be performed by a Member’s or a Designated Affiliate’s own employees and does not exceed $2,500,000, a certificate of an engineer or architect employed by such Member or Designated Affiliate may be furnished in lieu of the certificate of the independent architect.

(c) Long-Term Indebtedness may be incurred for the purpose of refunding any Outstanding Indebtedness, if prior to the incurrence thereof, there is delivered to the Master Trustee an Officer’s Certificate to the effect that (i) the Maximum Annual Debt Service will not increase by more than 15% after the incurrence of such proposed refunding Long-Term Indebtedness and after giving effect to the disposition of the proceeds thereof or (ii) the total Annual Debt Service on the Indebtedness being refinanced will not increase by more than 10% after the incurrence of such proposed refunding Long-Term Indebtedness and after giving effect to the disposition of the proceeds thereof; or (iii) the requirements described in (a)(1) or (2) above are met.

(d) Short-Term Indebtedness may be incurred if there is delivered to the Master Trustee an Officer’s Certificate to the effect that immediately after the incurrence of such Short-Term Indebtedness the Outstanding principal amount of all such Short-Term Indebtedness will not exceed 15% of the Total Revenues of the Credit Group for the most recent period of 12 full consecutive calendar months for which Financial Statements are available; provided, however, that the Credit Group shall be free from all such Short-Term Indebtedness, except for an amount equal to 3% of said Total Revenues, for a period of 20 consecutive calendar days in each Fiscal Year.

(e) Non-Recourse Indebtedness, Subordinated Indebtedness and Commitment Indebtedness may be incurred without limitation.

(f) Liabilities under capitalized lease agreements for the lease of, or indebtedness for money borrowed or liabilities under instruments evidencing deferred payment arrangements for the purchase of, equipment, tangible personal property or real property provided that the aggregate of the Outstanding liabilities under capitalized leases incurred as described under this subsection and the Outstanding Long-Term Indebtedness incurred under subsection (a)(3) above shall not exceed, at the time of incurrence, 15% of the Total Revenues of the Credit Group for the most recent Fiscal Year for which Financial Statements are available.

(g) Any Indebtedness, provided that the aggregate principal amount of such Indebtedness does not, as of the date of incurrence, exceed 25% of Total Revenues of the Credit Group.

For purposes of the provisions described under this subheading, the conversion of Indebtedness from Variable Rate Indebtedness to Indebtedness bearing a fixed interest rate or from one type of Variable Rate Indebtedness to another type of Variable Rate Indebtedness or from Indebtedness bearing a fixed interest rate to Variable Rate Indebtedness pursuant to the terms of the documents providing for the issuance of such Indebtedness shall not be considered to be incurrence of Indebtedness. If, in connection with any such conversion, Additional Indebtedness is incurred to fund costs and expenses associated with such conversion (including, without limitation, costs and expenses associated with funding debt service reserve accounts, funding original issue discount with respect to the converted Indebtedness, terminating Financial Products Agreements and paying remarketing, underwriting, legal and other expenses), such Additional Indebtedness may be incurred without meeting the requirements described under this subheading.

No Additional Indebtedness shall be deemed to arise when any funding occurs under any Commitment Indebtedness or any Commitment Indebtedness is renewed upon terms which provide for substantially the same terms of repayment of amounts disbursed pursuant to such commitment as obtained prior to such renewal.

For the purposes of meeting the tests described under subsections (a), (d), (f) and (g) above, any Indebtedness that will no longer be Outstanding on the proposed issuance date of the Indebtedness then to be incurred shall be excluded from the calculations required by such tests.

D-23 Indebtedness incurred pursuant to any one of the subsections described under this subheading may be reclassified as Indebtedness incurred pursuant to any other of such subsections if the tests set forth in the subsection to which such Indebtedness is to be reclassified are met at the time of such reclassification.

Income Available for Debt Service

Each Obligated Group Member agrees to manage its business such that in each Fiscal Year the combined or consolidated Income Available for Debt Service for the Credit Group will not be less than 1.10 times the Annual Debt Service calculated at the end of each Fiscal Year, commencing with the first full Fiscal Year following the execution of the Master Indenture.

If for any two consecutive Fiscal Years the Income Available for Debt Service is not sufficient to satisfy the preceding paragraph, the Obligated Group Representative covenants to retain a Consultant to make recommendations to increase Income Available for Debt Service the following Fiscal Year to the level required or, if in the opinion of the Consultant the attainment of such level is impracticable, to the highest level attainable. Each Obligated Group Member agrees to consider any recommendations of the Consultant and shall be obligated to implement such recommendations to the extent such recommendations are feasible.

If a report of a Consultant is delivered to the Master Trustee that states that Governmental Restrictions have been imposed which make it impossible for the Income Available for Debt Service to satisfy the requirement of the Master Indenture, then the required amount of Income Available for Debt Service shall be reduced to the maximum coverage permitted by such Governmental Restrictions.

Nothing in the Master Indenture shall be construed as prohibiting any Credit Group Member from providing indigent care at reduced or no cost to the extent required to maintain the status of such entity as a Tax- Exempt Organization or to meet the statutory missions of or otherwise comply with the statutory obligations of such entity.

Notwithstanding anything in the Master Indenture to the contrary, so long as the Obligated Group Representative and each Obligated Group Member complies with the provisions described in subsection (b) of this subheading, failure to meet the requirements described in subsection (a) of this subheading shall not result in an Event of Default.

Consolidation, Merger, Sale or Conveyance

(a) Each Member of the Obligated Group agrees, not to merge or consolidate with, or sell or convey all or substantially all of its Property to any Person that is not a Member of the Obligated Group unless:

(1) At the time of such consolidation, merger, sale or conveyance, such successor corporation becomes a Member of the Obligated Group in accordance with the Master Indenture; and

(2) No Member of the Obligated Group, including such successor corporation, immediately after such merger, consolidation, sale or conveyance would be in default in the performance or observance of any covenant or condition of the Master Indenture; and

(3) If all amounts due or to become due on any Related Bond have not been fully paid to the holder thereof, there shall have been delivered to the Master Trustee and each Related Bond Authority (i) an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee and each Related Bond Authority, to the effect that the consummation of such merger, consolidation, sale or conveyance, whether or not contemplated on any date of the delivery of any Related Bonds, would not adversely affect the validity of such Related Bonds or the exclusion of interest payable on such Related Bonds from the gross income of the Holder thereof for purposes of federal income taxation and (ii) an Opinion of Counsel, in form and substance satisfactory to the Master Trustee, to the effect that the consummation of such transaction (A) would not require the registration of the Related Bonds under the Securities Act of

D-24 1933, as amended, or any state securities law, or the Supplement under the Trust Indenture Act of 1939, as amended, or any state securities law, or if such registration is required, that all applicable registration and qualification provisions of said acts have been complied with, and (B) will not adversely affect the status as a Tax-Exempt Organization of any Member which otherwise has such status.

(b) In case of any such consolidation, merger, sale or conveyance and upon any such successor corporation becoming a Member of the Obligated Group, such successor corporation shall succeed to and be substituted for its predecessor, and its predecessor shall be released from all obligations thereunder.

(c) In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in Obligations thereafter to be issued as may be appropriate.

(d) The Master Trustee may accept an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of the Master Indenture and that it is proper for the Master Trustee under the provisions of the Master Indenture to join in the execution of any instrument required to be executed and delivered thereunder.

Concurrent with such consolidation, merger, sale or conveyance, the Obligated Group Representative shall furnish the Master Trustee and each Related Bond Authority with an Officer’s Certificate of the Obligated Group Representative to the effect that no Event of Default then exists under the Master Indenture and that upon such consolidation, merger, sale or conveyance no Event of Default will exist under the Master Indenture and that no event shall have occurred which with the passage of time or the giving of notice or both would become an Event of Default.

Filing of Financial Statements, Certificate of No Default, Other Information

The Members of the Obligated Group covenant and agree that they will keep or cause to be kept proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of, or in relation to, the business and affairs of the Obligated Group in accordance with generally accepted accounting principles. Each Controlling Member shall cause its Designated Affiliates to keep or cause to be kept proper books of records and account in which full, true and correct entries will be made of all dealings or transactions of, or in relation to, the business and affairs of such Designated Affiliates in accordance with generally accepted accounting principles.

The Obligated Group Representative covenants and agrees, and each Controlling Member covenants to cause its Designated Affiliates to furnish to the Master Trustee, Related Bond Authority and each Related Trustee:

(a) As soon as practicable, but in no event more than 180 days after the last day of each Fiscal Year, beginning with the Fiscal Year ending June 30, 2016, for each Member a financial report for or including such Member of the Obligated Group for such Fiscal Year certified by a firm of nationally recognized independent public accountants approved by the Obligated Group Representative prepared on a combined or consolidated basis to include the results of operations of all Persons required to be consolidated or combined with such Member of the Obligated Group in accordance with generally accepted accounting principles and containing an audited combined balance sheet as of the end of such Fiscal Year, an audited combined statement of operations and changes in net assets for such Fiscal Year and an audited combined statement of cash flows for such Fiscal Year showing in each case, in comparative form, the financial figures for the preceding Fiscal Year. If any of the financial statements prepared pursuant to the Master Indenture contain the results of Persons that are Material Affiliates, such financial statement shall contain, as “other financial information,” a combining or consolidating schedule from which financial information solely relating to the Members or Designated Affiliates may be derived.

(b) If the reports referred to in the preceding paragraph do not include the results of operations of any Designated Affiliate, as soon as practicable, but in no event more than 180 days after the last day of each Fiscal Year beginning with the first Fiscal Year succeeding the date a Person becomes a Designated Affiliate, a financial

D-25 report for or including such Designated Affiliate for such Fiscal Year certified by a firm of nationally recognized independent public accountants approved by the Obligated Group Representative, prepared on a combined or consolidated basis to include the results of operations of all Persons required to be consolidated or combined with such Designated Affiliate in accordance with generally accepted accounting principles, and containing an audited combined balance sheet as of the end of such Fiscal Year and an audited combined statement of changes in operations and changes in net assets for such Fiscal Year and an audited combined statement of cash flows for such Fiscal Year, showing in each case, in comparative form, the financial figures for the preceding Fiscal Year, and a certificate of the chief financial officer of such Designated Affiliate that such officer has obtained no knowledge of any default by such Designated Affiliate in the fulfillment of any terms, covenants, provisions or conditions of the Master Indenture, or if such chief financial officer shall have obtained knowledge of any such default or defaults, he shall disclose in such statement the default or defaults and the nature thereof. If any of the financial statements prepared pursuant to the Master Indenture contain the results of Persons that are Material Affiliates, such financial statement shall contain, as “other financial information,” a combining or consolidating schedule from which financial information solely relating to the Members or Designated Affiliates may be derived.

(c) As soon as practicable, but in no event more than 180 days after the last day of each Fiscal Year, beginning with the Fiscal Year of the Obligated Group ending June 30, 2016, an unaudited balance sheet, statement of operations and changes in net assets including all the Members of the Obligated Group and Designated Affiliates prepared by the Obligated Group Representative on a combined basis (based on the combining or consolidating schedules delivered with the audited financial statements described in the Master Indenture) to reflect only the operations of the Members of the Obligated Group and Designated Affiliates based on audited financial statements described in subparagraphs (a) and (b) above (such balance sheet, statement of operations and changes in net assets being referred to as the “Credit Group Financial Statements”), together with a certificate of the chief financial officer of the Obligated Group Representative stating that the Credit Group Financial Statements were prepared in accordance with generally accepted accounting principles (except for required consolidations or exclusions) and that the Credit Group Financial Statements reflect the results of the operations of only the Members of the Obligated Group and Designated Affiliates, and all Members of the Obligated Group and Designated Affiliates are included.

(d) Notwithstanding the foregoing, the audited and unaudited financial statements referred to in the Master Indenture may include the results of operation and financial position of Immaterial Affiliates which are not Designated Affiliates, and such results of operation and financial position may be considered as if they were a portion of the results of operation and financial position of the Members of the Obligated Group and the Designated Affiliate for all purposes of the Master Indenture.

(e) At the time of the delivery of the financial reports referred to in subparagraphs (a) or (c) above, an Officer’s Certificate of the Obligated Group Representative, stating that the Obligated Group Representative has made a review of the activities of each Member of the Obligated Group and Designated Affiliate during the preceding Fiscal Year for the purpose of determining whether or not the Members of the Obligated Group and Designated Affiliates have complied with all of the terms, provisions and conditions of the Master Indenture and that each Member of the Obligated Group and Designated Affiliates has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Master Indenture on its part to be performed and is not in default in the performance or observance of any of the terms, covenants, provisions or conditions thereof, or if any Member of the Obligated Group or Designated Affiliate shall be in default such, certificate shall specify all such defaults and the nature thereof.

Parties Becoming Members of the Obligated Group

Persons which are not Members of the Obligated Group may become Members of the Obligated Group if:

(a) The Person which is becoming a Member of the Obligated Group shall execute and deliver to the Master Trustee an appropriate instrument, satisfactory to the Master Trustee (i) containing the agreement of such Person to become a Member of the Obligated Group under the Master Indenture and thereby become subject to

D-26 compliance with all provisions of the Master Indenture pertaining to a Member of the Obligated Group, including the performance and observance of all covenants and obligations of a Member of the Obligated Group thereunder, and (ii) containing the agreement of such Person to jointly and severally agree to make all Required Payments upon each Obligation at the times and in the amounts provided in each such Obligation;

(b) Each instrument executed and delivered to the Master Trustee in accordance with subparagraph (a) above shall be accompanied by an Opinion of Counsel, addressed to and satisfactory to the Master Trustee, to the effect that such instrument has been duly authorized, executed and delivered by such Person and constitutes a valid and binding obligation enforceable in accordance with its terms, with such exceptions and limitations as are acceptable to the Master Trustee;

(c) If all amounts due or to become due on any Related Bond have not been paid in full to the Holders thereof, there shall be delivered to the Master Trustee (i) an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, to the effect that the consummation of such transaction would not adversely affect the validity of such Related Bonds or the exclusion of interest payable on any such Related Bond from the gross income of the Holder thereof for the purposes of federal income taxation and (ii) an Opinion of Counsel, in form and substance satisfactory to the Master Trustee, to the effect that the consummation of such transaction (A) would not require the registration of the Related Bonds under the Securities Act of 1933, as amended, or any state securities law, or the Supplement under the Trust Indenture Act of 1939, as amended, or any state securities law, or if such registration is required, that all applicable registration and qualification provisions of said acts have been complied with, and (B) will not adversely affect the status as a Tax-Exempt Organization of any Member which otherwise has such status; and

(d) There shall have been delivered to the Master Trustee by the Person becoming a Member of the Obligated Group an irrevocable power of attorney authorizing the execution of Obligations by the Obligated Group Representative.

Concurrent with the addition of such Obligated Group Member, the Obligated Group Representative shall furnish the Master Trustee with an Officer’s Certificate of the Obligated Group Representative to the effect that no Event of Default then exists under the Master Indenture and that upon addition of such Obligated Group Member no Event of Default will exist under the Master Indenture and that no event shall have occurred which with the passage of time or the giving of notice or both would become an Event of Default.

Withdrawal from the Obligated Group

The Corporation may not withdraw from the Obligated Group. No other Member of the Obligated Group may withdraw from the Obligated Group unless, prior to the taking of such action: (a) if all amounts due on any Related Bond have not been paid in full to the Holders thereof, there shall be delivered to the Master Trustee an Opinion of Bond Counsel, in form and substance satisfactory to the Master Trustee, to the effect that such Member’s withdrawal from the Obligated Group would not adversely affect the exclusion of interest payable on any such Related Bond from the gross income of the Holder thereof for the purposes of federal income taxation; and (b) there shall have been delivered to the Master Trustee an Officer’s Certificate of the Obligated Group Representative to the effect that immediately prior to and immediately after such withdrawal no Event of Default exists thereunder and no event shall have occurred which with the passage of time or the giving of notice or both would become such an Event of Default.

Upon the withdrawal of any Member from the Obligated Group pursuant to the Master Indenture, all liability of such Member of the Obligated Group with respect to all Obligations Outstanding under the Master Indenture shall cease, and the Lien of the Master Indenture on any Property of such Member of the Obligated Group shall be released.

Events of Default

The following events are “Events of Default” under the Master Indenture:

D-27 (a) The Members of the Obligated Group shall fail to make any Required Payment on an Obligation.

(b) Any Member of the Credit Group shall fail duly to perform, observe or comply with any other covenant or agreement on its part under the Master Indenture for a period of 30 days after the date on which written notice of such failure, requesting the same to be remedied, shall have been given to the Obligated Group Representative by the Master Trustee, or to the Obligated Group Representative and the Master Trustee by the Holders of at least 50% in Aggregate Principal Amount of Obligations then Outstanding; provided, however, that if said failure is such that it cannot be corrected within 30 days after the receipt of such notice, it shall not constitute an Event of Default if corrective action is instituted within such 30-day period and diligently pursued until the Event of Default is corrected;

(c) An event of default shall occur under a Related Bond Indenture or upon a Related Bond;

(d) Any Member of the Credit Group shall fail to make any required payment with respect to any Indebtedness for borrowed money the Outstanding principal amount of which is in excess of 2% of Total Revenues of the Credit Group for the most recent Fiscal Year for which Financial Statements are available (other than Obligations issued and Outstanding thereunder and other than Non-Recourse Indebtedness), whether such Indebtedness now exists or shall thereafter be created, and any period of grace with respect thereto shall have expired, or an event of default as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness the Outstanding principal amount of which is in excess of 2% of Total Revenues of the Credit Group for the most recent Fiscal Year for which Financial Statements are available (other than Non-Recourse Indebtedness), whether such Indebtedness now exists or shall thereafter be created, shall occur, which event of default shall not have been waived by the Holder of such mortgage, indenture or instrument, and as a result of such failure to pay or other event of default such Indebtedness shall have been accelerated; provided, however, that such default shall not constitute an Event of Default within the meaning of this subsection if within 30 days, or within the time allowed for service of a responsive pleading if any proceeding to enforce payment of the Indebtedness is commenced, any Member of the Credit Group in good faith shall commence proceedings to contest the obligation to pay or the existence of such Indebtedness;

(e) The entry of a decree or order by a court having jurisdiction in the premises for relief against any Member of the Credit Group, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of such Member under the United States Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, custodian, assignee or sequestrator (or other similar official) of such Member or of any substantial part of its Property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days;

(f) The institution by any Member of the Credit Group of proceedings of an order for relief, or the consent by it to an order for relief against it, or the filing by it of a petition or answer or consent seeking reorganization, arrangement, adjustment, compensation or relief under the United States Bankruptcy Code or any other similar applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, custodian, assignee, trustee or sequestrator (or other similar official) of such Member of the Credit Group or of any substantial part of its Property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due.

Acceleration; Annulment of Acceleration

Upon the occurrence and during the continuation of an Event of Default under the Master Indenture, the Master Trustee may and, upon the written request of (i) the Holders of not less than 50% in Aggregate Principal Amount of Obligations Outstanding or (ii) any Person properly exercising the right given to such Person under any Supplement to require acceleration of the Obligations issued pursuant to such Supplement, shall, by notice to the Members of the Obligated Group, all Holders of Obligations and each Related Bond Authority declare all Obligations Outstanding immediately due and payable, whereupon such Obligations shall become and be

D-28 immediately due and payable, anything in the Obligations or in any other section of the Master Indenture to the contrary notwithstanding; provided, however, that if the terms of any Supplement give a Person the right to consent to acceleration of the Obligations issued pursuant to said Supplement, the Obligations issued pursuant to such Supplement may not be accelerated by the Master Trustee unless such consent is properly obtained pursuant to the terms of such Supplement. In the event Obligations are accelerated there shall be due and payable on such Obligations an amount equal to the total principal amount of all such Obligations, plus all interest accrued thereon to the date of acceleration and, to the extent permitted by applicable law, which accrues to the date of payment.

At any time after the principal of the Obligations shall have been so declared to be due and payable and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, if (i) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay all matured installments of interest and interest on installments of principal and interest and principal or redemption prices then due (other than the principal then due only because of such declaration) of all Obligations Outstanding; (ii) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay the charges, compensation, expenses, disbursements, advances, fees and liabilities of the Master Trustee; (iii) all other amounts then payable by the Obligated Group thereunder shall have been paid or a sum sufficient to pay the same shall have been deposited with the Master Trustee; and (iv) every Event of Default (other than a default in the payment of the principal of such Obligations then due only because of such declaration) shall have been remedied, then the Master Trustee may, and upon the written request of Holders of not less than a majority in Aggregate Principal Amount of the Obligations Outstanding shall, annul such declaration and its consequences with respect to any Obligations or portions thereof not then due by their terms; provided that no such annulment shall extend to Obligations issued pursuant to a Supplement which provides that no such declaration may be annulled by the Master Trustee unless consent of a particular Person is obtained without the consent of such Person. No such annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon.

Additional Remedies and Enforcement of Remedies

Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon the written request of the Holders of not less than 50% in Aggregate Principal Amount of the Obligations Outstanding, together with indemnification of the Master Trustee to its satisfaction therefor, shall, proceed forthwith to protect and enforce its rights and the rights of the Holders thereunder by such suits, actions or proceedings as the Master Trustee, being advised by counsel, shall deem expedient, but only to the extent permitted by law, including but not limited to (a) enforcement of the right of the Holders to collect and enforce the payment of amounts due or becoming due under the Obligations; (b) suit upon all or any part of the Obligations; (c) civil action to require any Person holding moneys, documents or other property pledged to secure payment of amounts due or to become due on the Obligations to account as if it were the trustee of an express trust for the Holders; (d) civil action to enjoin any acts or things which may be unlawful or in violation of the rights of the Holders; (e) enforcement of any other right of the Holders conferred by law or thereby.

Regardless of the happening of an Event of Default, the Master Trustee, if requested in writing by the Holders of not less than 50% in Aggregate Principal Amount of the Obligations then Outstanding, shall, upon being indemnified to its satisfaction therefor, institute and maintain such suits and proceedings as it may be advised shall be necessary or expedient to prevent any impairment of the security thereunder by any acts which may be unlawful or in violation thereof.

Application of Moneys after Default

During the continuance of an Event of Default all moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of the Master Indenture, after payment of (i) the costs and expenses of the proceedings resulting in the collection of such moneys and of the fees, expenses and advances incurred or made by the Master Trustee with respect thereto and all other fees and expenses of the Master Trustee under the Master Indenture and (ii) in the sole discretion of the Master Trustee, the payment of the expenses of operating the Property of any Members of the Obligated Group, shall be applied as follows:

D-29 (a) Unless the principal of all Outstanding Obligations shall have become or have been declared due and payable:

First: To the payment to the Persons entitled thereto of all installments of interest then due on Obligations in the order of the maturity of such installments and, if the amount available shall not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon to the Persons entitled thereto, without any discrimination or preference; and

Second: To the payment to the Persons entitled thereto of the unpaid principal installments of any Obligations which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, and if the amounts available shall not be sufficient to pay in full all Outstanding Obligations due on any date, then to the payment thereof ratably, according to the amounts of principal installments due on such date, to the Persons entitled thereto, without any discrimination or preference.

(b) If the principal of all Outstanding Obligations shall have become or have been declared due and payable, to the payment of the principal and interest then due and unpaid upon Outstanding Obligations without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Obligation over any other Obligation, ratably, according to the amounts due respectively for principal and interest, to the Persons entitled thereto without any discrimination or preference.

(c) If the principal of all Outstanding Obligations shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of the Master Indenture, then, subject to the provisions of the preceding paragraph in the event that the principal of all Outstanding Obligations shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions described under subparagraph (a) above.

Whenever moneys are to be applied by the Master Trustee pursuant to the provisions of the Master Indenture, such moneys shall be applied by it at such times, and from time to time, as the Master Trustee shall determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Master Trustee shall apply such moneys, it shall fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such dates shall cease to accrue. The Master Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the Holder of any unpaid Obligation until such Obligation shall be presented to the Master Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid.

Whenever all Obligations and interest thereon have been paid under the provisions of the Master Indenture and all expenses and charges of the Master Trustee have been paid, any balance remaining shall be paid to the Person entitled to receive the same; if no other Person shall be entitled thereto, then the balance shall be paid to the Members of the Obligated Group, their respective successors, or as a court of competent jurisdiction may direct.

Remedies Vested in Master Trustee

All rights of action (including the right to file proof of claims) under the Master Indenture or under any of the Obligations may be enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any trial or other proceedings relating thereto. Any such suit or proceeding instituted by the Master Trustee may be brought in its name as the Master Trustee without the necessity of joining as plaintiffs or defendants any Holders. Subject to the provisions of the Master Indenture, any recovery or judgment shall be for the equal benefit of the Holders.

D-30 Holders’ Control of Proceedings

If an Event of Default shall have occurred under the Master Indenture and is continuing, notwithstanding anything in the Master Indenture to the contrary, the Holders of not less than a majority in Aggregate Principal Amount of Obligations then Outstanding shall have the right, at any time, by an instrument in writing executed and delivered to the Master Trustee and accompanied by indemnity satisfactory to the Master Trustee, to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the terms and conditions of the Master Indenture or for the appointment of a receiver or any other proceedings under the Master Indenture, provided that such direction is not in conflict with any applicable law or the provisions of the Master Indenture, and provided further, that the Master Trustee shall have the right to decline to follow any such direction if the Master Trustee in good faith shall determine that the proceeding so directed would involve it in personal liability or would be unduly prejudicial to the interest of any Holders not joining in such direction. Nothing in the Master Indenture shall impair the right of the Master Trustee in its discretion to take any other action under the Master Indenture which it may deem proper and which is not inconsistent with such direction by Holders.

Waiver of Event of Default

No delay or omission of the Master Trustee or of any Holder to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein. Every power and remedy given by the Master Indenture to the Master Trustee and the Holders, respectively, may be exercised from time to time and as often as may be deemed expedient by them.

The Master Trustee may waive any Event of Default which in its opinion shall have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it under the provisions of the Master Indenture or before the completion of the enforcement of any other remedy thereunder.

Notwithstanding anything contained in the Master Indenture to the contrary, the Master Trustee, upon the written request of the Holders of not less than a majority of the Aggregate Principal Amount of Obligations then Outstanding, shall waive any Event of Default under the Master Indenture and its consequences; provided, however, that, except under the circumstances as described in “Acceleration; Annulment of Acceleration” of the Master Indenture, a default in the payment of the principal of, premium, if any, or interest on any Obligation, when the same shall become due and payable by the terms thereof or upon call for redemption, may not be waived without the written consent of the Holders of all the Outstanding Obligations with respect to which such payment default exists.

In case of any waiver by the Master Trustee of an Event of Default under the Master Indenture, the Members of the Credit Group, the Master Trustee and the Holders shall be restored to their former positions and rights under the Master Indenture, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon.

Notice of Default

The Master Trustee shall, within 10 days after it has knowledge of the occurrence of an Event of Default, mail to all Holders and each Related Bond Authority as the names and addresses of such Holders appear upon the records of the Master Trustee, notice of such Event of Default known to the Master Trustee, unless such Event of Default shall have been cured before the giving of such notice: provided that, except in the case of default in the payment of the principal of or premium, if any, or interest on any of the Obligations and the Events of Default specified in the Master Indenture, the Master Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors of the Master Trustee in good faith determines that the withholding of such notice is in the interests of the Holders.

D-31 Supplements Not Requiring Consent of Holders

The Obligated Group Representative, on behalf of the Members of the Credit Group, and the Master Trustee may, without the consent of or notice to any of the Holders, enter into one or more Supplements for one or more of the following purposes: (a) to cure any ambiguity or formal defect or omission therein; (b) to correct or supplement any provision which may be inconsistent with any other provision therein, or to make any other provisions with respect to matters or questions arising thereunder and which shall not materially and adversely affect the interests of the Holders; (c) to grant or confer ratably upon all of the Holders any additional rights, remedies, powers or authority that may lawfully be granted or conferred upon them, subject to the provisions of the Master Indenture; (d) to qualify the Master Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal law from time to time in effect; (e) to create and provide for the issuance of Obligations as permitted in the Master Indenture; (f) to obligate a successor to any Member of the Obligated Group as provided in the Master Indenture; (g) to add a new Member or Designated Affiliate as provided in the Master Indenture; (h) in addition, and without limiting the foregoing, the Obligated Group Representative, on behalf of the Members of the Credit Group, and the Master Trustee may, without the consent of or notice to any of the Holders, enter into one or more Supplements for any purpose, if the Obligated Group Representative obtains (i) the written consent of each credit enhancer then providing credit enhancement for any Outstanding Related Bonds, and (ii) written confirmation from each Rating Agency then rating any Outstanding Related Bonds that upon execution of the Supplement, the ratings on such Related Bonds (without regard to any credit enhancement of the Related Bonds) will not be lower as a result of the execution of such Supplement); provided, however, that if, prior to the consummation of the proposed transactions, any such Outstanding Related Bonds are not then rated by any Rating Agency such a rating shall be obtained, which rating as evidenced by the written confirmation of such Rating Agency, will not be lower as a result of the entry into the Replacement Master Indenture and the Substitute Obligations.

Supplements Requiring Consent of Holders

Other than Supplements referred to in the Master Indenture and subject to the terms and provisions and limitations contained in the Master Indenture and not otherwise, the Holders of not less than a majority in Aggregate Principal Amount of Obligations then Outstanding shall have the right, from time to time, anything contained therein to the contrary notwithstanding, to consent to and approve the execution by the Obligated Group Representative, on behalf of the Members of the Credit Group, and the Master Trustee of such Supplements as shall be deemed necessary and desirable for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained therein; provided, however, nothing in the Master Indenture shall permit or be construed as permitting a Supplement which would: (1) effect a change in the times, amounts or currency of payment of the principal of, premium, if any, and interest on any Obligation or a reduction in the Aggregate Principal Amount or redemption price of any Obligation or the rate of interest thereon, without the consent of the Holder of such Obligation; (2) permit the preference or priority of any Obligation over any other Obligation except as expressly provided therein, without the consent of the Holders of all Obligations then Outstanding; or (3) reduce the Aggregate Principal Amount of Obligations then Outstanding the consent of the Holders of which is required to authorize such Supplement without the consent of the Holders of all Obligations then Outstanding.

If at any time the Obligated Group Representative shall request the Master Trustee to enter into a Supplement pursuant to the Master Indenture, which request is accompanied by a copy of the resolution or other action of its Governing Body certified by its secretary or if it has no secretary, an Authorized Representative, and the proposed Supplement and if within such period as shall be prescribed by the Obligated Group Representative following the request, the Master Trustee shall receive an instrument or instruments purporting to be executed by the Holders of not less than the Aggregate Principal Amount or number of Obligations specified in the Master Indenture for the Supplement in question, which instrument or instruments shall refer to the proposed Supplement and shall specifically consent to and approve the execution thereof in substantially the form of the copy thereof as on file with the Master Trustee, thereupon, but not otherwise, the Master Trustee may execute such Supplement in substantially such form, without liability or responsibility to any Holder, whether or not such Holder shall have consented thereto.

D-32 Any such consent shall be binding upon the Holder giving such consent and upon any subsequent Holder of such Obligation and of any Obligation issued in exchange therefor (whether or not such subsequent Holder thereof has notice thereof), unless such consent is revoked in writing by the Holder of such Obligation giving such consent or by a subsequent Holder thereof by filing with the Master Trustee, prior to the execution by the Master Trustee of such Supplement, such revocation. At any time after the Holders of the required Aggregate Principal Amount or number of Obligations shall have filed their consents to the Supplement, the Master Trustee shall make and file with the Obligated Group Representative a written statement to that effect. Such written statement shall be conclusive that such consents have been so filed.

If the Holders of the required Aggregate Principal Amount of the Obligations Outstanding shall have consented to and approved the execution of such Supplement as provided in the Master Indenture, no Holder shall have any right to object to the execution thereof, or to object to any of the terms and provisions contained therein or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Master Trustee or any Member of the Obligated Group from executing the same or from taking any action pursuant to the provisions thereof.

SUPPLEMENT NO. 1

The following summarizes certain provisions of Supplement No. 1. Such summary does not purport to be complete and reference is made to Supplement No. 1 and the Master Indenture for full and complete statements of all such provisions.

Creation of Obligation No. 26

Obligation No. 26 of the Obligated Group, created under Supplement No. 1, is to be issued as a single note and executed, authenticated and delivered in accordance with the Master Indenture with respect to the Bonds. Obligation No. 26 is to bear interest with respect to the Outstanding Bonds from their dated date payable as provided in Supplement No. 1. The principal of Obligation No. 26 is payable with respect to the Outstanding Bonds on the dates set forth in the Official Statement, subject to prior redemption as set forth in the Bond Indenture. The Obligated Group shall receive certain credits against its required payments of principal of and interest on Obligation No. 26 to the extent set forth in Supplement No. 1. Such principal and interest are payable directly to the Bond Trustee. The Obligated Group Representative shall give notice in writing of each such payment to the Master Trustee.

Obligation No. 26 shall each be subject to the acceleration provisions of the Master Indenture. Upon the occurrence of an Event of Default the Holder of Obligation No. 26 shall be entitled, by notice to the Master Trustee and the Obligated Group Representative, to require the Master Trustee to declare Obligation No. 26 immediately due and payable, subject to the provisions of the Master Indenture. The Holder of Obligation No. 26 shall also be entitled to consent to any acceleration of Obligation No. 26 in accordance with the Master Indenture and therefore Obligation No. 26 may not be accelerated by the Master Trustee without the consents of such Holders. The principal of, premium, if any, and interest on Obligation No. 26 is payable in any coin or currency of the United States of America which at the respective times of payment is legal tender for the payment of public and private debts.

Obligation No. 26 is being issued to secure the obligation of the Obligated Group to make payments required to pay all principal, interest and premium, if any, due or to become due under the Bond Indenture and the Loan Agreement for the Bonds.

The Obligated Group shall receive credit for payment on Obligation No. 26 in addition to any credits resulting from payment or prepayment from other sources, as follows: (a) on installments of interest on Obligation No. 26 in amounts equal to moneys deposited in the Bond Fund which amounts are available to pay interest on the Bonds to the extent such amounts have not previously been credited against payments on Obligation No. 26; and (b) on installments of principal on Obligation No. 26 in amounts equal to moneys

D-33 deposited in the Bond Fund which amounts are available to pay the principal of the Bonds to the extent such amounts have not previously been credited against payments on Obligation No. 26.

Prepayment of Obligation

So long as all amounts which have become due and payable under Obligation No. 26 has been paid, the Obligated Group may at any time and from time to time pay in advance and in any order of due dates all or part of the amounts to become due under Obligation No. 26 if, not less than sixty (60) days prior to such prepayment, the Obligated Group Representative gives notice to the Bond Trustee of its intention to make a prepayment and of the amount thereof and if, not later than the date of the prepayment, the Obligated Group Representative directs the Bond Trustee as to the application of the amounts prepaid to retire Bonds by purchase, redemption or both purchase and redemption in accordance with the Bond Indenture for the Bonds. Any such prepayment shall be in an amount sufficient to accomplish any such redemption.

Prepayments made as described in Supplement No. 1 shall be credited against amounts to become due on Obligation No. 26, as provided in Supplement No. 1. The Obligated Group may also prepay all of its indebtedness under Obligation No. 26 by providing for the payment of the respective series of Bonds in accordance with the Bond Indenture. The Obligated Group may also prepay all or any part of its indebtedness under Obligation No. 26 by depositing hazard insurance or condemnation proceeds received with respect to the facilities of the Members of the Obligated Group as provided pursuant to the Bond Indenture.

Defeasance of Obligation

Obligation No. 26 shall be deemed to be paid and discharged for all purposes of the Master Indenture if all of the Bonds are paid or provision for their payment has been made in compliance with the provisions of the Bond Indenture.

Supplement No. 1 to Constitute Contract

In consideration of the purchase and acceptance of Obligation No. 26 by the Holder thereof, the provisions of Supplement No. 1 shall be part of the contract of the Obligated Group with the Holder of Obligation No. 26 and shall be deemed to be and shall constitute a contract between the Obligated Group and the Holder of Obligation No. 26.

THE BOND INDENTURE

The Bond Indenture sets forth the terms of the Bonds, the nature and extent of the security, various rights of the Bondholders, rights, duties and immunities of the Bond Trustee and the rights and obligations of the Authority. Certain provisions of the Bond Indenture are summarized in this Official Statement under the captions “THE BONDS” and “SECURITY AND SOURCE OF PAYMENT FOR THE BONDS.” Other provisions are summarized below. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Bond Indenture.

Redemption

Redemption provisions applicable to the Bonds (including certain provisions relating to mandatory and extraordinary redemption of the Bonds) are described in the front part of this Official Statement under the heading “THE BONDS—Redemption of the Bonds.”

Pledge and Assignment of Revenues

The Authority transfers in trust, grants a security interest in and assigns to the Bond Trustee, for the benefit of the Holders from time to time of the Bonds, all of the Revenues and other assets pledged, including proceeds of the sale of the Bonds, held in any fund or account established under the Bond Indenture (except the

D-34 Rebate Fund); all of the right, title and interest of the Authority in, to and under the Loan Agreement (except for Unassigned Rights and the right to receive any Administrative Fees and Expenses to the extent payable to the Authority) and Obligation No. 26. The Bond Trustee shall be entitled to and shall, subject to the provisions of the Bond Indenture, receive all of the Revenues and any Revenues collected or received by the Authority shall be deemed to be held, and to have been collected or received, by the Authority as the agent of the Bond Trustee and shall forthwith be paid by the Authority to the Bond Trustee. The Bond Trustee also shall be entitled to, and shall, take all steps, actions and proceedings reasonably necessary in its judgment to enforce all of the rights of the Authority and all of the obligations of the Corporation under the Loan Agreement and Obligation No. 26 that are assigned and pledged to the payment and security of the Bonds pursuant to the Bond Indenture.

Establishment of Funds and Accounts

The Bond Indenture creates a Bond Fund, a Costs of Issuance Fund, a Refunding Fund and a Rebate Fund, all of which are to be held by the Bond Trustee.

Bond Fund. Moneys in the Bond Fund shall be held by the Bond Trustee in trust and applied only as provided in the Bond Indenture and, pending such application, the Bond Fund and the money therein shall be subject to a lien and charge in favor of the Bond Trustee for the benefit of the Holders and for the security of the Holders. The Bond Trustee shall also create such other funds and accounts under the Bond Fund as shall be requested in writing by the Corporation from time to time as necessary to facilitate proper administration of the Bond Fund. All Revenues shall be promptly deposited by the Bond Trustee upon receipt thereof in the Bond Fund; except that if there is no continuing Event of Default, Revenues comprised of all interest, profits and other income received from the investment of a fund established pursuant to the Bond Indenture (other than the Bond Fund) shall be credited, as received, to such fund as provided in the Bond Indenture; and except further that if there is no continuing Event of Default, Revenues comprised of all interest, profits and other income received from the investment of the Bond Fund shall be paid to the Corporation. All Revenues deposited with the Bond Trustee shall be held, disbursed, allocated and applied by the Bond Trustee only as provided in the Bond Indenture.

Except for payments of investment earnings to the Corporation pursuant to the Bond Indenture, all amounts in the Bond Fund shall be used and withdrawn by the Bond Trustee solely for the purpose of paying principal of, and premium, if any, and interest on the Bonds, as the same shall become due and payable, whether at maturity or upon acceleration of or redemption prior to maturity. Any amounts remaining in the Bond Fund when all of the Bonds are no longer Outstanding shall be withdrawn by the Bond Trustee and paid to the Corporation.

Costs of Issuance Fund. The Bond Trustee shall establish a Costs of Issuance Fund for payment of Costs of Issuance. Moneys remaining in the Costs of Issuance Fund after the date specified in the Bond Indenture shall be transferred to the Bond Fund and the Costs of Issuance Fund shall thereafter be closed.

Refunding Fund. The Bond Trustee shall establish a Refunding Fund. On the date of issuance and delivery of the Bonds, the Bond Trustee, upon receipt and deposit of the amount described in the Bond Indenture for the redemption of the Refunded Bonds, will withdraw from the Refunding Fund the sums provided in the Bond Indenture for the refunding of the Refunded Bonds. Upon the transfer of moneys in the Refunding Fund, the Bond Trustee shall close the Refunding Fund.

Rebate Fund. Subject to the transfer provisions provided in the Bond Indenture, all money at any time deposited in the Rebate Fund shall be held by the Bond Trustee in trust, to the extent required to satisfy the Rebate Amount (as defined in the Tax Agreement), for payment of amounts with respect to the Series 2016A Bonds due to the federal government of the United States of America. Neither the Authority, the Corporation nor the Holder of any Bonds shall have any rights in or claim to such money. All amounts deposited into or on deposit in the Rebate Fund shall be governed by the Bond Indenture and by the Tax Agreement (which is incorporated in the Bond Indenture by reference). The Bond Trustee shall be deemed conclusively to have complied with such provisions if it follows the directions of the Corporation including supplying all necessary

D-35 information in the manner provided in the Tax Agreement, and shall have no liability or responsibility to enforce compliance by the Corporation or the Authority with the terms of the Tax Agreement.

Investment of Moneys in Funds and Accounts

All moneys in any of the funds and accounts established pursuant to the Bond Indenture shall be invested by the Bond Trustee, upon written direction of the Corporation (or oral direction immediately confirmed in writing), solely in Investment Securities subject to the limitations and other provisions set forth in the Bond Indenture.

Events of Default; Remedies on Default

The following are Events of Default under the Bond Indenture: (a) default in the due and punctual payment of the principal or Redemption Price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise; (b) default in the due and punctual payment of any installment of interest on any Bond when and as such interest installment shall become due and payable; (c) default by the Authority in the observance of any of the other covenants, agreements or conditions on its part contained in the Bond Indenture or in the Bonds, if such default shall have continued for a period of 60 days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority and the Corporation by the Bond Trustee, or to the Authority, the Corporation and the Bond Trustee by the Holders of more than 50% in aggregate principal amount of the Bonds at the time Outstanding; and (d) a Loan Default Event shall have occurred and shall not have been remedied or waived under the terms of the Loan Agreement.

Upon actual knowledge of the occurrence of any Event of Default, the Bond Trustee shall notify the Corporation, the Authority and the Master Trustee as soon as practicable, but in any event within 5 days.

Whenever any Event of Default shall have happened and be continuing, the Bond Trustee may take the following remedial steps:

In the case of any Event of Default described in (a), (b) or (d) of the first paragraph of this section, the Bond Trustee may, and upon the written direction of the Holders of more than 50% in aggregate principal amount of the Bonds at the time Outstanding shall, upon notice in writing to the Authority and the Corporation, declare the principal of all of the Bonds then Outstanding, and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in the Bond Indenture or in the Bonds contained to the contrary notwithstanding. Any such declaration, however, is subject to the condition that if, at any time after such declaration and before any final judgment or decree in any suit, action or other proceeding instituted for the payment of the moneys due shall have been obtained or entered, the Authority or the Corporation shall deposit with the Bond Trustee a sum sufficient to pay all the principal or Redemption Price of and installments of interest on the Bonds payment of which is overdue, with interest on such overdue principal at the rate borne by the respective Bonds, and the reasonable charges and expenses of the Bond Trustee, and any and all other defaults known to the Bond Trustee (other than in the payment of principal of and interest on the Bonds due and payable solely by reason or such declaration) shall have been made good or cured to the satisfaction of the Bond Trustee or provision deemed by the Bond Trustee to be adequate shall have been made therefor, then, and in every such case, the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding, by written notice to the Authority, the Corporation and the Bond Trustee, or the Bond Trustee if such declaration was made by the Bond Trustee, may, on behalf of the Holders of all of the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon.

D-36 Upon the occurrence and during the continuation of an Event of Default, the Bond Trustee may, and upon the written direction of the Holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding shall, take whatever action at law or in equity it deems, or such Holders deem, necessary or desirable (i) to collect any amounts then due under the Bond Indenture, the Bonds, the Loan Agreement or Obligation No. 26, (ii) to enforce performance of any obligation, agreement or covenant of the Authority under the Bond Indenture or the Bonds or of the Corporation under the Loan Agreement, the Tax Agreement or Obligation No. 26, or (iii) to otherwise enforce any of its rights.

In the event that the Master Trustee has accelerated Obligation No. 26 and is pursuing its available remedies under the Master Indenture, the Bond Trustee, without waiving any Event of Default under the Bond Indenture, agrees not to pursue its available remedies under the Bond Indenture or the Loan Agreement in a manner that would hinder or frustrate the pursuit by the Master Trustee of its remedies under the Master Indenture provided that the Bond Trustee may take any action permitted of an Obligation holder under the Master Indenture.

Bond Trustee to Represent Bondholders

The Bond Trustee is irrevocably appointed pursuant to the Bond Indenture (and the successive respective Holders of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Bond Trustee) as trustee and true and lawful attorney-in-fact of the Holders of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Holders under the provisions of the Bonds, the Bond Indenture, the Loan Agreement, Obligation No. 26, the Act and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Bond Trustee to represent the Bondholders, the Bond Trustee in its discretion may, and upon the written request of the Holders of more than 50% in aggregate principal amount of the Bonds then Outstanding and upon being indemnified to its reasonable satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of such Holders by such appropriate action, suit, mandamus or other proceedings as it or such Holders shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Bond Indenture, or in aid of the execution of any power granted in the Bond Indenture, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Bond Trustee or in such Holders under the Bond Indenture, the Loan Agreement, Obligation No. 26, the Tax Agreement, the Act or any other law; and upon instituting such proceeding, the Bond Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Revenues and other assets pledged under the Bond Indenture or the Bonds, pending such proceedings. If more than one such request is received by the Bond Trustee from the Holders, the Bond Trustee shall follow the written request executed by the Holders of the greater percentage of Bonds then Outstanding in excess of 50%. All rights of action under the Bond Indenture or the Bonds or otherwise may be prosecuted and enforced by the Bond Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Bond Trustee shall be brought in the name of the Bond Trustee for the benefit and protection of all the Holders of such Bonds, subject to the provisions of the Bond Indenture.

Bondholders’ Direction of Proceedings

The Holders of more than 50% in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Bond Trustee, to direct the method of conducting all remedial proceedings taken by the Bond Trustee under the Bond Indenture, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Bond Indenture, and that the Bond Trustee shall have the right to decline to follow any such direction which in the opinion of the Bond Trustee would be unjustly prejudicial to Bondholders not parties to such direction.

Limitation on Bondholders’ Right to Sue

No Holder of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Bond Indenture, the Loan Agreement, Obligation No. 26, the Act or any other applicable law with respect to such Bond, unless (1) such Holder

D-37 previously shall have given to the Bond Trustee written notice of the occurrence of an Event of Default; (2) the Holders of more than 50% in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Bond Trustee to exercise the powers granted or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holders shall have tendered to the Bond Trustee indemnity satisfactory to the Bond Trustee against the costs, expenses and liabilities to be incurred in compliance with such request and (4) the Bond Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Bond Trustee.

Amendment of Bond Indenture and Loan Agreement

The Bond Indenture may be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Bond Trustee may enter into when there shall have been filed with the Bond Trustee the written consent of the Holders of not less than 51% in aggregate principal amount of the Bonds then Outstanding; provided that if such modification or amendment will, by its terms, not take effect so long as any Bonds of any particular maturity remain Outstanding, the consent of the Holders of such Bonds shall not be required and such Bonds shall not be deemed to be Outstanding for the purpose of any calculation of Bonds Outstanding as described under this paragraph. No such modification or amendment shall (1) extend the fixed maturity of any Bond, or change the method of determining the rate of interest thereon (other than as provided herein), or reduce the amount of principal of any Bond, or reduce the rate of interest on any Bond, or extend the time of payment of interest on any Bond, or reduce any premium payable upon the redemption on any Bond without the written consent of the Holder of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds the consent of the Holders of which is required to effect any such modification or amendment, or permit the creation of any lien on the Revenues and other assets pledged under the Bond Indenture prior to or on a parity with the lien created by the Bond Indenture, or deprive the Holders of the Bonds of the lien created by the Bond Indenture on such Revenues and other assets (except as expressly provided in the Bond Indenture), without the written consent of the Holders of all Bonds then Outstanding.

It shall not be necessary for the consent of the Bondholders to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof.

The Bond Indenture may be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Bond Trustee may enter into without the consent of any Bondholders, but only for any one or more of the following purposes: (i) to add to the covenants and agreements of the Authority contained in the Bond Indenture other covenants and agreements thereafter to be observed by the Authority which are not contrary to or inconsistent with the Bond Indenture as then in effect, or to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved to or conferred upon the Authority if the surrender of such right or power is not contrary to or inconsistent with the covenants and agreements of the Authority contained in the Bond Indenture then in effect; (ii) to cure any ambiguity, inconsistency or omission in or from the Bond Indenture, or to cure or correct any defective provision in the Bond Indenture, or to add or to modify provisions of the Bond Indenture in regard to matters or questions arising under the Bond Indenture as the Authority or the Corporation may deem necessary or desirable and are not contrary to or inconsistent with the Bond Indenture as then in effect or materially adverse to the interests of the Holders of the Bonds; (iii) to modify, amend or supplement the Bond Indenture in such manner as to permit the qualification thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially adversely affect the interests of the Holders of the Bonds; (iv) to provide for the issuance of coupon Bonds, if at such time federal law shall permit the issuance of coupon Bonds; provided that prior to such issuance the Authority shall have obtained the Opinion of Bond Counsel to the effect that such issuance will not affect the exclusion of the interest on the Bonds from gross income of the Holders for purposes of federal income taxation; (v) as necessary in the Opinion of Bond Counsel, to preserve the status of the interest on the Bonds as excluded from gross income of the Holders for purposes of federal income taxation; or (vi) to make any other change that does not materially adversely affect the rights or the interests of the Holders of the Bonds.

D-38 The Authority shall not amend, modify or terminate any of the terms of the Loan Agreement, or consent to any such amendment, modification or termination, without the prior written consent of the Bond Trustee. The Bond Trustee shall give such written consent only (1) if, based on an Opinion of Counsel, such amendment, modification or termination will not materially adversely affect the interests of the Bondholders or result in any material impairment of the security hereby given for the payment of the Bonds or (2) if the Bond Trustee first obtains the written consent of the Holders of all of the Bonds then Outstanding to such amendment, modification or termination, if such amendment, modification or termination shall reduce the amount of Loan Repayments to be made to the Authority or the Bond Trustee by the Corporation pursuant to the Loan Agreement, or extend the time for making such payments.

Defeasance

The Bonds may be paid by the Authority in any of the following ways: (a) by paying or causing to be paid the principal or Redemption Price of and interest on Outstanding Bonds, as and when the same become due and payable; (b) by depositing with the Bond Trustee, in trust, at or before maturity, money or securities in the amount necessary in the opinion of an Accountant delivered to the Bond Trustee to pay or redeem Outstanding Bonds; or (c) by delivering to the Bond Trustee, for cancellation by it, Outstanding Bonds. If the Authority shall pay all Outstanding Bonds and shall also pay or cause to be paid all other sums payable under the Bond Indenture by the Authority and the Corporation shall have paid all Administrative Fees and Expenses payable to the Authority pursuant to the Loan Agreement, then and in that case at the election of the Authority, and, then notwithstanding that any Bonds shall not have been surrendered for payment, the Bond Indenture and the pledge of Revenues and other assets made under the Bond Indenture and all covenants, agreements and other obligations of the Authority under the Bond Indenture shall cease, terminate, become void and be completely discharged and satisfied.

Deposit of Money or Securities with Bond Trustee

Whenever in the Bond Indenture it is provided or permitted that there be deposited with or held in trust by the Bond Trustee money or securities in the amount necessary to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Bond Trustee in the funds and accounts established pursuant to the Bond Indenture (other than the Rebate Fund) and shall be:

(a) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as provided in the Bond Indenture or provision satisfactory to the Bond Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon to the redemption date; or

(b) Defeasance Securities not subject to call and redemption by the Authority, the principal of and interest on which when due will provide money sufficient to pay the principal or Redemption Price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or Redemption Price and interest become due; provided that in each case, the Bond Trustee shall have been irrevocably instructed (by the terms of the Bond Indenture or by request of the Authority) to apply such money to the payment of such principal or Redemption Price and interest with respect to such Bonds, and shall have received (i) a verification report from an Accountant or other experts as more fully set forth in the Bond Indenture, (ii) an escrow deposit agreement in form and substance acceptable to the Bond Trustee and the Credit Facility Provider (if any), and (iii) an opinion of nationally recognized bond counsel as more fully set forth in the Bond Indenture.

THE LOAN AGREEMENT

The Loan Agreement provides the terms of the loan of proceeds of the Bonds to the Corporation and the repayment of and security for such loan provided by the Corporation. Certain of the provisions of the Loan

D-39 Agreement are summarized below. This summary does not purport to be complete or definitive and is qualified in its entirety by reference to the full terms of the Loan Agreement.

Issuance of Obligation No. 26

In consideration of the issuance of the Bonds by the Authority and the application of the proceeds thereof as provided in the Bond Indenture, the Corporation agrees to issue, or cause to be issued, and to cause to be authenticated and delivered to the Authority or its designee, pursuant to the Master Indenture and Supplement No. 1, concurrently with the issuance and delivery of the Bonds, Obligation No. 26 in substantially the form set forth in Supplement No. 1. The Authority agrees that Obligation No. 26 shall be registered in the name of the Bond Trustee.

Loan of Proceeds; Payments of Principal, Premium and Interest

The principal of and interest on the loan of the proceeds of the Bonds under the Loan Agreement will be repaid by means of “Loan Repayments” which the Corporation agrees to pay, or cause to be paid, to the Bond Trustee as assignee of the Authority. The Loan Repayments will be due and payable (i) on or before the second Business Day next preceding each Interest Payment Date the full amount of the interest becoming due and payable on such Interest Payment Date on all Bonds then Outstanding (less any amounts on deposit in the Bond Fund available for the payment of such interest) and (ii) on or before the second Business Day next preceding each Principal Payment Date the aggregate amount of principal becoming due and payable on the Outstanding Bonds, plus the aggregate amount of Mandatory Sinking Account Payments required to be paid into the Sinking Accounts for Outstanding Bonds, in each case on such Principal Payment Date (less any amounts on deposit in the Bond Fund available for the payment of such principal or Mandatory Sinking Account Payments). In addition, the Corporation agrees to duly and punctually pay, or cause to be paid, the principal of and interest and any premium on Obligation No. 26 at the dates and in the places and manner mentioned therein.

Additional Payments

In addition to the Loan Repayments and payments on Obligation No. 26, the Corporation shall also pay to the Authority or the Bond Trustee, as the case may be, “Additional Payments,” as follows: (i) all taxes and assessments of any type or character charged to the Authority or to the Bond Trustee affecting the amount available to the Authority or the Bond Trustee from payments to be received under the Loan Agreement or arising due to the transactions contemplated thereby; (ii) all reasonable fees, charges and expenses of the Bond Trustee for services rendered under the Bond Indenture and all amounts referred to in the indemnification provisions under the Bond Indenture; (iii) the reasonable fees and expenses of such accountants, consultants, attorneys, bond counsel and other experts as may be engaged by the Authority or the Bond Trustee to prepare audits, financial statements, reports or opinions or to provide such other services required under the Loan Agreement, Supplement No. 1, Obligation No. 26 or the Bond Indenture; (iv) the reasonable fees and expenses of the Authority or any agent selected by the Authority to act on its behalf and the Credit Facility Provider, if any, in connection with the Loan Agreement, Supplement No. 1, Obligation No. 26, the Bonds or the Bond Indenture; (v) all amounts necessary to make any payment required to be made under Section 148(f) of the Code, accompanied by any such related documentation as may be required to be filed with such payment; and (vi) all other reasonable and necessary fees and expenses attributable to the Loan Agreement or Obligation No. 26. Such Additional Payments shall be billed to the Corporation by the Authority or the Bond Trustee from time to time and shall be paid by the Corporation within 30 days after receipt of the bill by the Corporation.

Credits for Payments

The Corporation shall receive credit against its Loan Repayments, in addition to any credits resulting from payment or repayment from other sources, as follows: (i) on installments of interest in an amount equal to moneys deposited in the Bond Fund, which amounts are available to pay interest on the Bonds, to the extent such amounts have not previously been credited against such payments; (ii) on installments of principal in an amount equal to moneys deposited in the Bond Fund, which amounts are available to pay principal of the Bonds, to the

D-40 extent such amounts have not previously been credited against such payments; (iii) on installments of principal and interest in an amount equal to the principal amount of each Series of Bonds for the payment at maturity or redemption of which sufficient amounts in cash or Investment Securities are on deposit as provided in the Bond Indenture to the extent such amounts have not previously been credited against such payments, and the interest on such Bonds from and after the date fixed for payment at maturity or redemption thereof; and (iv) on installments of principal and interest in an amount equal to the principal amount of each Series of Bonds acquired by the Corporation and surrendered to the Bond Trustee for cancellation or purchased by the Bond Trustee and cancelled, and the interest on such Bonds from and after the date interest thereon has been paid prior to cancellation. Such credits shall be made against the installments of principal and interest which would have been used, but for such cancellation, to pay principal of and interest on such Bonds when due.

Prepayment

The Corporation shall have the right, so long as all amounts which have become due under the Loan Agreement and under Obligation No. 26 have been paid, at any time or from time to time to prepay all or any part of the Loan Repayments. All such prepayments (and the additional payment of any amount necessary to pay the applicable premium, if any, payable upon the redemption of Bonds) shall be deposited upon receipt in the Bond Fund and, at the request of and as determined by the Corporation, credited against payments due under the Loan Agreement or used for the redemption or purchase of Outstanding Bonds in the manner and subject to the terms and conditions set forth in the Bond Indenture.

Tax Covenant

The Corporation covenants and agrees that it will at all times do and perform all acts and things permitted by law and the Loan Agreement which are necessary in order to assure that interest paid on the Bonds will be excluded from gross income for federal income tax purposes and will take no action that would result in such interest not being so excluded.

Continuing Disclosure

The Corporation covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement. Notwithstanding any other provision of the Loan Agreement, failure of the Corporation to comply with the Continuing Disclosure Agreement shall not be considered a Loan Default Event; however, the Master Trustee may (and, at the written request of any participating underwriter or the Holders of at least 25% aggregate principal amount in Outstanding Bonds, shall) or any Holder or Beneficial Owner (as defined in the Continuing Disclosure Agreement) may take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Corporation to comply with its obligations described in this paragraph.

Events of Default

The following events will be “Loan Default Events”: (i) failure by the Corporation to pay in full any payment required under the Loan Agreement or under Obligation No. 26, when due, whether at maturity, upon a date fixed for prepayment, by declaration or otherwise pursuant to the terms of the Loan Agreement; (ii) if any material representation or warranty made by the Corporation in the Loan Agreement or made by the Corporation or any Member in any document, instrument or certificate furnished to the Bond Trustee or the Authority in connection with the issuance of Obligation No. 26 or the Bonds shall at any time prove to have been incorrect in any respect as of the time made; (iii) failure by the Corporation to observe or perform any covenant, condition, agreement or provision in the Loan Agreement on its part to be observed or performed, other than as referred to in (i) and (ii) above, or breach of any warranty by the Corporation contained in the Loan Agreement, for a period of 60 days after written notice, specifying such failure or breach and requesting that it be remedied, has been given to the Corporation by the Authority or the Bond Trustee; except that, if such failure or breach can be remedied but not within such 60-day period and if the Corporation has taken all action reasonably possible to remedy such failure or breach within such 60-day period, such failure or breach shall not become a Loan Default Event for so

D-41 long as the Corporation shall diligently proceed to remedy such failure or breach in accordance with and subject to any directions or limitations of time established by the Bond Trustee; (iv) certain incidents of bankruptcy, insolvency or similar conditions; (v) a court of competent jurisdiction enters an order, judgment or decree declaring the Corporation an insolvent, or adjudging it bankrupt, or appointing a trustee or receiver of the Corporation or of the whole or any substantial part of the Corporation’s facilities, or approving a petition filed against the Corporation seeking reorganization of the Corporation under any applicable law or statute of the United States of America or any state thereof, and such order, judgment or decree is not vacated or set aside or stayed within 60 days from the date of entry; (vi) under the provisions of any other law for the relief or aid of debtors; (vii) any court of competent jurisdiction assumes custody or control of the Corporation’s facilities, and such custody or control is not terminated within 60 days from the date of assumption; (viii) any Event of Default as defined in and under the Bond Indenture; or (ix) any Event of Default as defined in and under the Master Indenture.

Remedies on Default

During the continuance of a Loan Default Event, the Bond Trustee on behalf of the Authority subject to the limitations in the Bond Indenture as to the enforcement of remedies, may take such action as it deems necessary or appropriate to collect amounts due under the Loan Agreement, to enforce performance and observance of any obligation or agreement of the Corporation under the Loan Agreement or to protect the interests securing the same, and may, without limiting the generality of the foregoing: (i) exercise any and all rights and remedies given by the Loan Agreement or available under the Loan Agreement or given by or available under any other instrument of any kind securing the Corporation’s performance under the Loan Agreement; (ii) declare upon written notice to the Corporation, an amount equal to all amounts then due and payable on the Bonds, whether by acceleration of maturity or otherwise, to be immediately due and payable under the Loan Agreement, whereupon the same shall become immediately due and payable; and (iii) take any action at law or in equity to collect the payment required under the Loan Agreement then due, whether on the stated due date or by declaration of acceleration or otherwise, in accordance with the Master Indenture.

Amendment of Loan Agreement

The Loan Agreement may be amended, changed or modified only as provided in the Bond Indenture. See “THE BOND INDENTURE—Amendment of Bond Indenture and Loan Agreement.”

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APPENDIX E

FORM OF BOND COUNSEL OPINION

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November ___, 2016

Hospital Facility Authority of the City of Salem, Oregon Salem, Oregon

$______Hospital Facility Authority of the City of Salem, Oregon Revenue Refunding Bonds (Salem Health Projects), Series 2016A (Final Opinion)

Ladies and Gentlemen:

We have acted as bond counsel to the Hospital Facility Authority of the City of Salem, Oregon (the “Issuer”) in connection with issuance of $______aggregate principal amount of Hospital Facility Authority of the City of Salem, Oregon Revenue Refunding Bonds (Salem Health Projects), Series 2016A (the “Bonds”), issued pursuant to a Bond Indenture, dated as of November 1, 2016 (the “Indenture”), between the Issuer and U.S. Bank National Association, as bond trustee (the “Trustee”). The Indenture provides that the Bonds are issued for the stated purpose of making a loan of the proceeds thereof to Salem Health, an Oregon nonprofit corporation (the “Borrower”), pursuant to a Loan Agreement, dated as of November 1, 2016 (the “Loan Agreement”), between the Issuer and the Borrower. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture.

In such connection, we have reviewed the Indenture, the Loan Agreement, the Tax Certificate and Agreement, dated the date hereof (the “Tax Certificate”), between the Issuer and the Borrower, opinions of counsel to the Trustee and the Borrower, certificates of the Issuer, the Trustee, the Borrower and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein.

We have relied on the opinion of Parks, Bauer, Sime, Winkler & Fernety LLP, counsel to the Borrower and Salem Health Hospitals and Clinics, an Oregon nonprofit corporation (the “Parent”), regarding, among other matters, the current qualification of the Borrower and the Parent as organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”) and the use of the facilities financed or refinanced with the proceeds of the Bonds in activities that are not considered unrelated trade or business activities of the Borrower within the meaning of Section 513 of the Code. We note that such opinion is subject to a number of qualifications and limitations. Failure of the Borrower or the Parent to be organized and operated in accordance with the Internal Revenue Service’s requirements for the maintenance of their status as organizations described in Section 501(c)(3) of the Code, or use of the bond- financed or refinanced facilities in activities that are considered unrelated trade or business activities of the Borrower within the meaning of Section 513 of the Code, may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of issuance of the Bonds.

Hospital Facility Authority of the City of Salem, Oregon November ___, 2016 Page 2

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the Issuer. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents and of the legal conclusions contained in the opinions, referred to in the second and third paragraphs hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture, the Loan Agreement and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds, the Indenture, the Loan Agreement and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against hospital facilities authorities in the State of Oregon. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the assets described in or as subject to the lien of the Indenture or the Loan Agreement or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such assets. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement or other offering material relating to the Bonds and express no opinion with respect thereto.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

1. The Bonds constitute the valid and binding limited obligations of the Issuer.

E-2

Hospital Facility Authority of the City of Salem, Oregon November ___, 2016 Page 3

2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the Issuer. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Revenues and any other amounts (including proceeds of the Bonds) held by the Trustee in any fund or account established pursuant to the Indenture, except the Rebate Fund, subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture.

3. The Loan Agreement has been duly executed and delivered by, and constitutes a valid and binding agreement of, the Issuer.

4. Interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of Oregon personal income taxes. Interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Bonds.

Faithfully yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

per

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APPENDIX F

FORM OF CONTINUING DISCLOSURE AGREEMENT

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CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (the “Disclosure Agreement”) is executed and delivered by Salem Health, a Oregon nonprofit corporation (the “Corporation”), acting as Obligated Group Representative, for itself and on behalf of any future members of the obligated group (collectively, the “Obligated Group” and individually, “Obligated Group Member” or “Member of the Obligated Group”) under the Master Indenture (defined below), and U.S. Bank National Association, as dissemination agent (the “Dissemination Agent”) in connection with the issuance of $[PAR AMOUNT] Hospital Facility Authority of the City of Salem, Oregon Revenue Refunding Bonds (Salem Health Projects) Series 2016A (the “Bonds”). The Bonds are being issued pursuant to a Bond Indenture related to the Bonds, dated as of November 1, 2016 (the “Bond Indenture”), between the Hospital Facility Authority of the City of Salem, Oregon (the “Authority”) and U.S. Bank National Association, as bond trustee (in such capacity, the “Bond Trustee”). The proceeds of the Bonds are being loaned by the Authority to the Corporation pursuant to a Loan Agreement related to the Bonds, dated as of November 1, 2016 (the “Loan Agreement”), between the Authority and the Corporation. To secure the obligation of the Corporation to make the payments under the Loan Agreement, the Corporation, on behalf of itself and any future Members of the Obligated Group, delivered to the Bond Trustee Obligation Number 26 (the “Obligation No. 26”) issued by the Corporation, with respect to the Bonds, pursuant to the Amended and Restated Master Trust Indenture, dated as of November 1, 2016 (the “Master Indenture”), between the Corporation, any future Members of the Obligated Group named therein and U.S. Bank National Association, as master trustee (the “Master Trustee”), and as supplemented and amended by the Supplemental Master Trust Indenture No. 1, dated as of November 1, 2016 (the “Supplement No. 1”), between the Corporation, as Obligated Group Representative on behalf of itself and any future Members of the Obligated Group, and the Master Trustee. The Corporation and each other Member of the Obligated Group will be jointly and severally obligated to make payments on the Obligation No. 26 according to the terms thereof when due.

The Corporation (on its own behalf and as Obligated Group Representative on behalf of each Member of the Obligated Group), and the Dissemination Agent covenant and agree as follows:

SECTION 1 Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Corporation and the Dissemination Agent for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriters in complying with the Rule (as defined below). The Obligated Group Members are “obligated persons” within the meaning of the Rule (as defined below). The Corporation and the Dissemination Agent acknowledge that the Authority has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Agreement, and the Authority has no liability to any person, including any Holder or Beneficial Owner of the Bonds, with respect to the Rule. This Disclosure Agreement is enforceable by Beneficial Owners of the Bonds pursuant to Section 13 hereof in accordance with the term thereof.

SECTION 2 Definitions. In addition to the definitions set forth in the Bond Indenture and the Master Indenture, which apply to any capitalized term used in this Disclosure Agreement

unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

“Annual Filing Date” shall mean the date, set forth in Section 3(a), by which the Annual Report is to be filed with the MSRB.

“Annual Report” shall mean any Annual Report provided by the Corporation pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

“Beneficial Owner” shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries); provided, however, that a person shall not be deemed to be a beneficial owner of a Bond solely as a result of a right held by such person to acquire any Bond in the future.

“Certification” shall mean a written certification of compliance signed by the Corporation stating that the Annual Report, Quarterly Report, Obligated Group Financial Statements, Listed Event notice, or Failure to File Event notice, delivered to the Dissemination Agent is the Annual Report, Quarterly Report, Obligated Group Financial Statements, Listed Event notice, or Failure to File Event notice, required to be submitted to the MSRB under this Disclosure Agreement. A Certification shall accompany each such document submitted to the Dissemination Agent by the Corporation and include the full name of the Bonds and the 9-digit CUSIP numbers for all Bonds to which the document applies.

“Obligated Group” shall have the meaning assigned to it in the Master Indenture, which is described in APPENDIX D – “Summary of Principal Documents” of the Official Statement, which is incorporated herein by reference.

“Obligated Group Financial Statements” shall have the meaning assigned to it in the Master Indenture, which is described in APPENDIX D – “SUMMARY OF PRINCIPAL DOCUMENTS – THE MASTER INDENTURE – Filing of Financial Statements, Certificate of No Default, Other Information” of the Official Statement, which is incorporated herein by reference.

“Corporation” shall mean the Corporation as defined in the introductory paragraph to this Disclosure Agreement and any entity that succeeds to the role of Obligated Group Representative under the Master Indenture.

“Dissemination Agent” shall mean U.S. Bank National Association, acting in its capacity as Dissemination Agent hereunder, or any successor Dissemination Agent designated in writing by the Corporation and which has filed with the Trustee a written acceptance of such designation.

“Failure to File Event” shall mean the Corporation’s failure to file an Annual Report on or before the Annual Filing Date or failure to file a Quarterly Report on or before the Quarterly Filing Date.

F-2 “Force Majeure Event” shall mean: (i) acts of God, war, or terrorist action; (ii) failure or shut-down of the Electronic Municipal Market Access system maintained by the MSRB; or (iii) to the extent beyond the Dissemination Agent’s reasonable control, interruptions in telecommunications or utilities services, failure, malfunction or error of any telecommunications, computer or other electrical, mechanical or technological application, service or system, computer virus, interruptions in Internet service or telephone service (including due to a virus, electrical delivery problem or similar occurrence) that affect Internet users generally, or in the local area in which the Dissemination Agent or the MSRB is located, or acts of any government, regulatory or any other competent authority the effect of which is to prohibit the Dissemination Agent from performance of its obligations under this Disclosure Agreement.

“Holder” shall mean the person in whose name any Bond shall be registered.

“Information” shall mean, collectively, the Annual Reports, the Quarterly Reports, the Obligated Group Financial Statements, the Listed Event notices and the Failure to File Event notices.

“Listed Events” shall mean any of the events listed in Section 5 of this Disclosure Agreement.

“MSRB” shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive continuing disclosure filings pursuant to the Rule. Until otherwise designated by the MSRB or the Securities and Exchange Commission, filings with the MSRB are to be made through the Electronic Municipal Market Access (EMMA) website of the MSRB, currently located at http://emma.msrb.org.

“Official Statement” means the official statement relating to the Bonds, dated October __, 2016.

“Participating Underwriter” shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with the offering of the Bonds.

“Quarterly Filing Date” shall mean the date, set forth in Section 3(c), by which the Quarterly Report is to be filed with the MSRB.

“Quarterly Report” shall mean any Quarterly Report provided by the Corporation pursuant to, and as described in, Section 3 of this Disclosure Agreement.

“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“Bond Trustee” shall mean U.S. Bank National Association, acting in its capacity as bond trustee for the Bonds, or any successor bond trustee.

F-3 SECTION 3 Provision of Annual and Quarterly Reports.

(a) The Corporation shall provide, annually, an electronic copy of the Annual Report and Certification to the Dissemination Agent, together with a copy for the Bond Trustee, not later than the Annual Filing Date. Promptly upon receipt of an electronic copy of the Annual Report and the Certification, the Dissemination Agent shall provide an Annual Report to the MSRB not later than one hundred eighty (180) days after the end of the Obligated Group’s fiscal year, which fiscal year currently ends on December 31, commencing with the report for the fiscal year ending December 31, 2016. Such date and each anniversary thereof is the Annual Filing Date. The Annual Report may be submitted as a single document or as a separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Agreement; provided that the Obligated Group Financial Statements may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the Obligated Group’s fiscal year changes, the Corporation shall give notice of such change in a filing with the MSRB and the date above shall be deemed modified to a date one hundred eighty (180) days following the changed fiscal year date.

If on the fifteenth (15th) day prior to the Annual Filing Date, the Dissemination Agent has not received a copy of the Annual Report and Certification, the Dissemination Agent shall contact the Corporation by telephone and in writing (which may be by e-mail) to remind the Corporation of its undertaking to provide the Annual Report. Upon such reminder, the Corporation shall either (i) provide the Dissemination Agent with an anticipated date of filing, or (ii) instruct the Disclosure Dissemination Agent in writing that the Corporation will not be able to file the Annual Report within the time required under this Disclosure Agreement, state the date by which the Annual Report for such year will be provided and instruct the Dissemination Agent that a Failure to File Event has occurred and to immediately send a notice to the MSRB in substantially the form attached as EXHIBIT A, accompanied by a cover sheet completed by the Dissemination Agent in the form set forth in EXHIBIT B.

If the Dissemination Agent has not received an Annual Report and Certification by 6:00 p.m. Eastern time on an Annual Filing Date (or, if such Annual Filing Date falls on a Saturday, Sunday or holiday, then the first business day thereafter), a Failure to File Event shall have occurred and the Corporation irrevocably directs the Dissemination Agent to immediately send a notice to the MSRB in substantially the form attached as EXHIBIT A without reference to the anticipated filing date for the Annual Report, accompanied by a cover sheet completed by the Dissemination Agent in the form set forth in EXHIBIT B.

If Obligated Group Financial Statements are prepared but not available prior to the Annual Filing Date, the Corporation shall, when the audited financial statements are available, provide in a timely manner an electronic copy to the Dissemination Agent, accompanied by a Certification, for filing with the MSRB.

(b) In addition to the Annual Report required to be filed pursuant to subsection (a), the Corporation shall provide, quarterly (with the exception of the fourth fiscal quarter), an electronic copy of the Quarterly Report and Certification to the Dissemination Agent. Promptly upon receipt of an electronic copy of the Quarterly Report and Certification, the Dissemination

F-4 Agent shall provide a Quarterly Report to the MSRB not later than sixty (60) days after the end of each fiscal quarter of the Corporation (with the exception of the fourth fiscal quarter of each year), commencing with the fiscal quarter ending March 31, 2017. Such dates and each such date thereafter are the Quarterly Filing Date. The Quarterly Report may be submitted as a single document or as separate documents comprising a package, and may cross reference other information as provided in Section 4 of this Disclosure Agreement. The Quarterly Report shall consist of unaudited financial information for the Obligated Group for such fiscal quarter, including a consolidated balance sheet; a consolidated statement of operations and changes in net assets; presented on a basis substantially consistent with the Obligated Group Financial Statements.

If on the fifth (5th) day prior to the Quarterly Filing Date, the Dissemination Agent has not received a copy of the Quarterly Report and Certification, the Dissemination Agent shall contact the Corporation by telephone and in writing (which may be by e-mail), to remind the Corporation of its undertaking to provide the Quarterly Report. Upon such reminder, the Corporation shall either (i) provide the Dissemination Agent with an anticipated date of filing, or (ii) instruct the Disclosure Dissemination Agent in writing that the Corporation will not be able to file the Quarterly Report within the time required under this Disclosure Agreement, state the date by which the Quarterly Report for such fiscal quarter will be provided and instruct the Dissemination Agent that a Failure to File Event has occurred and to immediately send a notice to the MSRB in substantially the form attached as EXHIBIT A, accompanied by a cover sheet completed by the Dissemination Agent in the form set forth in EXHIBIT B.

If the Dissemination Agent has not received a Quarterly Report and Certification before 6:00 p.m. Eastern time on a Quarterly Filing Date (or, if such Quarterly Filing Date falls on a Saturday, Sunday or holiday, then the first business day thereafter), a Failure to File Event shall have occurred and the Corporation irrevocably directs the Dissemination Agent to immediately send a notice to the MSRB in substantially the form attached as EXHIBIT A without reference to the anticipated filing date for the Quarterly Report, accompanied by a cover sheet completed by the Dissemination Agent in the form set forth in EXHIBIT B.

(c) Any Information received by the Dissemination Agent before 6:00 p.m. Eastern time on any business day that it is required to file with the MSRB pursuant to the terms of this Disclosure Agreement and that is accompanied by a Certification and all other information required by the terms of this Disclosure Agreement will be filed by the Dissemination Agent with the MSRB no later than 11:59 p.m. Eastern time on the same business day; provided, however, the Dissemination Agent shall have no liability for any delay in filing with the MSRB if such delay is caused by a Force Majeure Event provided that the Dissemination Agent uses reasonable efforts to make any such filing as soon as possible.

(d) Upon receipt of an Annual Report or Quarterly Report and accompanying Certification for filing and subsequent filing with the MSRB, the Dissemination Agent shall file a report with the Corporation, the Authority and the Trustee certifying that the Annual Report or Quarterly Report has been provided pursuant to this Disclosure Agreement, and stating the date it was provided to the MSRB.

F-5 SECTION 4 Content of Annual Reports. The Corporation’s Annual Report shall contain or include by reference the following:

1. The Obligated Group Financial Statements for the prior fiscal year. If such Obligated Group Financial Statements are not available by the time the Annual Report is required to be filed with the MSRB pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the Obligated Group Financial Statements, and the Obligated Group Financial Statements shall be filed with the MSRB in the same manner as the Annual Report when they become available.

2. An update of the following information contained in APPENDIX A to the Official Statement; provided, however, such information does not need to be separately updated and included in an Annual Report to the extent such information is either (i) included in the Obligated Group Financial Statements included as part of the Annual Report, (ii) directly calculable from the financial information included as part of the Annual Report, (iii) was included in the Quarterly Reports for such fiscal year, or (iv) directly calculable from the unaudited financial information included as part of the Quarterly Reports for such fiscal year:

a. A list of the Obligated Group Members and Designated Affiliates.

b. Information and data of the kind contained in the table captioned “UTILIZATION STATISTICS” under the heading titled “SERVICE AREA –Historical Utilization”

c. Information and data of the kind contained in the table captioned “CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET” under the heading “FINANCIAL INFORMATION – Historical Financial Information”

d. Information and data of the kind contained in the table captioned “CORPORATION STATEMENTS OF OPERATIONS” under the heading “FINANCIAL INFORMATION – Summary of Revenues and Expenses”

e. Information and data of the kind contained in the table captioned “PAYOR MIX” under the heading “FINANCIAL INFORMATION – Sources of Revenue”

f. Information and data of the kind contained in the table captioned “ANNUAL DEBT SERVICE COVERAGE” under the heading titled “FINANCIAL INFORMATION – Historical Coverage of Annual Debt Service”

g. Information and data of the kind contained in the table captioned “UNRESTRICTED CASH AND BOARD DESIGNATED ASSETS” and “PERCENT OF INVESTMENTS BY ASSET CLASS” under the heading titled “FINANCIAL INFORMATION – Liquidity and Capital Resources”

The information provided pursuant to the Section shall be provided for, and as at the end of, the preceding fiscal year. The Corporation reserves the right to modify from time to time the format of the presentation of information provided pursuant to this Section to the extent necessary or appropriate in the judgment of the Corporation, provided that, in the Corporation’s discretion, such modification shall be consistent with the Rule and the purposes of this Disclosure

F-6 Agreement. Any or all of the items listed above may be set forth in one or a set of documents and may be included by specific reference to other documents, including official statements of debt issues with respect to which the Obligated Group Members are “obligated persons” (as defined by the Rule), which have been made available to the public on the MSRB’s website or filed with the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be filed with the MSRB. The Corporation shall clearly identify each such other document so included by reference. Neither the Bond Trustee nor the Dissemination Agent need verify the content or correctness of the Annual Report.

SECTION 5 Reporting of Significant Events.

(a) The Corporation shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, in a timely manner not in excess of ten (10) business days after the occurrence of the event:

1. principal and interest payment delinquencies;

2. non-payment related defaults, if material;

3. unscheduled draws on debt service reserves reflecting financial difficulties;

4. unscheduled draws on credit enhancements reflecting financial difficulties;

5. substitution of credit or liquidity provider, or their failure to perform;

6. adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax-exempt status of the Bonds, or other material events affecting the tax status of the Bonds;

7. modifications to rights of Bondholders, if material;

8. bond calls, if material, and tender offers;

9. defeasances;

10. release, substitution or sale of property securing repayment of the Bonds, if material;

11. rating changes;

12. bankruptcy, insolvency, receivership, or similar event of an obligated person (as defined in the Rule);

F-7 Note: for the purposes of the event identified in subparagraph (12), the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person;

13. the consummation of a merger, consolidation or acquisition involving an obligated person (as defined in the Rule) or the sale of all or substantially all of the assets of an obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and

14. the appointment of a successor or additional trustee, or the change in the name of trustee, if material.

(b) If the Corporation learns of the occurrence of a Listed Event described in (a) above, the Corporation shall, in a timely manner not in excess of ten business days after its occurrence, notify the Dissemination Agent in writing of the occurrence of such Listed Event. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (c) and shall be accompanied by a Certification. Such notice or Certification shall identify the Listed Event that has occurred (which shall be any of the categories set forth in paragraph (a) above), include the text of the disclosure that the Corporation desires to make, contain the written authorization of the Corporation for the Dissemination Agent to disseminate such information, and identify the date the Corporation desires for the Dissemination Agent to disseminate the information (provided that such date is not later than the tenth business day after the occurrence of the Listed Event).

(c) The Dissemination Agent is under no obligation to notify the Corporation or the Corporation of an event that may constitute a Listed Event. In the event the Dissemination Agent so notifies the Corporation, the Corporation will within two business days of receipt of such notice (but in any event not later than the tenth business day after the occurrence of the Listed Event, if the Corporation determines that a Listed Event has occurred), instruct the Dissemination Agent that (i) a Listed Event has not occurred and no filing is to be made or (ii) a Listed Event has occurred and the Dissemination Agent is to report the occurrence pursuant to subsection (b) of this Section 5, together with a Certification. Such Certification shall identify the Listed Event that has occurred (which shall be any of the categories set forth in paragraph (a) above), include the text of the disclosure that the Corporation desires to make, contain the written authorization of the Corporation for the Dissemination Agent to disseminate such information, and identify the date the Corporation desires for the Dissemination Agent to

F-8 disseminate the information (provided that such date is not later than the tenth business day after the occurrence of the Listed Event).

(d) If the Dissemination Agent has been instructed by the Corporation as prescribed in paragraph (b) or (c) of this Section 5 to report the occurrence of a Listed Event, the Dissemination Agent shall promptly file a notice of such occurrence with the MSRB pursuant to Section 5. This notice will be filed with a cover sheet completed by the Dissemination Agent in the form set forth in EXHIBIT B.

SECTION 6 Format for Filings with MSRB. Any report or filing with the MSRB pursuant to this Disclosure Agreement must be submitted in electronic format, accompanied by such identifying information as is prescribed by the MSRB, in accordance with the Rule.

SECTION 7 CUSIP Numbers. Whenever providing information to the Dissemination Agent, including but not limited to Annual Reports, documents incorporated by reference to the Annual Reports, audited financial statements, Listed Event notices and Failure to File Event notices, the Corporation shall indicate the full name of the Bonds and the 9-digit CUSIP numbers for the Bonds as to which the provided information relates.

SECTION 8 Reserved.

SECTION 9 Termination of Reporting Obligation. The Corporation’s and the Dissemination Agent’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds, when the Obligated Group Members are not or are no longer obligated persons with respect to the Bonds, or upon delivery by the Corporation to the Dissemination Agent of an opinion of counsel expert in federal securities laws to the effect that continuing disclosure is no longer required. If the Corporation’s obligations under the Loan Agreement are assumed in full by some other entity, such person shall be responsible for compliance with this Disclosure Agreement in the same manner as if it were the Corporation and the original Corporation shall have no further responsibility hereunder. If such termination or substitution occurs prior to the final maturity of the Bonds, the Corporation shall give notice of such termination or substitution in the same manner as for a Listed Event under Section 5.

SECTION 10 Dissemination Agent. The Corporation may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be U.S. Bank National Association. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by the Corporation pursuant to this Disclosure Agreement. The Dissemination Agent may resign by providing 30 days written notice to the Corporation and the Bond Trustee. If at any time there is not any other designated Dissemination Agent, the Corporation shall be the Dissemination Agent. If a successor Dissemination Agent is appointed to assist the Corporation in carrying out its obligations under this Disclosure Agreement, such successor Dissemination Agent shall execute an acceptance of duties as Dissemination Agent and file such acceptance with the Bond Trustee. Notwithstanding any replacement or

F-9 appointment of a successor, the Corporation shall remain liable until payment in full for any and all sums owed and payable to the Dissemination Agent.

SECTION 11 Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Corporation and the Dissemination Agent may amend this Disclosure Agreement (and the Dissemination Agent shall agree to any amendment so requested by the Corporation which does not impose any greater duties, nor greater risk of liability on the Dissemination Agent) and any provision of this Disclosure Agreement may be waived, provided that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of the Corporation or any other obligated person with respect to the Bonds, or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) The amendment or waiver either (i) is approved by the Holders of the Bonds in the same manner as provided in the Bond Indenture for amendments to the Bond Indenture with the consent of Holders, or (ii) does not, in the opinion of the Bond Trustee or nationally recognized bond counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds. In the event of any amendment or waiver of a provision of this Disclosure Agreement, the Corporation shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Corporation. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5, and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Notwithstanding the preceding paragraph, the Dissemination Agent shall have the right to adopt amendments to this Disclosure Agreement necessary to comply with modifications to and interpretations of the provisions of the Rule as announced by the Securities and Exchange Commission from time to time by giving not less than 30 days written notice of the intent to do so together with a copy of the proposed amendment to the Corporation. No such amendment shall become effective if the Corporation shall, following the giving of such notice, send a notice to the Dissemination Agent in writing that it objects to such amendment. SECTION 12 Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Corporation from disseminating any other information, using the means of

F-10 dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report, Quarterly Report or notice of occurrence of a Listed Event required to be filed pursuant to this Disclosure Agreement, in addition to that which is required by this Disclosure Agreement. If the Corporation chooses to include any information in any Annual Report, Quarterly Reports or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Agreement, the Corporation shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report, Quarterly Reports or notice of occurrence of a Listed Event or any event required to be reported. SECTION 13 Default. In the event of a failure of the Corporation or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Bond Trustee (at the written request of any Participating Underwriter or the Holders of at least twenty-five percent (25%) aggregate principal amount of Outstanding Bonds, shall but only to the extent funds in an amount satisfactory to the Bond Trustee have been provided to it or if it has been otherwise indemnified to its satisfaction from any loss, liability, expense or additional fees and expenses of the Bond Trustee whatsoever, including, without limitation, fees and expenses of its attorneys and advisors), or any Holder or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Corporation or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an Event of Default under the Bond Indenture or a Loan Default Event under the Loan Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the Corporation or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. This Disclosure Agreement confers no rights to any person or entity other than those listed in Section 16 hereof. SECTION 14 Duties, Immunities and Liabilities of the Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Corporation agrees to indemnify and save the Dissemination Agent and its respective officers, directors, employees and agents, harmless against any loss, expense and liabilities which it may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorneys’ fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the Corporation for its services provided hereunder in accordance with its schedule of fees as agreed to between the Dissemination Agent and the Corporation from time to time and all reasonable expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder. The Dissemination Agent shall have no duty or obligation to review any information provided to them hereunder and shall not be deemed to be acting in any fiduciary capacity for the Corporation, the Bondholders or any other party. The Dissemination Agent shall have no responsibility for the Corporation’s failure to report to the Dissemination Agent a Listed Event or a duty to determine the materiality thereof. The Dissemination Agent shall have no duty to determine, or liability for failing to determine, whether the Corporation has complied with this Disclosure Agreement. The Dissemination Agent may conclusively rely upon Certifications of the Corporation at all times. The obligations

F-11 of the Corporation under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds. SECTION 15 Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows: To the Corporation: Salem Health 665 Winter Street SE Salem, OR 97301 Attention: Chief Financial Officer E-mail: [email protected]

To the Bond Trustee: U.S. Bank National Association Global Corporate Trust Services 555 SW Oak Street, PD-OR-P7TD Portland, OR 97204 Attention: Cheryl K. Nelson E-mail: [email protected]

Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.

SECTION 16 Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Authority, the Corporation, the Obligated Group Members, the Bond Trustee, the Dissemination Agent, the Participating Underwriters and Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

SECTION 17 Governing Law. This Disclosure Agreement shall be governed by the laws of the State of Oregon (other than with respect to conflict of laws).

F-12

SECTION 18 Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

SALEM HEALTH, for itself and as Obligated Group Representative on behalf of the Members of the Obligated Group

By:

U.S. BANK NATIONAL ASSOCIATION, as Dissemination Agent

By:

[Signature Page – Continuing Disclosure Agreement – Salem Health Projects 2016A]

F-13

EXHIBIT A

NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Hospital Facility Authority of the City of Salem, Oregon

Name of Bond Issue: Hospital Facility Authority of the City of Salem, Oregon Revenue Refunding Bonds (Salem Health Projects) Series 2016A

Name of Obligated Person: Salem Health

CUSIP Number:

Date of Original Issuance: November __, 2016

NOTICE IS HEREBY GIVEN that Salem Health (the “Corporation”) has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated as of November __, 2016. The Corporation anticipates that the Annual Report will be filed by ______.

Dated:______

U.S. BANK NATIONAL ASSOCIATION as Dissemination Agent

cc: Salem Health

F-14

EXHIBIT B

EVENT NOTICE COVER SHEET

This cover sheet and accompanying “event notice” will be sent to the MSRB, pursuant to Securities and Exchange Commission Rule 15c2-12(b)(5)(i)(C) and (D).

Issuer’s and/or Other Obligated Person’s Name: [C1] ______Issuer’s Six-Digit CUSIP Number: [C2] ______or Nine-Digit CUSIP Number(s) of the bonds to which this event notice relates: [C3] ______Number of pages attached: [C4]______Description of Notice Events (Check One): [C5]

1. “Principal and interest payment delinquencies;” 2. “Non-Payment related defaults, if material;” 3. “Unscheduled draws on debt service reserves reflecting financial difficulties;” 4. “Unscheduled draws on credit enhancements reflecting financial difficulties;” 5. “Substitution of credit or liquidity providers, or their failure to perform;” 6. “Adverse tax opinions, IRS notices or events affecting the tax status of the security;” 7. “Modifications to rights of securities holders, if material;” 8. “Bond calls, if material;” 9. “Defeasances;” 10. “Release, substitution, or sale of property securing repayment of the securities, if material;” 11. “Rating changes;” 12. “Tender offers;” 13. “Bankruptcy, insolvency, receivership or similar event of the obligated person;” 14. “Merger, consolidation, or acquisition of the obligated person, if material;” and 15. “Appointment of a successor or additional trustee, or the change of name of a trustee, if material.”

____ Failure to provide annual financial information as required. [C6]

I hereby represent that I am authorized by the issuer or its agent to distribute this information publicly: Signature: ______Name: [C7] ______Title: [C8] ______U.S. BANK NATIONAL ASSOCIATION [ADDRESS] [PHONE NUMBER]

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APPENDIX G

DTC AND THE BOOK-ENTRY SYSTEM

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APPENDIX G

DTC AND THE BOOK-ENTRY SYSTEM

The information provided in this APPENDIX G has been provided by DTC. No representation is made by the Authority, the Corporation or the Underwriters as to the accuracy or adequacy of such information provided by DTC or as to the absence of material adverse changes in such information subsequent to the date hereof.

The Depository Trust Company, New York, New York (“DTC”), will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond will be issued for each maturity of the Bonds and will be deposited with DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Securities Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct Participants’ and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct Participant or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. BENEFICIAL OWNERS WILL NOT RECEIVE CERTIFICATES REPRESENTING THEIR OWNERSHIP INTERESTS IN THE BONDS, EXCEPT IN THE EVENT THAT USE OF THE BOOK-ENTRY SYSTEM FOR THE BONDS IS DISCONTINUED.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the Bonds with DTC and their registration in the

name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Bonds are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the Record Date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the Record Date (identified in a listing attached to the Omnibus Proxy).

Principal, sinking fund and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Authority or the Bond Trustee’s Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC (nor its nominee), the Corporation, the Authority, or the Bond Trustee, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Bond Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Bond Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, the Bonds are required to be printed and delivered as described in the Indenture.

The Authority may decide to discontinue use of the system of book-entry transfers of the Bonds through DTC (or a successor securities depository). In that event, the Bonds will be printed and delivered as described in the Indenture.

The Corporation and the Authority cannot and do not give any assurances that DTC will distribute to Participants, or that Participants or others will distribute to the Beneficial Owners, payments of principal of and interest and premium, if any, on the Bonds paid or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. Neither the Corporation nor the Authority is responsible or liable for the failure of DTC or any Direct Participant or Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Bonds or any error or delay relating thereto.

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The foregoing description of the procedures and record keeping with respect to beneficial ownership interests in the Bonds, payment of principal of and interest and other payments with respect to the Bonds to Direct Participants, Indirect Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in such Bonds and other related transactions by and between DTC, the Direct Participants, the Indirect Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the Direct Participants, the Indirect Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters but should instead confirm the same with DTC or the Participants, as the case may be.

SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE BONDS, AS NOMINEE OF DTC, REFERENCES HEREIN TO THE BONDHOLDERS OR REGISTERED HOLDERS OF THE BONDS, SHALL MEAN CEDE & CO., AS AFORESAID, AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE BONDS.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Authority and the Corporation believe to be reliable, but the Authority and the Corporation take no responsibility for the accuracy thereof.

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HOSPITAL FACILITY AUTHORITY OF THE CITY OF SALEM, OREGON • Revenue Refunding Bonds (Salem Health Projects) Series 2016A