Cleveland Clinic Health System Obligated Group - FMSbonds.com

Medicare Conditions of ParticipationHospitals must comply with standards called “Conditions of Participation” in order to be eligible forMedicare and Medicaid reimbursement. CMS is responsible for ensuring that hospitals meet these regulatoryConditions of Participation. Under the Medicare rules, hospitals accredited by The Joint Commission (“JCAHO”)are deemed to meet the Conditions of Participation. However, CMS may request that the state agency responsiblefor approving hospitals on behalf of CMS, conduct a “sample validation survey” of a hospital to determine whetherit is complying with the Conditions of Participation. Failure to maintain JCAHO accreditation or to otherwisecomply with the Conditions of Participation could have a material adverse effect on the continued participation inthe Medicare and Medicaid programs, and ultimately, the financial condition and results of operations of theObligated Issuers.Medicare Audits and WithholdsHospitals participating in Medicare and Medicaid are subject to audits and retroactive audit adjustmentswith respect to reimbursement claimed under those programs, and the representations upon which suchreimbursements are claimed. Although management of the Obligated Issuers believes its reserves are adequate forthe purpose, any such future adjustments could be material. Both Medicare and Medicaid regulations also providefor withholding payments in certain circumstances. Any such withholding with respect to any Obligated Issuercould have a material adverse effect on the financial condition and results of operations of the Obligated Issuers. Inaddition, contracts between hospitals and third-party payors often have contractual audit, setoff and withholdlanguage that may cause substantial, retroactive adjustments. Such contractual adjustments also could have amaterial adverse effect on the financial condition and results of operations of the Obligated Issuers. The ObligatedIssuers are not aware of any situation in which a Medicare or other payment is being, or may in the future be,withheld that would materially and adversely affect the financial condition or results of operations of the ObligatedIssuers.Under both Medicare and Medicaid programs, certain health care providers, including hospitals, arerequired to report certain financial information on a periodic basis, and with respect to certain types ofclassifications of information, penalties are imposed for inaccurate reports. As these requirements are numerous,technical and complex, there can be no assurance that the Obligated Issuers will avoid incurring such penalties in thefuture. These penalties may be material and could include criminal, civil or administrative liability for making falseclaims and/or exclusion from participation in the federal healthcare programs. Under certain circumstances,payments made may be determined to have been made as a consequence of improper claims subject to the federalFalse Claims Act or other federal statutes, subjecting the provider to civil or criminal sanctions. The United StatesDepartment of Justice has initiated a number of national investigations, including in the State of Ohio and the Stateof Florida, involving proceedings under the federal False Claims Act relating to alleged improper billing practicesby hospitals. These actions have resulted in substantial settlement amounts being paid in certain cases.Management of the Cleveland Clinic does not anticipate that Medicare audits or cost report settlements forthe Medicare program will materially adversely affect the financial condition or results of operations of theObligated Issuers, taken as a whole; however, in light of the complexity of the regulations relating to the Medicareprogram, and the threat of ongoing investigations as described above, there can be no assurance that significantdifficulties will not develop in the future.Recent LegislationThe Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “2003 Act”), inaddition to adding outpatient prescription drug coverage, made significant changes to the Medicare programaffecting hospitals, and provides certain economic benefits to hospitals over the 10 years from its effective date.Among other things, the 2003 Act’s hospital-related provisions (i) increase payments to rural providers; (ii) ensurethat inpatient PPS payment updates remain at the full market basket, provided hospitals participate in a voluntaryCMS-sponsored hospital reporting initiative; (iii) increase home health payments; and (iv) establish a competitiveacquisition program for durable medical equipment beginning in 2007.27