Cleveland Clinic Health System Obligated Group - FMSbonds.com

contracting, implementation and monitoring. Other integration structures include hospital based clinics or medicalpractice foundations, which may purchase and operate physician practices as well as provide all administrativeservices to physicians. Many of these integration strategies are capital intensive and may create certain business andlegal liabilities for the related hospital or health system.Often the start-up capitalization for such developments, as well as operational deficits, may be funded bythe sponsoring hospital or health system. Depending on the size and organizational characteristics of a particulardevelopment, these capital requirements may be substantial. In some cases, the sponsoring hospital or health systemmay be asked to provide a financial guarantee for the debt of a related entity which is carrying out an integrateddelivery strategy. In certain of these structures, the sponsoring hospital or health system may have an ongoingfinancial commitment to support operating deficits, which may be substantial on an annual or aggregate basis.These types of integrated delivery developments are generally designed to conform to existing trends in thedelivery of medicine, to implement anticipated aspects of health care reform, to increase physician availability to thecommunity and/or enhance the managed care capability of the affiliated hospital and physicians. However, thesegoals may not be achieved, and, if the development is not functionally successful, it may produce materially adverseresults that are counterproductive to some or all of the above-stated goals.All such integrated delivery developments carry with them the potential for legal or regulatory risks invarying degrees. Such developments may call into question compliance with the Medicare anti-referral laws,relevant antitrust laws, and federal or state tax exemption. Such risks will turn on the facts specific to theimplementation, operation or future modification of any integrated delivery system. MSOs which operate at a deficitover an extended period of time may raise significant risks of investigation or challenge regarding tax exemption orcompliance with the Medicare anti-referral laws. In addition, depending on the type of development, a wide range ofgovernmental billing and other issues may arise, including questions of the authorization of the entity to bill for oron behalf of the physicians involved. Other related legal and regulatory risks may arise, including employment,pension and benefits, and corporate practice of medicine, particularly in the current atmosphere of frequent andoften unpredictable changes in federal and state legal requirements regarding health care and medical practice. Thepotential impact of any such regulatory or legal risks on the Obligated Issuers cannot be predicted with certainty.There can be no assurance that such issues and risks will not lead to material adverse consequences in the future.Managed Care Uniform Licensure Act; HIC Solvency StandardsIn 1997, the Ohio Managed Care Uniform Licensure Act (“MCULA”) repealed existing statutes regulatinghealth maintenance organizations and similar types of existing managed care risk bearing organizations. MCULAreplaced such existing statutes by imposing a single comprehensive statutory plan of regulation of all managed carerisk bearing entities, known as health insurance corporations (“HICs”), as well as organizations contracting withHICs. Among other things, MCULA established minimum net worth and asset compared to liability requirementsfor all HICs, including provider-sponsored organizations (“PSOs”). MCULA therefore imposed requirements notcontained in prior law that may make it more difficult for providers, including the Obligated Issuers, to establish andmaintain their own HICs.In late 2000, Ohio law was revised to subject HICs to increased solvency standards. In general, all HICs inOhio will be required to comply with risk-based capital solvency requirements similar to those requirementsimposed on traditional indemnity insurers. If a HIC fails to meet the increased solvency requirements, the HIC maybe subject to increased regulatory supervision or the commencement of formal delinquency proceedings. Althoughsuch standards should, in the long term, benefit contracting health care providers by ensuring that HICs maintaingreater solvency, in the short term HICs with weak capitalization may be adversely affected. As a result, the overallimpact of such legislation on the Obligated Issuers remains uncertain.52