Cleveland Clinic Health System Obligated Group - FMSbonds.com

typically in a position to refer patients of federal health care programs. In its 1989 Special Fraud Alert, the OIGraised concern about certain physician joint ventures where the intent is not to raise investment capital to start abusiness but rather to “lock up a stream of referrals from the physician investors and compensate these investorsindirectly for these referrals.” The OIG listed various features of suspect joint ventures, but noted that its list wasnot exhaustive. These features include: (i) whether investors are chosen because they are in a position to makereferrals; (ii) whether physicians with more potential referrals are given larger investment interests; (iii) whetherreferrals are tracked and referral sources shared with investing physicians; (iv) whether the overall structure is a“shell” (i.e., one of the parties is an ongoing entity already engaged in a particular line of business); and (v) whetherinvestors are required to invest a disproportionately small amount or are paid extraordinary returns in comparisonwith their risk.In April 2003, the OIG issued a Special Advisory Bulletin indicating that “contractual joint ventures”(where a provider expands into a new line of business by contracting with an entity that already provides the itemsor services) may violate the Anti-Kickback Statute and expressing skepticism that existing statutory or regulatorysafe-harbors would protect suspect contractual joint ventures. In January, 2005, the OIG published its SupplementalProgram Guidance for hospitals and reiterated its concerns regarding joint ventures entered into by hospitals.In addition, under the federal tax laws governing Section 501(c)(3) organizations, a tax-exempt hospital’sparticipation in a joint venture with for-profit entities must further the hospital’s exempt purposes and the jointventure arrangement must permit the hospital to act exclusively in the furtherance of its exempt purposes, with onlyincidental benefit to any for-profit partners. If the joint venture does not satisfy these criteria, the hospital’s taxexemptionmay be revoked, the hospital’s income from the joint venture may be subject to tax, or the parties may besubject to some other sanction. See “Tax-Exempt Status of the Obligated Issuers and the Series 2008 Bonds” forfurther discussion of risks related to the tax-exempt status of the Cleveland Clinic and certain of the ObligatedIssuers.Finally, many hospital joint ventures with physicians may also implicate the federal Stark Law.Any evaluation of compliance with the Anti-Kickback Statute or tax laws governing Section 501(c)(3)organizations depends on the totality of the facts and circumstances. While management of the Combined Groupbelieves that the joint venture arrangements to which the Combined Group is a party are in material compliance withthe Anti-Kickback Statute and OIG policies, and the tax laws governing Section 501(c)(3) organizations, there canbe no assurance that the IRS or OIG will not take a contrary view. Any determination that it is not in compliancewith the Anti-Kickback Statute and OIG policies could have a material adverse effect on the future operational orfinancial condition of the Obligated Issuers.The Obligated Issuers have entered or are in the process of entering into several joint ventures withphysicians. The ownership and operation of certain of these joint ventures may not meet safe harbors under theAnti-Kickback Statute. Management of the Obligated Issuers has proceeded or is proceeding with the transactionsrelated to the joint ventures on the assumption, after consultation with its legal counsel, that each of the transactionsrelated to the joint ventures is in material compliance with the Stark Law and the tax laws governing Section501(c)(3) organizations, and is otherwise generally in material compliance with the Anti-Kickback Statute.However, there can be no assurance that regulatory authorities will not take a contrary position or that suchtransactions will not be found to have violated the Stark Law, the tax laws governing Section 501(c)(3)organizations and/or the Anti-Kickback Statute. Any such determination could have a material adverse effect on thefuture operations or financial condition of the Obligated Issuers.HIPAA Administrative SimplificationProviders of health care and operators of health plans are significantly affected by certain healthinformation requirements contained in the “administrative simplification” provisions of HIPAA, which requirestandardization of electronic transactions, specific security protections for medical information and processes,privacy protections for patient health information, and establishment of national employer and provider identifiers.DHHS and CMS have promulgated rules related to electronic transactions, national employer identifiers, nationalprovider identifiers, security, and privacy. Rules regarding national health plan identifiers, claims attachmentsstandards and first report of injury standards have been published in proposed form or are under development.37