Massachusetts Development Finance Agency · 2016. 1. 25. · Wells Fargo Bank, N.A., is serving as...

NEW ISSUE - BOOK-ENTRY ONLY

In the opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Bond Counsel, under existing law, and assuming continued compliance with various requirements of the Internal Revenue Code of 1986, as amended, interest on the Series Q Bonds will not be included in the gross income of holders of the Series Q Bonds for federal income tax purposes. While interest on the Series Q Bonds will not constitute a preference item for purposes of computation of the alternative minimum tax imposed on certain individuals and corporations, interest on the Series Q Bonds will be included in “adjusted current earnings” of corporate holders of the Series Q Bonds and therefore will be taken into account in computing the alternative minimum tax imposed on certain corporations. In the opinion of Bond Counsel, interest on the Series Q Bonds and any profit made on the sale thereof are exempt from Massachusetts personal income taxes, and the Series Q Bonds are exempt from Massachusetts personal property taxes. See “TAX EXEMPTION” herein.

$423,990,000 MASSACHUSETTS DEVELOPMENT FINANCE AGENCY

Revenue Bonds, Partners HealthCare System Issue, Series Q (2016)

Dated: Date of Delivery Due: July 1, As Shown Below

The Series Q Bonds will be issued as fully registered bonds without coupons and, when issued, will be registered in the name of Cede & Co. as Bondowner and nominee for The Depository Trust Company (“DTC”), New York, New York. DTC will act as securities depository for the Series Q Bonds. So long as Cede & Co. is the Bondowner, as nominee of DTC, references herein to the Series Q Bondowners or registered owners shall mean Cede & Co., as aforesaid, and shall not mean the Beneficial Owners (as defined herein) of the Series Q Bonds. See “THE SERIES Q BONDS - Book-Entry Only System” herein.

Purchases of the Series Q Bonds will be made in book-entry form in denominations of $5,000 or any integral multiple thereof. Principal of and interest on the Series Q Bonds will be paid by Wells Fargo Bank, N.A., of Philadelphia, Pennsylvania, as trustee and paying agent (the “Trustee”). Interest on the Series Q Bonds will be payable on January 1 and July 1, commencing July 1, 2016, until maturity or prior redemption.

The Series Q Bonds are subject to redemption prior to maturity, including optional redemption, special redemption, and mandatory sinking fund redemption as set forth in this Official Statement.

The Series Q Bonds shall be special obligations of the Massachusetts Development Finance Agency (the “Agency”) payable solely from the Revenues, as defined herein, of the Agency, including payments made to the Trustee for the account of the Agency by Partners HealthCare System, Inc. (‘Partners”) in accordance with the provisions of the Agreement (as defined herein). The payment obligations pursuant to the Agreement are general obligations of Partners.

THE SERIES Q BONDS DO NOT CONSTITUTE A GENERAL OBLIGATION OF THE AGENCY OR A DEBT OR PLEDGE OF THE FAITH AND CREDIT OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY POLITICAL SUBDIVISION THEREOF. THE PRINCIPAL, REDEMPTION PRICE OF AND INTEREST ON THE SERIES Q BONDS ARE PAYABLE SOLELY FROM THE REVENUES AND FUNDS PLEDGED FOR THEIR PAYMENT UNDER THE AGREEMENT. THE AGENCY HAS NO TAXING POWER UNDER THE ACT.

$239,160,000 Serial Bonds

MaturityJuly 1, CUSIP(1) Amount

Interest Rate

Yield

MaturityJuly 1, CUSIP(1) Amount

Interest Rate

Yield

2017 57584XJH5 $ 390,000 5.000% 0.600% 2026 57584XJE2 $ 9,000,000 5.000% 2.230%2018 57584XHF1 905,000 3.000 0.890 2027 57584XHQ7 20,000,000 5.000 2.340*2019 57584XHG9 2,415,000 4.000 1.060 2028 57584XHR5 20,000,000 5.000 2.450*2020 57584XHH7 2,435,000 5.000 1.220 2029 57584XHS3 20,000,000 5.000 2.550*2021 57584XHJ3 2,455,000 4.000 1.380 2030 57584XHT1 14,905,000 5.000 2.620*2022 57584XHK0 9,130,000 5.000 1.580 2031 57584XHU8 22,150,000 5.000 2.700*2023 57584XHL8 11,340,000 5.000 1.770 2032 57584XHV6 20,915,000 4.000 3.160*2024 57584XHM6 3,525,000 4.000 1.940 2033 57584XHW4 15,775,000 3.125 3.3102024 57584XJC6 7,000,000 5.000 1.940 2034 57584XJJ1 3,025,000 4.000 3.260*2025 57584XHN4 3,185,000 4.000 2.100 2034 57584XHX2 10,700,000 5.000 2.860*2025 57584XJD4 7,545,000 5.000 2.100 2035 57584XHY0 15,425,000 5.000 2.910*2026 57584XHP9 3,940,000 4.000 2.230 2036 57584XJA0 13,000,000 4.000 3.360*

$13,455,000 4.000% Term Bonds due July 1, 2041 @ 3.610%* CUSIP(1) 57584XJB8 $36,545,000 5.000% Term Bonds due July 1, 2041 @ 3.210%* CUSIP(1) 57584XJF9 $4,350,000 4.000% Term Bonds due July 1, 2047 @ 3.700%* CUSIP(1) 57584XHZ7 $130,480,000 5.000% Term Bonds due July 1, 2047 @ 3.300%* CUSIP(1) 57584XJG7

* Priced to July 1, 2026 call date.

The Series Q Bonds are offered when, as and if issued and received by the Underwriters, subject to prior sale, to withdrawal or modification of the offer without notice, and to the approval of their legality and certain other matters by Mintz, Levin, Cohn, Ferris, Glousky and Popeo, P.C., Boston, Massachusetts, Bond Counsel to Partners. Certain additional legal matters will be passed upon for Partners by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., as corporate counsel to Partners. Certain legal matters will be passed upon for the Agency by its counsel, Locke Lord LLP, Boston, Massachusetts. Certain legal matters will be passed upon for the Underwriters by their counsel, Hawkins Delafield & Wood LLP, New York, New York. It is expected that the Series Q Bonds in definitive form will be available for delivery to DTC in New York, New York or to its custodial agent on or about January 28, 2016.

J.P. Morgan BofA Merrill Lynch Barclays BNY Mellon Capital Markets, LLC Jefferies TD Securities US Bancorp Wells Fargo SecuritiesDated: January 20, 2016

(1) Copyright 2016, American Bankers Association. The CUSIP (Committee on Uniform Securities Identification Procedures) numbers in this Official Statement have been assigned by an organization not affiliated with the Agency, Partners, the Underwriters or the Trustee, and such parties are not responsible for the selection or use of the CUSIP numbers. The CUSIP numbers are included solely for the convenience of Series Q Bondowners and no representation is made as to the correctness of the CUSIP numbers herein. CUSIP numbers assigned to securities may be changed during the term of such securities based on a number of factors including but not limited to the refunding or defeasance of such issue or the use of secondary market financial products. None of the Agency, Partners, the Underwriters or the Trustee has agreed to, nor is there any duty or obligation to, update this Official Statement to reflect any change or correction in the CUSIP numbers herein.

(ii)

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SERIES Q BONDS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

No dealer, broker, salesperson or other person has been authorized by the Agency, Partners or the Underwriters to give information or to make representations with respect to the Series Q Bonds, 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. This Official Statement does not constitute an offer by any person to sell or the solicitation by any person of an offer to buy, nor shall there be any sale of the Series Q Bonds by any person, in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale.

Certain information contained herein has been obtained from Partners, DTC and other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation of the Agency or the Underwriters. 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 respective responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the parties referred to above since the date hereof.

This Official Statement, including Appendix A, contains disclosures which include “forward-looking statements.” Forward-looking statements comprise all statements that do not relate solely to historical or current fact and can be identified by use of words like “pro forma”, “may”, “believe”, “will”, “expect”, “project”, “estimate”, “anticipate”, “plan”, “continue” or similar expressions. These forward-looking statements are based on Partners management’s current plans and expectations and are subject to a number of known and unknown uncertainties and risks, many of which are beyond its control, that could significantly affect current plans and expectations and Partners’ future financial position and results of operations. As a consequence, current plans, anticipated actions and future financial position and results of operations may differ from those expressed in any forward-looking statements made by or on behalf of Partners. Investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Official Statement, including Appendix A.

THE SERIES Q BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS, AND THE AGREEMENT HAS NOT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS AND LAWS.

Wells Fargo Bank, N.A., is serving as Trustee for the Series Q Bonds. The Trustee has not reviewed or participated in the preparation of this Official Statement and assumes no responsibility for the contents, accuracy, fairness or completeness of the information given in this Official Statement. The Trustee has no duty to, has not undertaken to evaluate, and has not evaluated, the risks, benefits, or propriety of any investment in the Series Q Bonds and makes no representation, and has reached no conclusions, regarding the investment quality of the Series Q Bonds, about all of which the Trustee expresses no opinion and expressly disclaims the expertise to evaluate.

(iii)

TABLE OF CONTENTS

INTRODUCTION .............................................................................................................................................................. 1 SOURCES OF PAYMENT AND SECURITY FOR THE SERIES Q BONDS ................................................................ 2 THE AGENCY ................................................................................................................................................................... 4 THE SERIES Q BONDS .................................................................................................................................................... 5 ADDITIONAL INDEBTEDNESS ................................................................................................................................... 11 DEBT SERVICE COVERAGE RATIO AND RATE COVENANT ............................................................................... 11 PLAN OF FINANCING ................................................................................................................................................... 11 ESTIMATED SOURCES AND USES OF FUNDS ........................................................................................................ 12 BONDOWNERS’ RISKS AND MATTERS AFFECTING THE HEALTH CARE INDUSTRY .................................. 12 CONTINUING DISCLOSURE ........................................................................................................................................ 27 TAX EXEMPTION .......................................................................................................................................................... 28 VERIFICATION OF MATHEMATICAL SUFFICENCY .............................................................................................. 29 LEGALITY OF THE SERIES Q BONDS FOR INVESTMENT AND DEPOSIT ......................................................... 29 DESCRIPTION OF RATINGS ........................................................................................................................................ 29 COMMONWEALTH NOT LIABLE ON THE SERIES Q BONDS ............................................................................... 29 UNDERWRITING ........................................................................................................................................................... 30 FINANCIAL ADVISOR .................................................................................................................................................. 31 CERTAIN RELATIONSHIPS ......................................................................................................................................... 31 LEGAL MATTERS ......................................................................................................................................................... 31 LITIGATION ................................................................................................................................................................... 31 INDEPENDENT ACCOUNTANTS ................................................................................................................................ 31 MISCELLANEOUS ......................................................................................................................................................... 31 APPENDIX A Letter from Partners HealthCare System, Inc. ........................................................................ A-1 APPENDIX B Consolidated Financial Statements of Partners HealthCare System, Inc.

and Affiliates for the Years Ended September 30, 2015 and 2014 ......................................... B-1 APPENDIX C-1 Definitions of Certain Terms .................................................................................................. C-1-1 APPENDIX C-2 Summary of the Loan and Trust Agreement .......................................................................... C-2-1 APPENDIX D Proposed Form of Bond Counsel Opinion ............................................................................. D-1 APPENDIX E Form of Continuing Disclosure Agreement ........................................................................... E-1

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OFFICIAL STATEMENT

Relating to

$423,990,000 MASSACHUSETTS DEVELOPMENT FINANCE AGENCY

Revenue Bonds, Partners HealthCare System Issue, Series Q (2016)

INTRODUCTION

Purpose of this Official Statement

The purpose of this Official Statement is to set forth certain information concerning the Massachusetts Development Finance Agency (the “Agency”), Partners HealthCare System, Inc. (“Partners”) and the Agency’s $423,990,000 Revenue Bonds, Partners HealthCare System Issue, Series Q (2016), dated their date of delivery (the “Series Q Bonds”). The Series Q Bonds are being issued under the Loan and Trust Agreement, dated as of January 1, 2016 (the “Agreement”), by and among the Agency, Partners and Wells Fargo Bank, N.A., as trustee (in such capacity, the “Trustee”). The information contained in this Official Statement is provided for use in connection with the initial sale of the Series Q Bonds. The definitions of certain terms used and not otherwise defined herein are contained in Appendix C-1 hereto ― “DEFINITIONS OF CERTAIN TERMS.”

This Official Statement, including the cover page and appendices hereto, sets forth certain information in connection with the issuance and sale of the Series Q Bonds of the Agency, a body corporate and politic and a public instrumentality of The Commonwealth of Massachusetts (the “Commonwealth”). The Agency is authorized under Chapter 23G and, to the extent incorporated therein, Chapter 40D of the Massachusetts General Laws (said Chapters, collectively and as amended, the “Act”), and pursuant to a resolution of the Agency adopted on December 10, 2015 (the “Resolution”) to issue the Series Q Bonds. The Series Q Bonds will be issued in accordance with the provisions of the Act and the Agreement.

Partners HealthCare System, Inc.

Partners is a charitable membership corporation established under the laws of the Commonwealth that is exempt from federal income tax as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”). Partners controls a major healthcare system consisting of two tertiary and seven community acute care hospitals, one hospital providing inpatient and outpatient mental health services, four hospitals providing inpatient and outpatient services in rehabilitation medicine, a managed care organization, and other healthcare and related facilities. Partners and all of its affiliates as to which financial information is presented on a consolidated basis are referred to in this Official Statement as “Partners HealthCare.” Appendix A hereto sets forth more information relating to Partners and Partners HealthCare. Appendix B hereto includes audited consolidated financial statements of Partners HealthCare for the fiscal years ended September 30, 2015 and 2014.

Use of Proceeds

The proceeds from the sale of the Series Q Bonds will be used to (i) finance a number of capital projects for Partners and its affiliates, as more fully described herein under the caption “PLAN OF FINANCING” (the “Series Q Project”); (ii) refinance a drawing made by Partners on a line of credit, the proceeds of which drawing were used to fund the mandatory tender of the Agency’s $74,855,000 Revenue Bonds, Partners HealthCare System Issue, Series K-4 (the “Series K-4 Bonds”) on January 14, 2016; (iii) refund a portion of the Massachusetts Health and Educational Facilities Authority’s Revenue Bonds, Partners HealthCare System Issues, Series F-5 and Series G-5 (respectively, the “Series F-5 Bonds” and the “Series G-5 Bonds”); and (iv) pay certain costs and expenses incurred in connection with the issuance of the Series Q Bonds. A more detailed description of the uses of the proceeds from the sale of the Series Q Bonds and the use of certain other moneys, including approximate amounts and purposes, is included herein under “PLAN OF FINANCING” and “ESTIMATED SOURCES AND USES OF FUNDS.”

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Information and Continuing Disclosure

Set forth in this Official Statement is certain information relating to Partners and Partners HealthCare, the Series Q Bonds, the Agreement, the Agency, and related matters. Included in Appendix A hereto is certain information relating to Partners and Partners HealthCare. In accordance with the requirements of Rule 15c2-12 of the Securities and Exchange Commission (“Rule 15c2-12”), certain information relating to Partners and Partners HealthCare is required to be filed with the Trustee and with the Municipal Securities Rulemaking Board. See “CONTINUING DISCLOSURE” herein and Appendix E hereto – “FORM OF CONTINUING DISCLOSURE AGREEMENT.”

SOURCES OF PAYMENT AND SECURITY FOR THE SERIES Q BONDS

The Agency, Partners and the Trustee shall execute the Agreement, which provides that, to the extent permitted by law, it is a general obligation of Partners and that the full faith and credit of Partners are pledged to its performance. The Agreement provides, among other things, that Partners is obligated to make payments to the Trustee not later than the Business Day preceding any date on which a payment of principal (including sinking fund installments) or interest on the Series Q Bonds is due of an amount equal to the amount of any such principal or sinking fund installments, as the case may be, and interest on the Series Q Bonds, less the amount, if any, on deposit in the Debt Service Fund and available therefor, and requires the Trustee to make transfers from the Debt Service Fund in amounts and at times necessary to provide for debt service payments on the Series Q Bonds. The Agreement shall remain in full force and effect until such time as all the Series Q Bonds and the interest thereon have been fully paid or until adequate provision for such payments has been made.

Under the Agreement, the Agency assigns and pledges to the Trustee in trust upon the terms of the Agreement (i) all Revenues to be received from Partners or derived from any security provided thereunder, and (ii) all rights to receive such Revenues and the proceeds of such rights. Under the Act, to the extent authorized or permitted by law, the pledge of Revenues is valid and binding from the time when such pledge is made and the Revenues and all income and receipts earned on funds held by the Trustee for the account of the Agency shall immediately be subject to the lien of such pledge without any physical delivery thereof or further act, and the lien of such pledge shall be valid and binding as against all parties having claims of any kind in tort, contract, or otherwise against the Agency irrespective of whether such parties have notice thereof.

The assignment and pledge by the Agency under the Agreement does not include (i) the rights of the Agency pursuant to provisions for consent, concurrence, approval or other action by the Agency, notice to the Agency, or the filing of reports, certificates or other documents with the Agency, or (ii) the powers of the Agency as stated in the Agreement to enforce the provisions thereof.

The Brigham and Women’s Hospital, Inc. (“Brigham”) and Brigham and Women’s Health Care, Inc. (“BWHC”) together will issue a Guarantee, and The Massachusetts General Hospital (“MGH”) and The General Hospital Corporation (“The General” and, together with Brigham, BWHC and MGH, the “Guarantors”) together will issue a Guarantee (collectively with the Guarantee to be issued by Brigham and BWHC, the “Series Q Guarantees”), both of which guarantee to the Agency the payment of debt service on the Series Q Bonds, and any and all other monetary obligations of Partners under the Agreement. In addition, pursuant to separate but substantially similar guarantees (the “Similar Guarantees”), the Guarantors have also guaranteed the monetary obligations of Partners with respect to the Massachusetts Health and Educational Facilities Authority Revenue Bonds, Partners HealthCare System Issue, Series D, Partners HealthCare System Issue, Series F (a portion of which will be refunded with proceeds of the Series Q Bonds), Partners HealthCare System Issue, Series G (a portion of which will be refunded with proceeds of the Series Q Bonds), Partners HealthCare System Issue, Series H, Partners HealthCare System Issue, Series I, and Partners HealthCare System Issue, Series J, the Agency’s Revenue Bonds, Partners HealthCare System Issue, Series K, Partners HealthCare System Issue, Series L, Partners HealthCare System Issue, Series M, Partners HealthCare System Issue, Series N, and Partners HealthCare System Issue, Series O, and the Partners HealthCare System Taxable Bonds, Series 2007, the Partners HealthCare System Taxable Bonds, Series 2011, the Partners HealthCare System 2012 Taxable Senior Notes, the Partners HealthCare System 2014 Taxable Senior Notes, and the Partners HealthCare System Taxable Bonds, Series 2015 (collectively, the “Other Outstanding Partners Bonds”), as well as repayments of variable rate loans from a capital asset program issued by the Massachusetts Health and Educational Facilities Authority and administered by the Agency, as successor to such Authority, which has been funded from the proceeds of such Authority’s Partners HealthCare System, Capital Asset Program Issue, Series P (the “Pool P Bonds”) and certain obligations to credit and liquidity providers associated with certain Other Outstanding Partners Bonds and the Pool P Bonds. The obligations of the

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Guarantors under their respective Series Q Guarantees and Similar Guarantees (collectively, the “Guarantees”) are unconditional and unsecured. In addition, the Guarantees include certain financial covenants applicable to the Guarantors.

The Guarantees may be suspended (a “Guarantee Suspension”), and the Agency and the Trustee shall have no right to make demand upon the Guarantors under certain conditions. One condition is that the ratio of all Indebtedness of Affiliates (as such terms are defined in the Guarantees) to the unrestricted net assets of (i) Partners HealthCare, as shown on the most recent audited consolidated financial statements of Partners HealthCare, plus (ii) any Affiliate that is not included in Partners HealthCare’s consolidated financial statements, as shown on such Affiliate’s most recent audited financial statements, be less than twenty-five percent (25%) (the “Suspension Ratio”), as demonstrated in a certificate of an Authorized Officer of Partners filed with the Agency, the Trustee, and the credit enhancers providing credit support for the payment of debt service on, or providing liquidity support for, one or more series of the Other Outstanding Partners Bonds (each, a “Credit Enhancer”), setting forth the financial information and calculations used to determine whether or not the Suspension Ratio has been achieved (a “Suspension Certificate”). Once a Suspension Certificate has been filed, within 120 days after the end of each fiscal year of the Guarantors, the Guarantors shall file, if appropriate, a confirmatory Suspension Certificate demonstrating that the Suspension Ratio was achieved for such fiscal year. If the Suspension Ratio is not achieved, the Guarantors’ obligations under the Guarantees are deemed reinstated until such time as the Suspension Ratio is again achieved.

As an additional condition to the effectiveness of any Suspension Certificate, any Credit Enhancer, in the case of the Other Outstanding Partners Bonds, may require the Guarantors to covenant to provide such funds to Partners as may be necessary to enable Partners to make all debt service payments on, and other required fees and expenses in respect of, all of its outstanding Indebtedness, including the Series Q Bonds and the Other Outstanding Partners Bonds, other than Indebtedness which is made expressly subordinate to the obligations of Partners under the Agreement.

Partners has achieved the Suspension Ratio but has not filed, and has no present intention of filing, a Suspension Certificate under any Guarantee. Partners does not intend to cause a Suspension Certificate to become effective with respect to any Guarantee unless one becomes effective with respect to all Guarantees.

The Agreement also contains provisions permitting the incurring of additional Indebtedness by Partners. Such additional Indebtedness can be incurred without limitation, except during a Guarantee Suspension. See “ADDITIONAL INDEBTEDNESS” herein and Appendix C-2 ― “SUMMARY OF THE LOAN AND TRUST AGREEMENT” under the heading “Senior Indebtedness.”

The Series Q Bonds are not secured by a mortgage lien or security interest in any real or tangible personal property or any other property or revenues of Partners. The Agreement contains restrictions on the creation of liens and encumbrances with respect to the Property of Partners. See Appendix C-2 ― “SUMMARY OF THE LOAN AND TRUST AGREEMENT” under the heading “Restrictions on Encumbrance, Sale and Lease of Property.” The Agreement also contains provisions permitting transfers of assets to be made upon compliance with certain conditions. See Appendix C-2 ― “SUMMARY OF THE LOAN AND TRUST AGREEMENT” under the heading “Transfer of Assets.”

The Series Q Bonds are special obligations of the Agency, equally and ratably secured by and payable from a pledge of and lien on, to the extent provided by the Agreement, the Revenues and any other moneys received with respect to the Series Q Bonds by the Trustee for the account of the Agency pursuant to the Agreement.

THE SERIES Q BONDS DO NOT CONSTITUTE A GENERAL OBLIGATION OF THE AGENCY OR A DEBT OR PLEDGE OF THE FAITH AND CREDIT OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY POLITICAL SUBDIVISION THEREOF. THE PRINCIPAL, REDEMPTION PRICE OF AND INTEREST ON THE SERIES Q BONDS ARE PAYABLE SOLELY FROM THE REVENUES AND FUNDS PLEDGED FOR THEIR PAYMENT UNDER THE AGREEMENT. THE AGENCY HAS NO TAXING POWER UNDER THE ACT.

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THE AGENCY

The Agency is authorized and empowered under the laws of the Commonwealth, including the Act, to issue the Series Q Bonds for the purposes described herein and to enter into the Agreement and other agreements and instruments necessary to issue and secure the Series Q Bonds.

The Members of the Board of Directors and the officers of the Agency authorized to sign documents related to bond transactions are as follows:

Members of the Board of Directors

Ex Officio Members

Chairperson, Secretary of the Executive Office of Housing & Economic Development, The Commonwealth of Massachusetts

Secretary, the Executive Office for Administration & Finance, The Commonwealth of Massachusetts, or the Secretary’s designee.

Appointed Members:

James Chisholm, Vice President for Business Development, Advantage Waypoint

Gerald D. Cohen, Vice Chair; Founder and Principal, SF Properties, Inc.

Keon T. Holmes, Managing Director, Cambridge Associates LLC

Dennis Kanin, Co-Founder and Principal, New Boston Ventures LLC

Brian Kavoogian, Principal, Charles River Realty Advisors

Patricia McGovern, Consultant, formerly General Counsel and Senior Vice President at Beth Israel Deaconess Medical Center (retired)

Jeffrey R. Porter, Member, Mintz Levin Cohn Ferris Glovsky and Popeo PC

Christopher Vincze, Chairman and CEO, TRC Solutions, Inc.

There is one vacancy on the Board of Directors.

Officers of the Agency

Marty Jones, President and Chief Executive Officer

Simon R. Gerlin, Treasurer, Chief Financial Officer and Executive Vice President for Finance & Administration

Anne Marie Dowd, Executive Vice President, Legislative and Defense Sector Initiatives

Laura L. Canter, Executive Vice President for Finance Programs

Richard C.J. Henderson, Executive Vice President for Real Estate

Patricia DeAngelis, General Counsel

Teresa M. Patten, Secretary

Steven J. Chilton, Senior Vice President, Investment Banking (Mr. Chilton has signing authority for bond transactions only.)

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Except for the information contained herein under the captions “THE AGENCY” and “LITIGATION” insofar as it relates to the Agency, the Agency has not provided any of the information contained in this Official Statement. The Agency is not responsible for and does not certify as to the accuracy or sufficiency of the disclosures made herein or any other information provided by Partners, the Underwriters or any other person.

THE AGENCY MAKES NO REPRESENTATION THAT INTEREST ON THE SERIES Q BONDS IS EXCLUDED FROM THE GROSS INCOME OF THE OWNERS THEREOF FOR FEDERAL INCOME TAX PURPOSES OR THAT INTEREST ON THE SERIES Q BONDS IS EXEMPT FROM MASSACHUSETTS INCOME TAX.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., attorneys of Boston, Massachusetts, are serving as Bond Counsel to Partners (as well as corporate counsel to Partners) and will submit their approving opinion as Bond Counsel with regard to the legality of the Series Q Bonds in substantially the form attached hereto as Appendix D.

THE SERIES Q BONDS

General

The Series Q Bonds will be issued in the aggregate principal amount set forth on the cover page hereof, will be dated the date of their initial delivery and will mature on the dates indicated on the cover page hereof. Interest on the Series Q Bonds is payable on January 1 and July 1 of each year, commencing on July 1, 2016, and shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The Record Date for the Series Q Bonds is the fifteenth day of the month immediately preceding each interest payment date

Subject to the provisions discussed under “THE SERIES Q BONDS - Book-Entry Only System” below, the Series Q Bonds are issuable as fully registered bonds without coupons in the denomination of $5,000 or any integral multiple thereof. The Series Q Bonds will be registered in the name of Cede & Co., as Bondowner and nominee for The Depository Trust Company (“DTC”). So long as DTC or its nominee is the Bondowner, payment of principal, redemption price of, and interest on, the Series Q Bonds will be made to DTC for ultimate distribution to the Beneficial Owners (hereinafter defined) of the Series Q Bonds in accordance with the procedures described herein under the heading “THE SERIES Q BONDS - Book-Entry Only System”.

Redemption of the Series Q Bonds

Optional Redemption. The Series Q Bonds maturing after July 1, 2026 are subject to optional redemption at the direction of Partners as a whole or in part at any time on or after July 1, 2026 in such order of maturity and sinking fund installments within a maturity as directed by Partners, at a redemption price equal to 100% of the principal amount redeemed, plus accrued interest to the redemption date.

Mandatory Redemption. The Series Q Bonds described below shall be redeemed from their respective sinking fund installments set forth below at their respective principal amounts, without premium, plus accrued interest to their respective redemption dates on each July 1 as provided for in the Agreement.

For the retirement of the Series Q Bonds maturing on July 1, 2041 bearing interest at 4.000%, sinking fund installments shall be payable on July 1, 2038 and each July 1 thereafter, as follows:

Year Sinking Fund Installment Year

Sinking Fund Installment

2038 $3,360,000 2040 $3,365,000 2039 3,365,000 2041* 3,365,000

___________________ * Maturity.

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2038 $9,135,000 2040 $9,135,000 2039 9,135,000 2041* 9,140,000

________________ * Maturity.




2042 $11,565,000 2045 $23,135,000 2043 15,425,000 2046 30,310,000 2044 19,280,000 2047* 30,765,000

___________________ * Maturity.

Special Redemption. The Series Q Bonds are subject to redemption, as a whole or in part at any time, in such order of maturity as directed by Partners, at a redemption price equal to 100% of the principal amount redeemed, plus accrued interest to the redemption date, at the direction of Partners, in the event of substantial loss to the Series Q Project, from insurance or condemnation award proceeds allocable to the Series Q Bonds pursuant to the Agreement.

Selection of Series Q Bonds. If less than all of the Series Q Bonds of a maturity are to be redeemed, the Series Q Bonds to be redeemed shall be selected by the Trustee (in integral multiples of $5,000) by lot or in any customary manner of selection as determined by the Trustee, provided, however, that so long as DTC or its nominee is the Bondowner, if less than all of the Series Q Bonds of a maturity shall be called for redemption, the particular Series Q Bonds or portions of Series Q Bonds to be redeemed shall be selected by DTC in such manner as DTC may determine. Subject to the preceding sentence, if less than all of the Series Q Bonds of a maturity are to be redeemed, and if such redemption includes the redemption of Series Q Bonds of such maturity subject to sinking fund redemption, the Trustee shall credit such redemption to particular sinking fund installments as directed by Partners.

Purchase in Lieu of Redemption. Partners may purchase Series Q Bonds of any maturity and may credit them against the principal payment or, as the case may be, any sinking fund installments for such Series Q Bonds of the same maturity at the principal amount or applicable redemption price, as the case may be, by delivering them to the Trustee for cancellation at least 60 days before the principal payment date or sinking fund installment date.

Acceleration. In addition to the foregoing redemption provisions, the Trustee may, and upon the written request of the registered owners of a majority in principal amount of the Outstanding Series Q Bonds, shall, upon the occurrence and continuation of an Event of Default, as defined in the Agreement, by written notice to Partners and the Agency, declare immediately due and payable the principal amount of the Outstanding Series Q Bonds and the payments to be made by Partners therefor, and accrued interest on the foregoing, whereupon the same shall become immediately due and payable without any further action or notice. See Appendix C-2 ― “SUMMARY OF THE LOAN AND TRUST AGREEMENT” under the headings “Default by the Borrower” and “Remedies for Events of Default.”

Effect of Redemption. On the redemption date, the redemption price of each Series Q Bond to be redeemed will become due and payable. From and after such date, notice having been properly given and amounts having been made available and set aside from such redemption in accordance with the provisions of the Agreement, notwithstanding that any Series Q Bonds called for redemption have not been surrendered, no further interest will accrue on any Series Q Bonds called for redemption.

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Notice of Redemption and Other Notices. So long as DTC or its nominee is the Bondowner, the Agency and the Trustee will recognize DTC or its nominee as the Bondowner for all purposes, including notices and voting. Conveyance of notices and other communications by DTC to DTC Participants, by DTC Participants to indirect Participants, and by DTC Participants and indirect Participants to Beneficial Owners (as such terms are defined herein) will be governed by arrangements among them, subject to any statutory and regulatory requirements as may be in effect from time to time.

The Trustee shall give notice of redemption (which may be conditional) to the holders of Series Q Bonds no less than 20 days nor more than 45 days prior to the date fixed for redemption. Failure to mail notice to a particular Bondowner or any defect in the notice given to such Bondowner shall not affect the redemption of any other Series Q Bond. So long as DTC or its nominee is the Bondowner, any failure on the part of DTC or failure on the part of a nominee of a Beneficial Owner (having received notice from a DTC Participant or otherwise) to notify the Beneficial Owner so affected shall not affect the validity of the redemption.

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Principal, Sinking Fund Installments, and Interest Requirements

The following table sets forth, for each respective year ending July 1, the amounts (rounded to the nearest whole dollar) required to be made available by Partners in such year for payment of total debt service on the Series Q Bonds, total debt service on all Other Outstanding Partners Bonds, and total aggregate debt service on the Series Q Bonds and all Other Outstanding Partners Bonds. Totals may vary due to rounding.

Year Ending July 1

Total Debt Service on the

Series Q Bonds

Total Debt Service on Other Outstanding Partners Bonds(1)(2)(3)

Total Debt Service on the Series Q Bonds and Other Outstanding

Partners Bonds(1)(2)(3)

2016 $ 8,577,762 $225,238,750 $233,816,512 2017 20,572,969 220,772,321 241,345,290 2018 21,068,469 222,914,711 243,983,180 2019 22,551,319 221,863,064 244,414,383 2020 22,474,719 221,428,242 243,902,961 2021 22,372,969 473,267,307 495,640,276 2022 28,949,769 205,166,456 234,116,225 2023 30,703,269 206,084,264 236,787,533 2024 29,321,269 210,403,239 239,724,508 2025 29,035,269 206,930,329 235,965,597 2026 30,740,619 197,973,608 228,714,226 2027 37,193,019 196,116,070 233,309,089 2028 36,193,019 188,837,627 225,030,645 2029 35,193,019 186,907,477 222,100,496 2030 29,098,019 194,796,008 223,894,027 2031 35,597,769 191,619,391 227,217,160 2032 33,255,269 194,316,476 227,571,745 2033 27,278,669 188,144,822 215,423,490 2034 24,735,700 187,658,118 212,393,818 2035 25,779,700 194,298,427 220,078,127 2036 22,583,450 201,884,642 224,468,092 2037 9,063,450 298,266,655 307,330,105 2038 21,558,450 208,139,621 229,698,071 2039 20,972,300 203,335,417 224,307,717 2040 20,380,950 200,047,241 220,428,191 2041 19,794,600 197,606,727 217,401,327 2042 18,263,000 190,429,710 208,692,710 2043 21,544,750 176,419,975 197,964,725 2044 24,628,500 298,582,913 323,211,413 2045 27,519,500 113,027,150 140,546,650 2046 33,537,750 90,091,250 123,629,000 2047 36,827,250 64,280,000 101,107,250 2048 - 59,870,000 59,870,000 2049 - 39,261,000 39,261,000 2050 - 39,026,000 39,026,000 2051 - 28,791,000 28,791,000 2052 - 28,791,000 28,791,000 2053 - 420,571,000 420,571,000 2054 - 12,351,000 12,351,000 2055 - 312,351,000 312,351,000

TOTAL $827,366,535 $7,517,860,008 $8,345,226,539

(1) Includes scheduled debt service requirements on the long-term obligations recorded in the Consolidated Financial Statements of Partners and its Affiliates, being

the Other Outstanding Partners Bonds, and assumed principal and interest requirements of loans from the Pool P Bonds. Excludes debt service on approximately $7.3 million of capital lease and other obligations. The table reflects the refunding of the bonds being refinanced with proceeds of the Series Q Bonds.

(2) For purposes of this table, interest on Partners’ variable rate bonds has been assumed at an interest rate of 1.87% based on the historical 20-year average of the SIFMA Index; and interest on index floating rate bonds has been calculated inclusive of spreads to the 20-year historical average of the SIFMA Index or LIBOR Index, as applicable. Principal on the loans related to the Pool P Bonds is expected to correspond to the principal due on such Pool P Bonds.

(3) Partners has entered into certain interest rate exchange agreements to fix the rate on $838.6 million of bonds, which arrangements are not reflected in the table above. For a further discussion of such agreements, see Appendix A ― “LETTER FROM PARTNERS HEALTHCARE SYSTEM, INC.” under the heading “Management’s Discussion and Analysis of Recent Financial Performance - Derivatives.”

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Book-Entry Only System

DTC will act as securities depository for the Series Q Bonds. The Series Q 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 Series Q Bond certificate will be issued for each maturity of the Series Q Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world’s largest securities 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, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, 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”). DTTC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income 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”, and, together with the Direct Participants, the “Participants”). DTC has Standard & Poor’s Service’s (“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 and www.dtc.org.

Purchases of Series Q Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series Q Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series Q Bond (“Beneficial Owner”) is in turn to be recorded on the Direct 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 or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series Q 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 Series Q Bonds, except in the event that use of the book-entry system for the Series Q Bonds is discontinued.

To facilitate subsequent transfers, all Series Q Bonds deposited by DTC 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 Series Q Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series Q Bonds. DTC’s records reflect only the identity of the Direct and Indirect Participants to whose accounts such Series Q 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. Beneficial Owners of the Series Q Bonds may wish to take certain steps to augment the transmissions to them of notices of significant events with respect to the Series Q Bonds, such as redemptions, tender offers, defaults and proposed amendments to the principal financing documents. For example, Beneficial Owners of the Series Q Bonds may wish to ascertain that the nominee holding the Series Q Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

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Redemption notices shall be sent to DTC. If less than all of the Series Q Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series Q Bonds unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Agency 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 Series Q Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal and interest payments on the Series Q 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 Agency or the Trustee on the 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, the Trustee or the Agency, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium and interest to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC, is the responsibility of the Agency or the 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 Series Q Bonds at any time by giving reasonable notice to the Agency or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Series Q Bond certificates are required to be printed and delivered to Beneficial Owners.

The Agency may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Series Q Bond certificates will be printed and delivered to Beneficial Owners.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Agency, Partners and the Underwriters believed to be reliable, but neither the Agency, Partners nor the Underwriters takes any responsibility for the accuracy thereof.

NONE OF PARTNERS, THE AGENCY OR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DTC PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO THE PAYMENTS TO OR THE PROVIDING OF NOTICE FOR DTC PARTICIPANTS, OR INDIRECT PARTICIPANTS, OR BENEFICIAL OWNERS.

SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE SERIES Q BONDS, AS NOMINEE OF DTC, REFERENCES HEREIN TO THE BONDOWNERS OR REGISTERED OWNERS OF SHALL MEAN CEDE & CO. AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE SERIES Q BONDS.

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ADDITIONAL INDEBTEDNESS

General

Subject to certain provisions set forth therein, the Agreement permits Partners to incur Indebtedness for any purpose of Partners or to guarantee the Indebtedness of others. In general, during the period that there is no Guarantee Suspension, there are no limitations set forth in the Agreement relating to the incurrence of additional Indebtedness by Partners or the securing of Indebtedness by Partners. Subject to certain requirements that apply only during a Guarantee Suspension (i.e., while the obligations of the Guarantors under the Guarantees are suspended), Indebtedness of Partners, whether incurred through the Agency or another lender, may be secured by a pledge, lien, mortgage, security interest or other encumbrance on the Property of Partners without any such lien or security interest equally or ratably securing the obligations of Partners with respect to the Series Q Bonds under the Agreement. See Appendix C-2 ― “SUMMARY OF THE LOAN AND TRUST AGREEMENT,” under the heading “Senior Indebtedness” and “Restrictions on Encumbrance, Sale and Lease of Property.”

Senior Indebtedness

The Agreement provides that, during any period in which a Guaranty Suspension is in effect, and therefore the Guarantee obligations of the Guarantors are suspended, Partners shall not permit an Affiliate to incur Indebtedness, whether secured or unsecured, unless (i) such Affiliate delivers to the Agency a guarantee, substantially similar in form and substance to the Guarantees, securing Partners’ obligations under the Agreement on an equal and ratable basis with such Indebtedness, or (ii) such Indebtedness does not exceed certain limitations set forth in the Agreement. In addition, during any such suspension, Partners shall not incur any Indebtedness secured by a non-parity lien on any Property of Partners (other than a Permitted Lien, as defined in the Agreement) unless such Indebtedness does not exceed certain limitations set forth in the Agreement. See Appendix C-2― “SUMMARY OF THE LOAN AND TRUST AGREEMENT” under the heading “Senior Indebtedness.” The Agreement also provides that if any of the Guarantors shall incur Indebtedness secured by a pledge, lien, mortgage, security interest or other encumbrance on any of their tangible or intangible property (other than such an encumbrance on or of property financed by such Indebtedness or on the proceeds of such Indebtedness provided only to secure such Indebtedness), Partners shall cause such Affiliate to extend such encumbrance also to secure such Affiliate’s obligations under its respective Guarantee.

DEBT SERVICE COVERAGE RATIO AND RATE COVENANT

Under the Agreement, Partners agrees to maintain or cause to be maintained a Debt Service Coverage Ratio at least equal to 1.0 to 1.0 in each fiscal year. If Partners fails to maintain such ratio, then within 30 days after publication of its audited consolidated financial statements, Partners covenants to retain a consultant to make recommendations as to how such ratio may be achieved in subsequent fiscal years. Failure to follow the consultant’s recommendations shall not be a default under the Agreement so long as the ratio actually achieved in the immediately following fiscal year is at least 1.0 to 1.0. In addition, a consultant’s report will not be required in the succeeding fiscal year if the report provided in the prior fiscal year states that Partners was precluded from achieving a Debt Service Coverage Ratio of at least 1.0 to 1.0 by factors beyond its control and that Partners has done all that it reasonably could to achieve the highest reasonably possible Debt Service Coverage Ratio under the circumstances, and Partners certifies that these circumstances have persisted into the succeeding fiscal year. For a more complete description, see Appendix C-2 ― “SUMMARY OF THE LOAN AND TRUST AGREEMENT” under the heading “Debt Service Coverage Ratio.”

PLAN OF FINANCING

Proceeds of the Series Q Bonds will be used to (i) finance (a) the construction of an approximately 384,000 square foot building by Brigham to house clinical and research space and approximately 406 underground parking spaces; (b) the renovation of a 46-bed level III neonatal intensive care unit and construction of a new 20-bed level II special care nursery at Brigham comprising approximately 34,032 square feet; (c) the development and implementation of a system-wide common revenue processing and clinical application system, called Partners eCare, to improve the performance of Partners and its Affiliates in dimensions of quality, cost and service and to integrate care across diverse and growing systems and thereby to coordinate care; (d) the construction of an approximately 768,000 square foot office building to house administrative personnel; and (e) the renovation, equipping and furnishing of various facilities and the acquisition or construction of various other routine capital

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improvements for Partners and its Affiliates (collectively, the “Series Q Project”); (ii) refinance a drawing made by Partners on a line of credit (the “Interim Borrowing”), the proceeds of which Interim Borrowing were used to fund the mandatory tender of the Agency’s Series K-4 Bonds on January 14, 2016; (iii) refund a portion of the Series F-5 Bonds and the Series G-5 Bonds; and (iv) pay costs of issuing the Series Q Bonds.

ESTIMATED SOURCES AND USES OF FUNDS

The proceeds from the sale of the Series Q Bonds are expected to be applied as follows:

Sources of Funds

Principal Amount of the Series Q Bonds $423,990,000 Plus Net Original Issue Premium 67,635,624

Total Sources of Funds $491,625,624

Uses of Funds

Refinancing Interim Borrowing $75,090,706 Refunding of Series F-5 Bonds 2,872,958 Refunding of Series G-5 Bonds 8,068,485 Series Q Project Costs 401,861,563 Costs of Issuance(1) 3,731,911

Total Uses of Funds $491,625,624

(1) Includes initial fees and expenses of the Agency and the Trustee, rating agency charges, legal fees, fees of accountants, Underwriters’ discount, and other costs of issuance.

BONDOWNERS’ RISKS AND MATTERS AFFECTING THE HEALTH CARE INDUSTRY

In addition to the factors described elsewhere in this Official Statement, the following factors constitute risks with respect to the Series Q Bonds. These factors include significant risks relating to the health care industry generally, as well as to the enforceability of the Agreement and the Guarantees. Certain of these factors are also addressed in the context of Partners HealthCare’s activities in Appendix A – “LETTER FROM PARTNERS HEALTHCARE SYSTEM, INC.”

In General

Partners’ obligation to make payments under the Agreement on account of amounts owing on the Series Q Bonds is a general obligation of Partners. The obligations of the Guarantors to make payments under the Guarantees are general obligations of each Guarantor, respectively. Future economic and other conditions, some of which are described below, may adversely affect Partners HealthCare’s revenues and expenses and, consequently, payment of amounts due on or with respect to the Series Q Bonds.

Partners HealthCare is subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental agencies that administer Medicare and Medicaid, namely, the Centers for Medicare & Medicaid Services (CMS) of the U.S. Department of Health and Human Services (DHHS), and the Massachusetts Executive Office of Health and Human Services (EOHHS), respectively, by commercial payers, by accreditation organizations such as The Joint Commission, and by other federal, state and local government agencies, including the Massachusetts Department of Public Health (DPH).

The financial future of Partners HealthCare may be affected by, among other things, demand for the services of Partners HealthCare providers (i.e., its hospitals and Network physicians); the ability of Partners HealthCare providers to provide the services required by patients; physicians’ relationships with the hospitals; changes in private philanthropy; the success of Partners HealthCare’s strategic plans; economic developments in Partners HealthCare’s service area; Partners HealthCare’s ability to control expenses and maintain relationships with NIH, corporate and other sponsors of research, managed care organizations (MCOs) and other third-party payers; the adequacy of NHP’s Medicaid and commercial premiums; the level of investment returns; competition; costs; third-party reimbursement; legislation; government regulation; malpractice claims and other litigation; and

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accreditation requirements. While Partners HealthCare reasonably expects in the future to generate sufficient revenues to cover its expenses, statutes, regulations and contractual provisions that affect revenues may change, and other unanticipated events and circumstances may occur, that cause variations from this expectation, and the variations may be material. In addition, the tax-exempt status of Partners HealthCare and its affiliated entities could be adversely affected by, among other things, an adverse determination by a governmental entity, non-compliance with governmental regulations, or legislative changes.

The following general factors, among others, could affect the level of revenues and expenses of Partners HealthCare or its financial condition or otherwise present risks for owners of the Series Q Bonds.

Federal and State Budget Cuts

The federal government and the Commonwealth are under continuing pressure to reduce spending and, therefore, seek ways to limit healthcare spending. For example, in connection with the implementation of the MS-DRG system and the resulting so called behavioral offset, the American Taxpayer Relief Act of 2012 (ATRA) requires the Medicare program to recoup funds from hospitals based upon changes in documentation and coding that have increased IPPS payments but that do not represent real increases in the intensity of services provided to patients. Additional recoupment adjustments are mandated for FFYs 2016-2017. Annually, CMS issues various final rules containing updated rates and payment policy changes for the Medicare program including the inpatient prospective payment system (IPPS) and the outpatient prospective payment system (OPPS) for the upcoming federal fiscal year. For further information concerning IPPS and OPPS, see Appendix A, “SOURCES OF PATIENT SERVICE REVENUE” under the heading “Medicare.”

Sequestration is a process that automatically cuts the federal budget across most departments and agencies. Congress included the threat of sequestration in the Budget Control Act of 2011 as a way to encourage compromise on deficit reduction efforts. Ahead of a December 13, 2013 deadline, a bipartisan and bicameral budget deal was achieved which offered limited relief from sequestration cuts for certain defense and non-defense spending for FYs 2014 and 2015, but did not extend relief to sequestration reductions impacting Medicare. Subsequent federal legislation has extended Medicare sequestration cuts through FFY 2025.

Federal budgetary pressures also present a significant uncertainty for research funding. There can be no assurance that Partners HealthCare will continue to receive research funding from federal agencies consistent with current levels.

In response to significant gaps between the expected level of tax revenues and projected expenditures, Massachusetts has implemented a series of reductions to Medicaid payments in recent years, and further reductions in payment rates and covered services may occur if the Commonwealth’s budgetary gap persists, even as more patients enroll in MassHealth. These reductions may increase any excess of the cost of providing care to such Medicaid patients over funds provided for this purpose under the Medicaid program.

Future actions by the federal government and the Commonwealth are generally expected to continue the trend toward more limits on payment for hospital services. The changes in Medicare and Medicaid reimbursement referred to above are further described in Appendix A, “SOURCES OF PATIENT SERVICE REVENUE,” including changes related to implementation of the Affordable Care Act. In addition, as described in more detail below, there are other activities at the federal and state level that may adversely affect hospital reimbursement.

National Health Reform

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “Affordable Care Act” or the “ACA”), was enacted in 2010. In general, the ACA changes the sources and methods by which consumers pay for health care for themselves and their families and by which employers procure health insurance for their employees and dependents. The ACA also mandates significant changes to the Medicare program. Certain provisions of the ACA took effect immediately or within a few months, while others are being phased in over time, ranging from one year to ten years. Some of the most significant changes took effect in 2014. These included: certification of group health plans as “qualified health plans;” an individual mandate for U.S. citizens and legal residents to obtain coverage or pay a fine; and imposition of penalties for employers with more than 50 workers if any of their full-time workers buy coverage through a federally- or state-run Health Insurance Marketplace (also known as an exchange) established under the ACA, as opposed to

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through employer-sponsored coverage and the initiatives described immediately below under the sub-heading “Insurance Reform.” As is the case with any legislation, the ACA may, in whole or in part, be amended, nullified, or delayed as a result of legislative amendments or decisions resulting from judicial challenges. The ACA, together with health care reform at the state level, subjects the health care industry to significant new statutory and regulatory requirements and is likely to continue to affect reimbursement for federally and state funded health care programs. For additional information see Appendix A, “SOURCES OF PATIENT SERVICE REVENUE.” Uncertainties regarding the implementation of the ACA create unpredictability for the strategic and business planning efforts of health care providers; this, in itself, creates risk.

Insurance Reform

One of the primary drivers of the ACA is to provide or make available, or subsidize the premium costs of, health care insurance for uninsured (or underinsured) consumers who fall below certain income levels. Among other things, the ACA: (i) creates exchanges in which individuals and small employers can access health care insurance (and related tax credits and subsidies) (the Massachusetts exchange is the Commonwealth Health Insurance Connector Authority (the “Connector”)); (ii) mandates that individual consumers obtain, and that certain employers provide, a minimum level of health care insurance and provides for penalties or taxes on consumers and employers that do not comply; (iii) provides subsidies to low-income individuals and small businesses for the purchase of health care insurance; (iv) prohibits denials of coverage for pre-existing conditions and eliminates lifetime or annual cost caps; (v) limits insurance premium variation based on age; (vi) at each state’s discretion expands existing public programs, including Medicaid, for individuals and families; and (vii) expands the program of insurance currently available to federal employees. These provisions may reduce a health care system’s free care expenses through an increase in utilization of health care services by individuals who have insurance coverage.

Medicare Reform

The ACA made significant changes in Medicare program reimbursement, related to both the structure and payment provisions of the Medicare program. Among other things, the ACA established an Independent Payment Advisory Board (IPAB) to develop proposals relating to Medicare reimbursement rates intended to reduce rates of Medicare spending growth and to improve the quality of care provided to Medicare beneficiaries. The ACA created the Center for Medicare and Medicaid Innovation (CMMI) to examine new cost effective ways of delivering and paying for health care, and it also provided for the implementation of various demonstration programs and pilot projects to test, evaluate, encourage and expand new payment structures and methodologies to reduce health care expenditures while maintaining or improving quality of care. Under the ACA, provider payments are increasingly aligned with quality and coordination of care measures. See, Appendix A, “SOURCES OF PATIENT SERVICE REVENUE” under the heading “Medicare.”

Accountable Care Organizations

The ACA includes a number of provisions that encourage the creation of new health care delivery programs for Medicare beneficiaries, such as patient-centered medical homes that feature interdisciplinary professional teams to support primary care practices, and the Medicare Shared Savings Program (MSSP), under which accountable care organizations (ACOs) composed of groups of providers will be held accountable for the quality, cost and overall care of Medicare beneficiaries attributed to the ACO and will share in the cost savings they achieve for the Medicare program.

CMMI implemented the Pioneer ACO Model, which is designed for health care organizations and providers that are experienced in coordinating care for patients across care settings. The Pioneer ACO Model generally has higher levels of shared savings and shared losses and more flexibility in the choice of payment model than is available in the MSSP. For information concerning Partners HealthCare’s participation in the Pioneer ACO Model, see Appendix A, “SOURCES OF PATIENT SERVICE REVENUE” under the heading “Medicare.”

Challenges to the ACA

The ACA has been subject to significant opposition in the political and judicial arenas. Multiple lawsuits challenging the constitutionality of the ACA have been filed by private and state parties in federal courts. In 2012 the United States Supreme Court largely upheld the ACA as constitutional. In 2015 the Supreme Court rejected an effort to limit federal subsidies only to exchanges that were established directly by the states and not through the federal government. Key elements of the insurance reform included in the ACA became effective at the

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beginning of 2014. The third enrollment period under the ACA began in the fall of 2015. Many issues remain to be determined about the ACA’s impact, and it seems likely that continuing litigation and political strategies will seek to undermine portions, perhaps significant portions, of the ACA. The extent to which key provisions of the ACA may be modified or repealed will depend also on the success of its on-going implementation and on the outcome of the 2016 Presidential election.

Management of Partners HealthCare cannot predict with any reasonable degree of certainty the interim or ultimate effects of the legislation or whether additional health care reform legislation will be enacted.

Massachusetts Health Care Reform: Chapter 224

In August, 2012, the Commonwealth enacted Chapter 224 of the Acts of 2012. Chapter 224 encourages a restructuring of health care payment and delivery systems to reduce the rate of cost growth while improving the quality and accessibility of health care. The law uses delivery reform, incentives, targets, and increased public scrutiny to achieve these goals. It provides for the establishment of ACOs, creation of new commissions and agencies that will establish and monitor annual health care cost growth benchmarks and undertake health resource planning, the encouragement of alternative payment methodologies and delivery systems, including increased price transparency, investment in wellness and prevention, the expansion of the primary care workforce, and further support for health information technology. These new agencies include the Health Policy Commission (HPC) and the Center for Health Information and Analysis (CHIA). In addition, new responsibilities were assigned to DPH, the Division of Insurance (DOI) and a new Health Planning Council (the Council) within EOHHS. Chapter 224 establishes a statewide health care cost growth goal for the health care industry, tied to the growth in the state’s overall economy. In 2014 the benchmark of 3.6% was exceeded. Beginning in 2016 the HPC is able to require health care entities that exceed the benchmark to prepare and implement performance improvement plans identifying actions to be taken to address the cause of excessive cost growth. In the case of Medicaid and other public programs, Chapter 224 adds specific requirements for how and how much to pay providers. Further, Chapter 224 provides that private health plans must also, “to the maximum extent feasible,” reduce the use of fee-for-service payment mechanisms. A significant percentage of the commercially insured population in Massachusetts is already covered by such payment methodologies, such as through the Blue Cross Alternative Quality Contract. Further, Chapter 224 institutes a certification process, through DOI, for risk-bearing provider organizations, that is, organizations representing providers in negotiating payer contracts under which significant down-side risk is assumed. Partners HealthCare is a risk-bearing provider entity and has been so certified by DOI. Chapter 224 also institutes a review process for certain “material changes” involving insurers or providers to be undertaken by the HPC, to which Partners HealthCare has been subject. See below under “Affiliation, Merger, Acquisition and Divestiture”.

Free Care and Uncompensated Care

Partners HealthCare provides emergency and other care to all patients regardless of their ability to pay. The reimbursement for care provided does not, in all cases, cover the cost of providing services. The cost of providing that care is reflected in the statements of operations.

Massachusetts hospitals and free-standing community health centers are able to recover a portion of the costs of providing uncompensated care to eligible low income and uninsured patients from the Health Safety Net Trust Fund (HSN). Primary funding for the HSN is provided by hospitals and the insurance industry, with some support from federal matching funds and payments from the Commonwealth. The annual process of setting the state budget determines the level and sources of funding for the HSN. Hospitals incur the full impact of any shortfall in funding through reduced HSN payments with limits on the level of payment reductions for certain hospitals. For information concerning the impact of the HSN on Partners HealthCare, see “MANAGEMENT’S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL PERFORMANCE” under the heading “Uncompensated Care” and Appendix A, “SOURCES OF PATIENT SERVICE REVENUE” under the heading “Health Safety Net Trust Fund.”

Risk Factors Relating to Neighborhood Health Plan

NHP, a licensed, not-for-profit managed care organization, became part of Partners HealthCare as of October 1, 2012. NHP provides coverage to persons eligible for MassHealth and other subsidized and commercial populations. The future financial condition of NHP is generally subject to all of the factors described in this Official Statement that affect Partners HealthCare, including without limitation, regulation by the Commonwealth and the federal government and a highly competitive marketplace. The Commonwealth, primarily

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through its DOI regulates the overall operations of NHP. This regulation includes, among other things, requirements for certain minimum levels of risk based capital (as defined in DOI regulations), review of subscriber and provider contracts, financial reporting, mandated benefits, and review and approval of commercial premiums. In connection with its acquisition of NHP, PHS agreed to assure that NHP maintained a specified minimum amount of capital and surplus pursuant to DOI’s risk based capital regulations. EOHHS also regulates delivery of services by Medicaid managed care organizations, including oversight of matters such as complaint resolution, quality assurance and continuity of care procedures, and there can be no assurance that EOHHS will set adequate premium rates for Medicaid managed care organizations such as NHP. NHP’s programs and products are also subject to federal regulatory standards, which impose, among other things, minimum benefits, consumer protection procedures, financial accountability and other operational matters. Such government regulation is subject to periodic review and revision, and the future impact of such regulation on the ability of NHP to be competitive cannot be predicted. In addition, NHP is exempt from federal taxation pursuant to section 501(c)(4) of the Code. Any change in such tax-exempt status could have a material adverse effect on NHP’s operations. See Appendix A, “NEIGHBORHOOD HEALTH PLAN.”

Economic and Financial Market Risks

Partners HealthCare derives a substantial portion of its excess of revenues over expenses from investment income and gifts. Similarly, its balance sheet has substantial financial assets. Any significant deterioration in the economy or in the securities markets generally or adverse changes in the interest rates used to value liabilities, in the valuations of the specific investments which Partners HealthCare has made or in its ability to generate investment gains or receive gifts would reduce its income and cash flow and, therefore, could impair its ability to finance its operating and capital needs and future growth. Further, government policy and regulations affecting interest rates, taxes, ERISA program requirements, trading and valuation and accounting, among others, may negatively affect the investments, liabilities, cash flow and gift receipts of Partners HealthCare.

Nonprofit Healthcare Environment

Partners HealthCare and substantially all of its affiliates are not-for-profit entities and are exempt from federal income taxation as organizations described in Section 501(c)(3) of the Code. At the same time, Partners HealthCare conducts complex business transactions and is a significant employer in its community. 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.

Many entities have challenged or questioned the operations or practices of healthcare providers to determine if they meet the regulatory requirements for not-for-profit and tax-exempt organizations. These challenges range from concerns about compliance with federal and state statutes and regulations, such as Medicare and Medicaid compliance, to examinations of core business practices. Areas examined include pricing practices, billing and collection practices, charitable care, community benefit, executive compensation, exemption of property from real property taxation and others. These challenges and questions have come from a variety of sources, including state attorneys general, the IRS, local and state tax authorities, labor unions, Congress, state legislatures and patients, and in a variety of forums, including hearings, audits and litigation.

New ACA Requirements for Tax-Exempt Status

As part of the ACA, Congress enacted Section 501(r) of the Code which imposes additional requirements for hospitals and other designated health care organizations to be treated as tax-exempt organizations. Under the new rules, in order to maintain their tax-exempt status hospitals must establish and publicize written financial assistance policies, conduct community health needs assessments at least once every three years and describe in their annual tax returns how they are addressing the needs identified in such assessments. Tax-exempt hospitals are also subject to new limitations on their collection activities and the amounts they can charge for emergency or other medically necessary care for individuals eligible for financial assistance. Each of Partners HealthCare’s tax-exempt hospitals is subject to these new rules, and failure to comply can result in fines and the loss of a hospital’s tax-exempt status. There have been no challenges to the tax-exempt status of the Partners HealthCare hospitals, but there can be no assurance that a challenge will not occur in the future.

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Competition

The Massachusetts health care industry is highly competitive, and many Massachusetts hospitals have merged, closed or affiliated with other hospitals or have been acquired by for-profit hospitals or investors in an effort to remain financially viable as health care delivery systems compete against each other and against non-hospital providers of health care services, including physician groups, specialty providers and other industry participants. Massachusetts hospitals continue to actively consider merger, affiliation and acquisition activities. See “Antitrust,” below, and Appendix A, “COMPETITIVE ENVIRONMENT”.

Regulation of the Health Care Industry

The health care industry is heavily regulated by federal and state governments and is dependent on governmental sources for a substantial portion of revenues. In the past, there have been periodic and often significant changes in the methods and standards used by government agencies to reimburse and regulate the operation of healthcare providers. The ACA has implemented additional changes and there is reason to believe that further substantial changes will occur in the future. See “SOURCES OF PATIENT SERVICE REVENUE” in Appendix A and “National Health Reform,” above.

In addition to the state and governmental regulation discussed elsewhere in this Bondowners’ Risks section, Partners HealthCare providers are subject to regulatory and administrative actions by the DPH, the Massachusetts Department of Mental Health (DMH), the Massachusetts Office of the Attorney General (AGO), the DOI, the HPC, the United States Food and Drug Administration (FDA), the United States Department of Labor, the National Labor Relations Board, and other federal, state and local government agencies. Partners HealthCare hospitals and certain of the services and educational programs that these hospitals offer are subject to accreditation by The Joint Commission, ACGME and other entities. Further, Partners HealthCare providers are subject to regulations that limit gifts and other payments to health care practitioners from representatives of pharmaceutical and medical device manufacturers.

The federal government has also increased enforcement of laws and regulations governing the conduct of clinical trials at hospitals. HHS elevated and strengthened its Office of Human Research Protection, one of the agencies with responsibility for monitoring federally funded research. The NIH significantly increased the number of facility inspections that these agencies perform. The 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. Partners HealthCare providers receive payments for health care items and services under many of these grants and are subject to complex and ambiguous coverage principles and rules governing billing for items or services they provide to patients participating in clinical trials funded by governmental agencies and private sponsors. These agencies’ enforcement powers range from substantial fines and penalties to exclusion of researchers and suspension or termination of entire research programs. Errors in billing the Medicare program for care provided to patients enrolled in clinical trials that are not eligible for Medicare reimbursement can subject these providers to sanctions as well as repayment obligations.

While management believes that Partners HealthCare providers are in substantial compliance with the standards of the aforementioned regulatory and accrediting bodies, there can be no assurance that a challenge or investigation will not occur in the future. An adverse finding by such organizations or agencies could have a material adverse effect on the future operations or revenue of Partners HealthCare providers.

From time to time Partners HealthCare receives subpoenas, civil investigatory demands, audit requests and other formal inquiries from state and federal legislative committees, governmental agencies or investigators. It is often impossible to determine the specific nature of the investigation or whether Partners HealthCare might have any potential liability under a cause of action that might subsequently be asserted by the government. Moreover, Partners HealthCare is generally not informed when such investigations are resolved without the assertion of any claims. Management considers these investigations a routine part of operations in the current health care climate, and expects them to continue in the future. See Appendix A, “LITIGATION AND REGULATORY MATTERS.”

Determination of Need Restrictions; Limits on Reduction of Essential Services

The Commonwealth maintains a Determination of Need (DON) program administered by DPH that requires health care facilities, including acute care hospitals, to obtain state approval prior to undertaking certain

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activities. Currently, acute care hospitals must obtain state approval before expending funds in excess of $17.6 million on capital projects for inpatient services or in excess of $29 million on capital projects for outpatient services. These amounts are adjusted annually for inflation. In addition, without DON approval, acute care hospitals may not offer certain innovative services or new technologies and may not convert beds to certain non-acute services or provide inpatient services at previously-licensed outpatient satellites.

Chapter 224 has provisions that affect DON requirements, including extending the moratorium on new ambulatory surgery capacity to hospital ambulatory surgery centers and requiring DPH, in connection with its review of DON applications, to be guided by the state health plan in furtherance of the plan’s goals of ensuring appropriate allocation of health care resources, increased access and lower cost to consider inter alia any comments from CHIA, the HPC, and any other agency (the AGO, for example, may intervene).

The existence of the DON program has two principal implications for Partners HealthCare providers. First, the program may limit a provider’s ability to respond on a timely basis to competitive programs offered by other providers. Second, while the existence of the DON program may limit a provider’s ability to expand or add services needed to compete, the program has also, in certain instances, served as a barrier to entry that prevents would-be competitors from entering or expanding operations in a particular field of service.

Massachusetts legislation and regulations also limit the ability of an acute care hospital to terminate “essential services” without prior notice to DPH, a public hearing and various remedial actions, including in certain circumstances financial payments to support or continue public access to such services through other means. To some extent, this legislation limits the flexibility of hospitals to reconfigure their service lines in pursuit of cost reduction initiatives or other goals.

Federal and State “Fraud and Abuse” Laws and Regulations

“Fraud” in government funded health care programs is a significant concern of HHS and many states and is one of the federal government’s prime law enforcement priorities. The federal government and, to a lesser degree, state governments impose a wide variety of complex and technical requirements intended to prevent over-utilization based on economic inducements, misallocation of expenses, overcharging and other forms of “fraud” in state and federally-funded health care programs, including the Medicare and Medicaid programs. Fraud regulation affects a broad spectrum of hospital commercial activity, including billing, accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials, discounts and other functions and transactions. Violations carry significant civil, criminal and administrative sanctions and may result in temporary or permanent exclusion from participation in Medicare, Medicaid and other federal health care programs. Health care providers may reduce their financial exposure for fraud and abuse law violations through prompt repayment of sums received as a result of violations of applicable laws, prompt voluntary reporting to the government of illegal arrangements and implementation of effective corporate compliance programs. This financial exposure is generally uninsured. Much of this risk cannot be assessed accurately due to the broadly worded prohibitions, limited case law and the lack of material guidance by CMS and the Office of the Inspector General (OIG).

Anti-Kickback Law

The federal anti-kickback statute makes it a criminal offense to knowingly and willfully offer, pay, solicit or receive remuneration in return for or to induce referrals for any item or service that may be paid for, in whole or in part, under a federal health care program including, but not limited to, the Medicare or Medicaid programs. Activities subject to the statute include almost any arrangement between a hospital and a person or entity in a position to generate business for the hospital or benefit from business from the hospital. In recent years, the government has aggressively enforced the anti-kickback statute, and the ACA amended the statute to make it easier for the government to prove “intent” to violate the law.

Violation of the anti-kickback statute is a felony, subject to a maximum fine of $25,000 for each criminal act, imprisonment for up to five years and exclusion from the Medicare and Medicaid programs. The OIG can also initiate an administrative exclusion of a provider from the Medicare and Medicaid programs. In addition, civil monetary penalties of $50,000 for each act in violation of the anti-kickback statute or damages equal to three times the amount of prohibited remuneration may be imposed. “Safe harbor” regulations, published by the OIG, provide protections from prosecution or administrative enforcement action for a limited scope of arrangements. The safe harbors described in the regulations are narrow and do not cover a wide range of economic relations that most

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hospitals, physicians and other health care providers consider to be legitimate business arrangements. However, failure to satisfy the conditions of a safe harbor does not necessarily indicate a violation of the applicable statute.

In addition, Massachusetts has both a Medicaid anti-kickback statute and an all payer anti-kickback statute that applies to services covered by commercial payers. Unlike the federal statute, both of the Commonwealth’s anti-kickback statutes lack an intent requirement and do not incorporate safe harbor provisions. Violations of the Massachusetts anti-kickback statutes may result in criminal and/or civil penalties.

False Claims Acts

The federal False Claims Acts are criminal and civil statutes that prohibit a person from “knowingly” presenting or causing to be presented a false or fraudulent claim for payment or approval to the federal government and from “knowingly” making, using or causing to be made a false record or statement to get a false or fraudulent claim paid or approved by the federal government. These prohibitions extend to claims submitted to federal health care programs including, but not limited to, Medicare and Medicaid. The terms “knowing” and “knowingly” are broadly defined and do not require proof of a specific intent to defraud in order to prove that the law has been violated. The ACA amended the False Claims Act to expressly state that claims for items or services resulting from violations of the anti-kickback statute are false or fraudulent for purposes of the False Claims Act. Additionally, providers may be liable for the submission of false claims when they are not in full compliance with applicable legal and regulatory standards. Both the Fraud Enforcement and Recovery Act of 2009 and the ACA significantly expanded the scope of the False Claims Act by, for example, making a conspiracy to commit any substantive violation of the False Claims Act or knowingly retaining an overpayment from a federal health care program a potential liability under the False Claims Act and making payments made by, through or in connection with a health insurance exchange subject to the False Claims Act.

Violations of the criminal False Claims Act can result in imprisonment and/or fines, while violations of the civil False Claims Act may result in monetary penalties ranging from $5,500 to $11,000 plus three times the amount of damages sustained by the federal government. In certain limited cases involving prompt disclosure of False Claims Act violations, the statute provides for double rather than treble damages. Private individuals may also bring suit under the qui tam provisions of the civil False Claims Act and may be eligible for incentive payments for providing information that leads to recoveries or sanctions that arise in a variety of contexts in which hospitals and health care providers operate. The ACA also eased the requirements for private individuals to bring suit under the civil False Claims Act.

The Commonwealth has a state false claims act that is modeled on the federal statutes.

Stark Law

The federal statute commonly known as the Stark Law prohibits a physician (or an immediate family member of such physician) from referring a Medicare or Medicaid patient for certain “designated health services” to an entity with which the referring person has a financial relationship. It also prohibits such entity from billing the Medicare or Medicaid program for services furnished pursuant to a prohibited referral. Unlike the federal anti-kickback statute, no finding of knowledge that the referral was prohibited or intent to violate the Stark Law is required. The “designated health services” include clinical laboratory services, physical and occupational therapy services, radiology services, radiation therapy services and supplies, durable medical equipment, parenteral and enteral nutrients (including equipment and supplies), orthotic and prosthetic devices, speech language pathology, home health services, outpatient prescription drugs and inpatient and outpatient hospital services. The Stark Law defines a financial relationship as either an ownership or investment interest in the entity that provides designated health services or a compensation arrangement with such entity.

Many ordinary business practices and economically desirable arrangements with physicians would constitute financial relationships under the Stark Law and trigger the prohibition on referrals and billing. There are certain statutory and regulatory exceptions to the prohibition, but these exceptions are narrow and an arrangement must fully comply with the exception. Violations of the Stark Law can result in denial of payment, or a refund of amounts paid for the designated health services, substantial civil monetary penalties and exclusion from the Medicare and Medicaid programs. In certain circumstances, knowing violations may also create liability under the False Claims Acts.

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CMS has established a voluntary self-disclosure program under which hospitals and other entities may report Stark Law violations in an effort to reduce potential refund obligations. The program is relatively new, so it is uncertain whether it will provide significant monetary relief to hospitals that discover and self-disclose inadvertent Stark Law violations. Partners HealthCare may make self-disclosures under this program as appropriate from time to time.

Civil Monetary Penalty Act

The federal Civil Monetary Penalty Act (CMPA) provides for administrative sanctions, including civil money penalties and treble damages, against health care providers for a broad range of billing and other financial abuses. For example, a health care provider is liable under the CMPA if it knowingly presents, or causes to be presented, improper claims for reimbursement under Medicare, Medicaid and other federal health care programs or if it gives benefits or other inducements to Medicare or Medicaid beneficiaries that the provider knows or should know are likely to induce the beneficiaries to choose the provider for their care. In addition, a hospital that participates in arrangements (known as “gainsharing”) under which a physician is paid to limit or reduce needed services to Medicare fee-for-service beneficiaries would be subject to CMPA penalties. The ACA added new exceptions to the CMPA permitting, among other things, arrangements that promote access to care and pose a low risk of harm to patients and the federal health care programs.

Health care providers may be found liable under the CMPA even when they did not have actual knowledge of the impropriety of their action. It is sufficient to knowingly undertake the action. Ignorance of the CMPA 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.

OIG Compliance Guidance

The OIG has encouraged all health care providers to adopt and implement programs to promote compliance with federal and state laws, including the False Claims Acts, the Anti-Kickback Statute and the Stark Law. The OIG’s Compliance Program Guidance (CPG) and Supplemental Compliance Program Guidance provide recommendations to hospitals for adopting and implementing effective programs to promote compliance with applicable federal and state law and health plan program requirements. The CPG also discusses significant risk areas for hospitals. The ACA requires the establishment of a compliance program as a condition of enrollment under the Medicare and Medicaid programs. In implementing the ACA, the OIG solicited comments from the industry regarding the core elements of industry-specific compliance programs and is expected to do further rulemaking on compliance plan requirements. The OIG will consider the existence of an effective compliance program that pre-dated any governmental investigation when addressing the appropriateness of administrative penalties. However, the presence of a compliance program is not an assurance that a health care provider will not be investigated by one or more federal or state agencies that enforce health care fraud and abuse laws or that it will not be required to make repayments to various health care insurers (including the Medicare and/or Medicaid programs). Hospitals are also required to create a Medicaid Compliance Plan and to educate staff, agents and contractors about state and federal anti-fraud and abuse laws.

Enforcement Activity

Federal and state governments are intensifying their efforts to investigate and prosecute waste, fraud and abuse in both government and private health care programs, and pursuant to the ACA and other legislation significant additional federal monies have been put into these enforcement efforts. Enforcement activity against health care providers, such as investigations, audits or inquiries, has increased, and enforcement authorities are adopting more aggressive approaches. Enforcement authorities are sometimes in a position to compel settlements by providers charged with, or being investigated for, violations of the various federal and state fraud and abuse or false claims laws and regulations by threatened penalties, including withholding Medicare, Medicaid or similar payments or the possibility of a criminal action. The cost, time and management attention of defending or responding to an investigation or alleged violation and the facts of a particular case may dictate settlement, resulting in additional costs. Prolonged and publicized investigations could damage the reputation, business and credit of a provider, regardless of the outcome. Settlements, fines, prospective restrictions or other results of settlement agreements and negative publicity may have a materially adverse impact on a hospital’s operations, financial condition and reputation.

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Partners HealthCare conducts a variety of activities that pose varying degrees of risk under the foregoing federal and state fraud and abuse laws and accompanying regulations, and under the Health Insurance Portability and Accountability Act (HIPAA) and Health Information Technology for Economic and Clinical Health Act (HITECH) (discussed below). While management believes that Partners HealthCare is in material compliance with such laws and regulations and is not aware of any current compliance investigations or proceedings, there can be no assurance that a federal or state investigation or enforcement action may commence in the future. Any such investigation or enforcement action, if it resulted in an adverse outcome, could have a material adverse effect on Partners HealthCare.

Federal and State Laws Relating to the Privacy and Security of Personal Health Information

Under HIPAA, HHS has issued regulations to standardize and facilitate the electronic transfer of health care information for purposes that include the processing of health care payments, privacy regulations that protect patient medical records and other personal health information maintained by health care providers, health plans and health care clearinghouses, and security regulations that require health care providers to implement administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of the electronic health information that they receive or create. HIPAA also requires that health care providers enter into business associate agreements to assure that contractors and other entities doing business on their behalf protect the privacy and security of patient information.

The HIPAA privacy and security regulations were strengthened under HITECH. HITECH expanded certain HIPAA privacy and security provisions and created new avenues of enforcement, including the ability of state attorneys general to bring HIPAA enforcement actions. HITECH also made business associates directly liable for HIPAA security compliance and established breach notification obligations for providers in the event of a breach of unsecured protected health information that creates a risk of harm to individuals. Violations of the privacy and security standards can result in civil monetary penalties up to $1.5 million per year and criminal penalties including fines and imprisonment. Partners HealthCare believes that its operations and information systems comply with the HIPAA standardized electronic transfer, privacy and security regulations, although there can be no assurance that Partners HealthCare will not be found to have violated these regulations in any one instance.

Regulations implementing major provisions of HITECH (the “Omnibus Rule”) contained significant changes for Covered Entities and Business Associates (as such terms are defined under HIPAA) with respect to permitted uses and disclosures of Protected Health Information.

Under HITECH's new breach notification requirements, Covered Entities must report breaches of protected health information that has not been encrypted or otherwise secured in accordance with guidance from the Secretary of HHS (the “Secretary”). Required breach notices must be made as soon as is reasonably practicable, but no later than 60 days following discovery of the breach. Reports must be made to affected individuals and to the Secretary and in some cases, they must be reported through local and national media, depending on the size of the breach.

Covered Entities are subject to audit under HHS’s HITECH-mandated audit program and may also be audited in connection with a privacy complaint. Covered Entities are subject to prosecution and/or administrative enforcement and increased civil and criminal penalties for non-compliance, including a new, four-tiered system of monetary penalties adopted under HITECH. Covered Entities are also subject to enforcement by state attorneys general who were given authority to enforce HIPAA under HITECH. To avoid penalties under the HITECH breach notification provisions, Covered Entities must ensure that breaches of Protected Health Information (as such term is defined under HIPAA) are promptly detected and reported within the organization, so that the Covered Entity can make all required notifications on a timely basis. However, even if such reports are timely made, Covered Entities may still be subject to penalties for the underlying breach.

Massachusetts also has state laws relating to the privacy and security of personal information. The so-called Data Breach Notification Law requires businesses to notify the AGO, the Director of Consumer Affairs and Business Regulation, and the affected individual in the event of a data breach. Businesses, including hospitals, must implement and document compliance with certain security standards such as vendor contracting provisions and encryption of portable devices. The AGO may bring an action under the unfair trade practices statute for violation of the Data Breach Notification Law. Additionally, the so-called Data Disposal Law requires businesses, including

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hospitals, to employ certain safeguards when disposing of or destroying personal information. The penalties for violation of the Data Disposal Law include a maximum of $50,000 per instance of improper disposal.

Tax-Exempt Status

The Code restricts the issuance of tax-exempt bonds for the purpose of financing and refinancing different types of health care facilities for tax-exempt organizations. Consequently, the Code and changes thereto could adversely affect Partners HealthCare’s ability to finance its future capital needs and could have other adverse effects on Partners HealthCare that cannot be predicted at this time. The Code also continues to subject unrelated business income of tax-exempt organizations to taxation.

As a tax-exempt organization, no part of the net earnings of Partners HealthCare may inure to the benefit of any private individual, and a violation may cause the organization to lose its tax-exempt status under Section 501(c)(3) of the Code. Revocation of the tax-exempt status of PHS and/or one or more of its affiliates could subject the interest paid to Bondowners to federal income tax retroactively to the date of issuance of the Series Q Bonds. Accordingly, there are certain restrictions on the types of business arrangements that Partners HealthCare may enter into without jeopardizing its tax-exempt status. The IRS has issued guidance in revenue rulings, private letter rulings and general counsel memoranda on some situations that give rise to private inurement, but there is no definitive body of law and no regulations or public advisory rulings that address many common arrangements between exempt health care providers and nonexempt individuals or entities. While management believes that Partners HealthCare arrangements with private persons and entities are generally consistent with IRS guidance, there can be no assurance concerning the outcome of an audit or other investigation given the lack of clear authority interpreting the range of activities undertaken by Partners HealthCare.

The IRS has intensified its scrutiny of a broad variety of contractual relationships commonly entered into by tax-exempt hospitals with physicians and for-profit entities, such as recruitment arrangements, income guarantees and joint ventures. The IRS has issued detailed hospital audit guidelines and has commenced intensive audits of select health care providers to determine whether the activities of these providers are consistent with their continued tax-exempt status. The IRS has indicated that, in certain circumstances, violation of the fraud and abuse statutes could constitute grounds for revocation of a hospital’s tax-exempt status. Any suspension, limitation, or revocation of the tax-exempt status of Partners HealthCare or assessment of significant tax liability could have a material adverse effect on Partners HealthCare.

Intermediate sanctions provisions of the Code impose penalty excise taxes in lieu of (and in certain situations, in addition to) revocation of tax-exempt status where an exempt organization is found to have engaged in an “excess benefit transaction” with a “disqualified person,” meaning that organization insiders have received some type of unreasonable compensation or excessive economic benefit from the organization. The tax is imposed both on the disqualified person receiving such excess benefit and on any officer, director, trustee or other person having similar powers or responsibilities who participated in the transaction willfully or without reasonable cause, knowing it would involve “excess benefit.”

From time to time, Congress has introduced legislation affecting the tax-exempt status of not-for-profit organizations. See “Nonprofit Healthcare Environment” above. While Partners HealthCare management is not aware of any challenge or investigation concerning Partners HealthCare and its tax-exempt status, there can be no assurance that none will occur in the future. Such a challenge could have adverse consequences for Partners HealthCare.

Regulation of Patient Transfer

The Emergency Medical Treatment and Active Labor Act (EMTALA) requires hospitals that have emergency rooms to provide medical screening and stabilizing treatment before transferring a patient who is medically unstable or in labor to another facility, unless the patient asks to be transferred or a physician certifies that the benefits of the transfer outweigh the risks. The law further prohibits hospitals from delaying such screening or treatment in order to inquire about an individual’s method of payment. Failure to comply with EMTALA can result in exclusion from the Medicare and/or Medicaid programs as well as civil and criminal penalties of up to $50,000 per violation. In addition, hospitals may be liable for claims brought by any individual who has suffered harm as a result of such violation. Accordingly, failure of acute care hospitals to meet their responsibilities under the law could adversely affect their financial condition. Management believes that Partners HealthCare hospitals are in compliance with these requirements.

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Licensure and Accreditation

Each Partners HealthCare hospital is licensed by DPH and, if applicable, DMH, and is accredited by the Joint Commission. A number of Partners HealthCare hospitals are accredited by the ACGME for residencies and internships for over 245 programs. See Appendix A for a description of individual Partners HealthCare hospitals and programs.

Renewal and continuation of the operating licenses, certifications and accreditations of the Partners HealthCare hospitals are based on inspections, surveys, investigations and other reviews, some of which may require or include affirmative action or response by the hospitals. These activities are conducted in the normal course of business of health facilities, both in connection with periodic renewals and in response to specific complaints, which may be made to governmental agencies, private agencies or the media by patients, ombudsmen or employees, among others.

Affiliation, Merger, Acquisition and Divestiture

As part of its ongoing planning and property management functions, Partners HealthCare reviews the use, compatibility and financial viability of many of its operations and from time to time may pursue changes in the use or disposition of its facilities. Likewise, Partners HealthCare actively receives offers from, and conducts discussions with, third parties about the potential acquisition of operations or properties that may become part of Partners HealthCare in the future or about the potential sale of some of the operations and properties of Partners HealthCare. Some of the actions, including mergers, acquisitions and certain clinical affiliations, that Partners HealthCare may contemplate may give rise to the need to submit a “notice of material change” with the HPC disclosing the nature of a proposed transaction or affiliation. The HPC has a time frame within which it reviews such notices, which can have the effect of delaying completion of the action. The HPC may conclude, based on the submission of a notice of material change, that the contemplated activity may require a more detailed examination and it may then initiate a cost and market impact review of the transaction or affiliation. The HPC undertook cost and market impact reviews related to transactions proposed in the past by Partners HealthCare with South Shore Hospital, Harbor Medical Associates and Hallmark Health Corporation, and in each case raised significant concerns about the effects of the proposed transactions. The HPC is obliged to complete such a review within 185 days from the filing of a complete notice of material change.

Discussions with respect to affiliation, merger, acquisition, disposition or change of use, including those that may affect Partners HealthCare providers, are held from time to time, usually on a confidential basis. As a result, it is possible that the assets currently owned by Partners HealthCare may change, subject to the provisions in the financing documents that apply to merger, sale, disposition or purchase of assets. Certain merger and acquisition transactions are subject to review under applicable antitrust laws. See “Antitrust” below and Appendix A, “COMPETITIVE ENVIRONMENT”.

ICD-10 Implementation

The International Classification of Diseases (ICD) is an international coding system for health management and clinical purposes. ICD codes are used for the classification of medical diagnoses and inpatient hospital procedures and are used to file claims with insurers, including Medicare. Health care providers and health plans have historically used a version of ICD called “ICD-9.” Originally scheduled for completion by October 1, 2014, as a result of H.R. 4302, HHS issued a rule finalizing October 1, 2015 as the new compliance date for health care providers, health plans, and health care clearinghouses to transition to the new ICD-10 version, which uses many more codes for the classification of health information. The conversion to ICD-10 requires changes to billing systems and medical records systems, extensive training of financial and clinical staff, investment in new technology, and cooperation among various trading partners, such as physician groups and health insurers. The conversion to ICD-10 is expected to consume significant resources for the health care system, including Partners HealthCare and could result in delays in billing and payments. To date Partners HealthCare has not experienced any material delays in its conversion to ICD-10.

Antitrust

Enforcement of the antitrust laws against health care providers may arise in a wide variety of circumstances including medical staff privilege disputes; payer contracting; physician relations; joint ventures; merger, affiliation, acquisition and expansion activities; and certain pricing and salary setting activities. From time

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to time Partners HealthCare may be involved with some or all of these types of activities, and it periodically reviews with the AGO certain proposed relationships that it is developing with other providers.

Actions can be brought by federal and state enforcement agencies seeking criminal and civil penalties and, in some instances, by private litigants seeking damages for harm from allegedly anti-competitive behavior. Liability may be substantial, depending on the facts and circumstances of each case, and may include treble damages in certain cases. In addition, if any provider with whom Partners HealthCare is (or becomes) affiliated is determined to have violated the antitrust laws, Partners HealthCare may be subject to liability as a joint actor.

In 2009, a civil investigative process commenced relating to certain payer contracting activities of Partners HealthCare. In 2013 the review of certain proposed acquisitions was consolidated with such investigative process. As a result of negotiations between the AGO and Partners HealthCare, in June 2014 the AGO filed in Massachusetts Superior Court a complaint against Partners HealthCare et al. and an accompanying settlement agreement in the form of a proposed consent judgment among, inter alia, Partners HealthCare and the AGO that, if approved by the Court, would have resolved the civil investigation of Partners HealthCare’s payer contracting activities and permitted it to proceed with the proposed acquisitions. In early 2015, the Court rejected the proposed consent judgment and the AGO exercised its right to terminate the underlying settlement agreement. Since that time, Partners HealthCare has abandoned the proposed acquisition transactions and, to Partners HealthCare’s knowledge, the civil investigative process has been inactive. See Appendix A, “LITIGATION AND REGULATORY MATTERS.”

Ballot Initiatives and Legislation: Nursing and Other Workforce Shortages; Operating Margins

Periodically organizations or interest groups involved in or focused on the delivery of healthcare in the Commonwealth seek to address issues of concern through public ballot initiatives. In recent years these have been introduced by the Massachusetts Nurses Association (MNA) and the 1199SEIU Union (SEIU).

In 2014, the MNA initiated a statewide ballot initiative requiring minimum nurse to patient staffing ratios. While the statewide ballot question did not reach the ballot, in part as a result of the ballot initiative, Chapter 155 of the Acts of 2014 was enacted to establish patient assignment limits for registered nurses in intensive care units (ICUs) in acute hospitals licensed by the Massachusetts Department of Public Health and in hospitals operated by the Commonwealth. The law provides in part that in all intensive care units the patient assignment for a registered nurse shall be 1:1 or 1:2 depending on the stability of the patient as assessed by an acuity tool (see below) and by the staff nurses in the unit, including the nurse manager or the nurse manager’s designee when needed to resolve a disagreement. Pursuant to Chapter 155, in June 2015 the HPC promulgated regulations regarding (1) the formulation of an acuity tool to assess ICU patient stability; (2) the method of reporting to the public on staffing compliance in hospital ICUs; and (3) the identification, measurement, and public reporting by hospitals of related patient safety quality measures. These mandated ratios could result in nursing shortages and higher costs for hospitals.

In August 2015 the SEIU, which represents health care workers, initiated a statewide ballot initiative petition seeking to establish payment bands for all providers that participate in a payer’s network. Under this proposal no provider (except certain geographically isolated providers and certain specialty hospitals) would receive payments that are more than 20% higher than the median carrier-specific relative price for its provider category for that payer or that are more than 10% lower than the payer-specific median relative price for its provider category. The Secretary of the Commonwealth recently certified that the SEIU had achieved the requisite number of signatures to place the petition on the November 2016 ballot and will then send the petition to the Legislature in January, 2016. The Legislature may approve or disapprove the petition, propose a substitute, or take no action. If the Legislature does not enact the petition before the first Wednesday in May 2016, by obtaining approximately 11,000 additional signatures by July 2016 the SEIU will be entitled to place the petition and any legislative substitute on the November 2016 ballot. Such arbitrary payment bands, if mandated in Massachusetts, could limit contract negotiating ability and have potentially significant financial impacts, such as impeding access to capital and affecting delivery of safe patient care, on acute hospitals in Massachusetts, including in particular Partners HealthCare acute hospitals.

There can be no assurance that the MNA, SEIU or other organizations will not continue to initiate ballot initiatives or engage in other legislative activities that may adversely affect hospital operations, patient and physician satisfaction, financial condition, results of operations and future growth.

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Covenant to Maintain Tax-Exempt Status of the Series Q Bonds

The tax-exempt status of the Series Q Bonds is based on the continued compliance by the Agency and Partners with certain covenants contained in the Agreement. These covenants relate generally to maintenance of Partners’ tax-exempt status, arbitrage limitations, rebate of certain investment earnings to the federal government, and restrictions on the amount of costs of issuance financed with the proceeds of the Series Q Bonds. Failure to comply with any of these covenants may result in the treatment of interest on the Series Q Bonds as taxable retroactive to the date of issuance. See “TAX EXEMPTION” herein.

No Security Interest Granted

The Agreement provides that Partners shall make payments to the Trustee sufficient to pay the Series Q Bonds, and the interest thereon, as the same become due. The obligation of Partners to make such payments is an unsecured general obligation of Partners. The Series Q Bonds are not secured by a mortgage lien or security interest in any real or tangible personal property or any other property or revenues of Partners. Under certain circumstances Partners can issue, incur or assume additional Indebtedness which may be secured without equally and ratably securing the Series Q Bonds, with the effect that such Indebtedness would be senior to the Series Q Bonds. See Appendix C-2, “SUMMARY OF THE LOAN AND TRUST AGREEMENT” under the heading “Senior Indebtedness.”

Enforceability of Remedies Generally

The remedies granted to the Trustee or the Owners of the Series Q Bonds upon an Event of Default under the Agreement are or may be dependent upon judicial actions which are often subject to discretion and delay. Under existing law, the remedies specified in the Agreement may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Series Q Bonds will be qualified as to the enforceability of the provisions of the Agreement by limitations imposed by state and federal laws, rulings and decisions relating to equitable remedies regardless of whether enforceability is sought in a proceeding at law or in equity, fraudulent conveyances, the ability of one charitable corporation to pledge its assets to secure the debt of another, and bankruptcy, reorganization, insolvency, receivership or other similar laws affecting the rights of creditors generally.

Enforceability of Guarantees

Under Massachusetts law, a nonprofit corporation may guarantee the debt of another corporation only if such guarantee is in furtherance of the corporate purposes of such guarantor nonprofit corporation. In addition, it is possible that the joint and several obligation of a guarantor to make payments due under a guarantee may be declared void in an action brought by third party creditors pursuant to the Massachusetts fraudulent conveyance statutes or may be avoided by a guarantor or a trustee in bankruptcy in the event of the bankruptcy of the guarantor from which payment is requested. An obligation may be voided under the federal Bankruptcy Code or under the Massachusetts fraudulent conveyance statute, if (a) the obligation was incurred without receipt by the obligor of “fair consideration” or “reasonably equivalent value,” and (b) the obligation renders the obligor “insolvent,” as such terms are defined under the applicable statute. Interpretation by the courts of the tests of “insolvency,” “reasonably equivalent value” and “fair consideration” has resulted in a conflicting body of case law. For example, a Guarantor’s joint and several obligation under a Guarantee to make all payments thereunder, including payments in respect of funds used for the benefit of Partners or the other Guarantors, may be held to be a “transfer” which makes such Guarantor “insolvent” in the sense that the total amount due under the Guarantee could be considered as causing its liabilities to exceed its assets. Also, one of the Guarantors may be deemed to have received less than “fair consideration” for such obligation because only a portion of the proceeds of the indebtedness is to be used to finance facilities occupied or used by such Guarantor. While the Guarantors may benefit generally from the facilities financed from the indebtedness for Partners or the other Guarantors, the actual cash value of this benefit may be less than the joint and several obligation. Rights under the Massachusetts fraudulent conveyance statutes may be asserted for a period of up to six years from the incurring of the obligations or granting of security under the Agreement.

In addition, the assets of any guarantor may be held by a court to be subject to a charitable trust which prohibits payments in respect of obligations incurred by or for the benefit of others if a guarantor has insufficient assets remaining to carry out its own charitable functions or, under certain circumstances, if the obligations paid by such guarantor were issued for purposes inconsistent with or beyond the scope of the charitable

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purposes for which the guarantor was organized. In the absence of clear legal precedent in this area, the extent to which the assets of any guarantor can be used to pay obligations incurred by others cannot be determined at this time.

Derivative Products

Partners has used interest rate hedging arrangements in connection with certain prior obligations. Such arrangements are used to manage exposure to interest rate volatility, but may expose Partners to additional risks. For example, although minimum credit ratings are required for counterparties, this does not eliminate the risk that a counterparty may fail to honor its obligations.

Swap agreements are subject to periodic “mark-to-market” valuations. A swap agreement may, at any time, have a positive or negative value to Partners. If Partners were to choose to terminate a swap agreement or if a swap agreement were terminated pursuant to an event of default or a termination event as described in the swap agreement, Partners could be required to pay a termination payment to the swap provider, and such payment could adversely affect Partners’ financial condition. See Appendix A, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL PERFORMANCE” under the heading “Derivatives”.

Trading Market for the Series Q Bonds

There can be no assurance that there will be a secondary market for the purchase or sale of the Series Q Bonds. From time to time there may be no market for them depending upon prevailing market conditions, including the financial condition or market position of firms who may constitute the secondary market, the evaluation of Partners’ capabilities and the financial condition and results of operations of Partners.

Risks Related to Outstanding Variable Rate Bonds

Certain outstanding obligations of Partners are variable rate obligations, the interest rates on which could rise. Such interest rates vary on a periodic basis and some obligations may be converted to a fixed interest rate. This protection against rising interest rates is limited, however, because Partners would be required to continue to pay interest at a variable rate until it is permitted to convert the obligations to a fixed rate pursuant to the terms of the applicable transaction documents.

Variable rate indebtedness is often secured by a credit facility or a liquidity facility with a commercial bank whereby such bank agrees to make payments to bondholders in certain events. In consideration for the agreement to make payments on the variable rate bonds, banks often are the beneficiary of covenants in addition to those set forth in the Agreement and in the Guarantees. The additional covenants could restrict the ability of Partners to enter into certain transactions and the violation of such covenants could result in an event of default under the applicable credit agreement or liquidity agreement potentially causing a cross-default with respect to the Series Q Bonds.

As of September 30, 2015, Partners HealthCare had approximately $1.301 million principal amount outstanding of variable rate demand bonds. If these variable rate demand bonds cannot be remarketed following their tender, or converted to another interest rate mode, Partners HealthCare will be required to pay the purchase price of tendered and unremarketed bonds with funds provided under liquidity or credit facilities or its own funds. See Appendix A, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL PERFORMANCE” under the heading “Variable Rate Debt”.

Other Risk Factors

The following additional factors, among others, may adversely affect the operations of health care providers, including Partners HealthCare, to an extent that cannot be determined at this time:

• Technical issues and delays associated with development and implementation of state-of-the-art information technology systems to support critical clinical and financial operations, as well as cyber-attacks aimed at disabling information technology systems;

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• Reduced need for hospitalization or other health care services arising from medical and scientific advances or from decreases in population in the facilities’ respective service areas;

• Employee-related risks, including strikes and other related work actions, contract disputes, discrimination claims, personal tort actions, work-related injuries, exposure to hazardous materials, scarcity of qualified personnel and other risks that may flow from the relationships between employer and employee, including without limitation nurses, or between physicians, patients and employees;

• Costs of pension plans and benefit plans for employees, including the impact of interest rate movements on the requirements for funding for future liabilities;

• Increased unemployment or other adverse economic conditions in the service areas of Partners HealthCare facilities that would increase the proportion of patients who are unable to meet fully their obligations for the cost of their care;

• Increases in cost and limitations in the availability of any insurance, such as fire, terrorism and/or business interruption, automobile and comprehensive general liability, medical professional liability, cyber security liability, and directors’ and officers’ liability, that Partners HealthCare generally carries;

• Bankruptcy of an indemnity/commercial insurer, managed care plan or other payer; and

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

CONTINUING DISCLOSURE

No financial or operating data concerning the Agency is material to any decision to purchase, hold or sell the Series Q Bonds and the Agency will not provide any such information. Partners has undertaken all responsibilities for any continuing disclosure to Bondowners as described below, and the Agency shall have no liability to the Bondowners or any other person with respect to such disclosures.

Partners has covenanted for the benefit of Bondowners to provide certain financial information and operating data relating to Partners by not later than 150 days following the end of Partners’ fiscal year beginning with the fiscal year ending September 30, 2016 (the “Annual Report”), and to provide notices of the occurrence of certain listed events. The Annual Report will be filed on behalf of Partners with the Municipal Securities Rulemaking Board (the “MSRB”) through the MSRB’s Electronic Municipal Market Access (“EMMA”) system. The notices of certain listed events will be filed on behalf of Partners with the MSRB through EMMA. The specific nature of the information to be contained in the Annual Report or the notices of certain listed events is summarized in Appendix E ― “FORM OF CONTINUING DISCLOSURE AGREEMENT.” These covenants have been made in order to assist the Underwriters in complying with Rule 15c2-12 promulgated by the Securities and Exchange Commission. Under the Continuing Disclosure Agreement, Digital Assurance Certification LLC is serving as the dissemination agent.

Partners has expressed its willingness to furnish, or cause to be furnished, to (1) the Agency, (2) EMMA, and (3) any person who has so requested in writing, no later than 60 days subsequent to the last day of each of the first three calendar quarters, and 90 days subsequent to the last day of the fourth calendar quarter, in each fiscal year (i) Partners’ internal, unaudited and consolidated (a) balance sheet as of the end of such quarter and as of the end of the prior fiscal year, and (b) statement of operations and statement of cash flows for the year-to-date period then ended and, in the case of the statement of operations, for the comparable prior year period; and (ii) quarterly utilization statistics of Partners in form and substance similar to that provided in Appendix A attached hereto subject, however, in each case to modification if the form of such information changes. Failure of Partners to provide such information shall not constitute a default under the Agreement or the Continuing Disclosure Agreement.

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TAX EXEMPTION

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Bond Counsel to Partners (“Bond Counsel”) is of the opinion that, under existing law, interest on the Series Q Bonds will not be included in the gross income of holders of the Series Q Bonds for federal income tax purposes. This opinion is expressly conditioned upon continued compliance with certain requirements imposed by the Internal Revenue Code of 1986, as amended (the “Code”), which must be satisfied subsequent to the date of issuance of the Series Q Bonds in order to ensure that interest on the Series Q Bonds is and continues to be excludable from the gross income of holders of the Series Q Bonds. Failure to comply with certain of such requirements could cause interest on the Series Q Bonds to be included in the gross income of holders of the Series Q Bonds retroactive to the date of issuance of the Series Q Bonds. In particular, and without limitation, these requirements include restrictions on the use, expenditure and investment of Series Q Bond proceeds and the payment of rebate, or penalties in lieu of rebate, to the United States, subject to certain exceptions. The Agency and Partners have provided covenants and certificates as to continued compliance with such requirements.

In the opinion of Bond Counsel, under existing law, interest on the Series Q Bonds will not constitute a preference item under Section 57(a)(5) of the Code for purposes of computation of the alternative minimum tax imposed on certain individuals and corporations under Section 55 of the Code. However, interest on the Series Q Bonds will be included in “adjusted current earnings” of corporate holders of the Series Q Bonds and therefore will be taken into account under Section 56(g) of the Code in the computation of the alternative minimum tax applicable to certain corporations. Bond Counsel has not opined as to any other matters of federal tax law relating to the Series Q Bonds. However, prospective purchasers should be aware that certain collateral consequences may result under federal tax law for certain holders of the Series Q Bonds. The nature and extent of these consequences depends on the particular tax status of the holder and the holder’s other items of income or deduction. Holders should consult their own tax advisors with respect to such matters.

Interest paid on tax-exempt obligations such as the Series Q Bonds is generally required to be reported by payors to the IRS and to recipients in the same manner as interest on taxable obligations. In addition, such interest may be subject to “backup withholding” if the Bondholder fails to provide the information required on IRS Form W-9, Request for Taxpayer Identification Number and Certification, or the IRS has specifically identified the Bondholder as being subject to backup withholding because of prior underreporting. Neither the information reporting requirement nor the backup withholding requirement affects the excludability of interest on the Series Q Bonds from gross income for federal tax purposes.

In the opinion of Bond Counsel, under existing law, interest on the Series Q Bonds and any profit made on the sale thereof are exempt from Massachusetts personal income taxes, and the Series Q Bonds are exempt from Massachusetts personal property taxes. Bond Counsel has not opined as to other Massachusetts tax consequences arising with respect to the Series Q Bonds. Prospective purchasers should be aware, however, that the Series Q Bonds are included in the measure of Massachusetts estate and inheritance taxes, and the Series Q Bonds and the interest thereon are included in the measure of Massachusetts corporate excise and franchise taxes. Bond Counsel has not opined as to the taxability of the Series Q Bonds, their transfer and the income therefrom, including any profit made on the sale thereof, under the laws of any state other than Massachusetts.

For federal and Massachusetts income tax purposes, interest includes original issue discount, which with respect to a Series Q Bond is equal to the excess, if any, of the stated redemption price at maturity of such Series Q Bond over the initial offering price thereof to the public, excluding underwriters and other intermediaries, at which price a substantial amount of all such Series Q Bonds with the same maturity was sold. Original issue discount accrues based on a constant yield method over the term of a Series Q Bond. Holders should consult their own tax advisers with respect to the computations of original issue discount during the period in which any such Series Q Bond is held.

An amount equal to the excess, if any, of the purchase price of a Series Q Bond over the principal amount payable at maturity constitutes amortizable bond premium for federal and Massachusetts tax purposes. The required amortization of such premium during the term of a Series Q Bond will result in reduction of the holder’s tax basis on such Series Q Bond. Such amortization also will result in reduction of the amount of the stated interest on the Series Q Bond taken into account as interest for tax purposes. Holders of Series Q Bonds purchased at a premium should consult their own tax advisers with respect to the determination and treatment of such premium for federal income tax purposes and with respect to the state or local tax consequences of owning such Series Q Bonds.

Bond Counsel has not undertaken to advise in the future whether any events after the date of issuance of the Series Q Bonds, including legislation, court decisions, or administrative actions, whether at the federal or state level,

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may affect the tax exempt status of interest on the Series Q Bonds or the tax consequences of ownership of the Series Q Bonds. No assurance can be given that future legislation, if enacted into law, will not contain provisions which could directly or indirectly reduce the benefit of the exclusion of the interest on the Series Q Bonds from gross income for federal income tax purposes or any state tax benefit. Tax reform proposals and deficit reduction measures, including the limitation of federal tax expenditures, are expected to be under ongoing consideration by the United States Congress. These efforts to date have included proposals to reduce the benefit of the interest exclusion from income for certain holders of tax-exempt bonds, including bonds issued prior to the proposed effective date of the applicable legislation. Future proposed changes could affect the market value or marketability of the Series Q Bonds, and, if enacted, could also affect the tax treatment of all or a portion of the interest on the Series Q Bonds for some or all holders. Holders should consult their own tax advisors with respect to any of the foregoing tax consequences.

The proposed form of opinion of Bond Counsel is set forth in Appendix D hereto.

VERIFICATION OF MATHEMATICAL SUFFICENCY

Causey Demgen & Moore P.C. (the “Verification Agent”), a firm of independent certified public accountants, will deliver to the Agency, Partners and the Underwriters on or before the delivery date of the Series Q Bonds, its verification report indicating that it has verified, in accordance with standards established by the American Institute of Certified Public Accountants, the information and assertions provided by Partners and its representatives. Included in the scope of the report will be a verification of the mathematical accuracy of (a) the mathematical computations of the adequacy of the funds and investments in the escrow to pay, when due, the maturing principal of, interest on and any redemption premium of the Series F-5 Bonds and the Series G-5 Bonds being refunded, and (b) the mathematical computations supporting the conclusions of Bond Counsel that the Series Q Bonds are not “arbitrage bonds” under the Code and the regulations promulgated thereunder.

LEGALITY OF THE SERIES Q BONDS FOR INVESTMENT AND DEPOSIT

The Act provides that the Series Q Bonds are securities in which all public officers and public bodies of the Commonwealth and its political subdivisions, all Massachusetts insurance companies, trust companies, savings banks, co-operative banks, banking associations, investment companies, executors, administrators, trustees and other fiduciaries may properly and legally invest funds, including capital in their control or belonging to them. Under the Act, the Series Q Bonds are securities which may properly and legally be deposited with and received by any Commonwealth or municipal officer of any agency or political subdivision of the Commonwealth for any purpose for which the deposit of bonds or obligations of the Commonwealth is now or may hereafter be authorized by law.

DESCRIPTION OF RATINGS

Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services, and Fitch Ratings have assigned the long-term ratings of Aa3(stable), AA-(stable), and AA(stable), respectively, to the Series Q Bonds. Such ratings reflect only the views of such organizations and any desired explanation of the significance of such ratings should be obtained from the rating agency furnishing the same, at the following addresses: Moody’s Investors Service, Inc., Seven World Trade Center, New York, New York 10007, Standard & Poor’s Ratings Services, 55 Water Street, New York, New York 10041 and Fitch Ratings, One State Street Plaza, New York, New York 10004. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agencies, if in the judgment of such rating agencies circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series Q Bonds.

COMMONWEALTH NOT LIABLE ON THE SERIES Q BONDS

The Series Q Bonds are not a general obligation of the Agency and shall not be deemed to constitute a debt or liability of the Commonwealth or any political subdivision thereof, or a pledge of the faith and credit of the Commonwealth or any such political subdivision, but shall be payable solely from and to the extent of the payments made by Partners pursuant to the Agreement and any other funds held under the Agreement for such purpose. Neither the faith and credit of the Agency or the Commonwealth nor the taxing power of the

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Commonwealth or of any political subdivision thereof is pledged to the payment of the principal of or the interest on the Series Q Bonds. The Act does not in any way create a so-called moral obligation of the Commonwealth or of any political subdivision thereof to pay any debt service on the Series Q Bonds in the event of default by Partners. The Agency has no taxing power under the Act.

UNDERWRITING

The Series Q Bonds are being purchased for reoffering by the underwriters listed on the cover page hereof (collectively, the “Underwriters”) pursuant to a Purchase Contract between the Agency and J.P. Morgan Securities LLC, as Representative of the Underwriters. The Series Q Bonds will be purchased by the Underwriters at an aggregate purchase price of $489,369,362.63, reflecting a net original issue premium of $67,635,623.55 and an aggregate Underwriters’ discount of $2,256,260.92. The obligations of the Underwriters are subject to certain terms and conditions contained in the Purchase Contract. The Underwriters will be obligated to purchase all of the Series Q Bonds under the Purchase Contract if any of the Series Q Bonds are so purchased. Partners has agreed to indemnify the Underwriters and the Agency against certain liabilities, including certain liabilities arising under federal and state securities laws.

J.P. Morgan Securities LLC, one of the underwriters of the Series Q Bonds, has entered into negotiated dealer agreements (each, a “JPM Dealer Agreement”) with each of Charles Schwab & Co., Inc. (“CS&Co.”) and LPL Financial LLC (“LPL”) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to each JPM Dealer Agreement, each of CS&Co. and LPL will purchase Series Q Bonds from J.P. Morgan Securities LLC at the original issue price less a negotiated portion of the selling concession applicable to any Series Q Bonds that such firm sells.

Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association (“WFBNA”). WFBNA, one of the Underwriters of the Series Q Bonds, has entered into an agreement (the “WF Distribution Agreement”) with its affiliate, Wells Fargo Advisors, LLC (“WFA”), for the distribution of certain municipal securities offerings, including the Series Q Bonds. Pursuant to the WF Distribution Agreement, WFBNA will share a portion of its underwriting compensation with respect to the Series Q Bonds with WFA. WFBNA also utilizes the distribution capabilities of its affiliate Wells Fargo Securities, LLC (“WFSLLC”), for the distribution of municipal securities offerings, including the Series Q Bonds. In connection with utilizing the distribution capabilities of WFSLLC, WFBNA pays a portion of WFSLLC’s expenses based on its municipal securities transactions. WFBNA, WFSLLC, and WFA are each wholly-owned subsidiaries of Wells Fargo & Company. WFBNA, one of the Underwriters of the Series Q Bonds, is also serving as Trustee for the Series Q Bonds.

TD Securities (USA) LLC, one of the Underwriters of the Series Q Bonds, has entered into a negotiated dealer agreement (the “TD Dealer Agreement”) with TD Ameritrade for the retail distribution of certain securities offerings, including the Series Q Bonds, at the original issue prices. Pursuant to the TD Dealer Agreement, TD Ameritrade may purchase Series Q Bonds from TD Securities (USA) LLC at the original issue prices less a negotiated portion of the selling concession applicable to any of the Series Q Bonds that TD Ameritrade sells.

Jefferies LLC (“Jefferies”), one of the Underwriters of the Series Q Bonds, has entered into an agreement (the “Jefferies Agreement”) with E*TRADE Securities LLC (E*TRADE”) for the retail distribution of municipal securities. Pursuant to the Jefferies Agreement, Jefferies will sell Series Q Bonds to E*TRADE and will share a portion of its selling concession compensation with E*TRADE.

The Underwriters and their respective 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. Certain of the Underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various investment banking services for Partners, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the Underwriters and their respective 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

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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 Partners.

FINANCIAL ADVISOR

Melio & Company, LLC, Northfield, Illinois, has been engaged by Partners to provide various financial advisory services in connection with the Series Q Bonds.

CERTAIN RELATIONSHIPS

One or more of the Underwriters or their affiliates has served, is serving and expects to serve as counterparty to Partners in hedging transactions unrelated to the Series Q Bonds.

LEGAL MATTERS

All legal matters incidental to the authorization and issuance of the Series Q Bonds by the Agency are subject to the approval of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts, Bond Counsel to Partners, whose opinion approving the validity and tax-exempt status of the Series Q Bonds will be delivered with the Series Q Bonds. A copy of the proposed form of the opinion of Bond Counsel is attached hereto as Appendix D. Certain additional legal matters will be passed on for Partners and the Guarantors by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., as their corporate counsel. Certain legal matters will be passed upon for the Agency by its counsel, Locke Lord LLP, Boston, Massachusetts. Certain legal matters will be passed on for the Underwriters by their counsel, Hawkins Delafield & Wood LLP, New York, New York.

LITIGATION

There is no litigation pending against the Agency or, to the knowledge of the officers of the Agency, threatened against the Agency seeking to restrain or enjoin the issuance or delivery of the Series Q Bonds or in any way contesting the existence or the powers of the Agency relating to the issuance of the Series Q Bonds. See Appendix A with respect to any material litigation affecting Partners.

INDEPENDENT ACCOUNTANTS

The consolidated financial statements as of and for the fiscal years ended September 30, 2015 and September 30, 2014 of Partners HealthCare System, Inc. and Affiliates, included in Appendix B to this Official Statement, have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their report appearing in Appendix B to this Official Statement.

MISCELLANEOUS

The references to the Act, the Agreement and the Guarantees are brief summaries of certain provisions thereof. Such summaries do not purport to be complete, and reference is made to the Act, the Agreement and the Guarantees for full and complete statements of such provisions. The agreements of the Agency with the owners of the Series Q Bonds are fully set forth in the Agreement, and neither any advertisement of the Series Q Bonds nor this Official Statement is to be construed as constituting an agreement with the Bondowners. So far as any statements are made in this Official Statement involving matters of opinion, whether or not expressly so stated, they are intended merely as such and not as representations of fact. Copies of the documents mentioned in this paragraph are on file at the offices of the Agency and of the Trustee.

Information relating to DTC and the book entry system described herein under the heading “THE SERIES Q BONDS - Book Entry Only System” has been furnished by DTC and is believed to be reliable.

Attached hereto as Appendix A is a letter from Partners to the Agency that contains certain information relating to Partners and certain of its Affiliates. Included as Appendix B hereto are the audited consolidated financial statements of Partners and its Affiliates and the report of its independent accountants. While the information contained in Appendix A and Appendix B is believed to be reliable, the Agency and the

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Underwriters make no representations or warranties whatsoever with respect to the information contained therein. The Agency and the Underwriters have relied on the information contained in Appendix A and the financial statements contained in Appendix B. The Agency has no responsibility for Appendix A or Appendix B hereto.

Appendix C-l ― “DEFINITIONS OF CERTAIN TERMS,” Appendix C-2 ― “SUMMARY OF THE LOAN AND TRUST AGREEMENT” and Appendix D ― “PROPOSED FORM OF BOND COUNSEL OPINION” have been prepared by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Bond Counsel to Partners.

Appendix E ― “FORM OF CONTINUING DISCLOSURE AGREEMENT” has been prepared by Hawkins Delafield & Wood LLP in its capacity as counsel to the Underwriters.

All appendices are incorporated as an integral part of this Official Statement.

Partners has reviewed the portions of this Official Statement describing Partners, Partners HealthCare, Estimated Sources and Uses of Funds, and Bondowners’ Risks and Matters Affecting the Health Care Industry, and has furnished Appendices A and B to this Official Statement, and has approved all such information for use with this Official Statement. Concurrently with, and as a condition to, the issuance of the Series Q Bonds, Partners will certify that such portions of this Official Statement, except for any projections and opinions contained in such portions, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such statements therein, in the light of the circumstances under which they are made, not misleading.

The Agency has consented to the use of this Official Statement. The Agency is responsible only for the statements contained under the caption “THE AGENCY” and the information pertaining to the Agency under the caption “LITIGATION,” and the Agency makes no representation as to the accuracy, completeness or sufficiency of any other information contained herein. Except as otherwise stated herein, neither the Agency nor the Underwriters makes any representations or warranties whatsoever with respect to the information contained herein.

Partners HealthCare System, Inc.,

Prudential Tower, Suite 1150, 800 Boylston Street, Boston, MA 02199-8001 Tel: 617-278-1000, Fax: 617-278-1049

January 20, 2016

Massachusetts Development Finance Agency 99 High Street Boston, MA 02110 Dear Members of the Agency:

In connection with the sale of $423,990,000 Massachusetts Development Finance Agency Revenue Bonds, Partners HealthCare System Issue, Series Q (2016) (the Series Q Bonds), Partners HealthCare System, Inc. is pleased to submit to the Massachusetts Development Finance Agency (the Agency) the following information with respect to Partners HealthCare System, Inc., The Brigham and Women’s Hospital, Inc., The General Hospital Corporation, the Project (as more fully described herein) and other pertinent information. Unless otherwise indicated, defined terms used in the forepart of this Official Statement have the same meanings herein and references to years are to fiscal years ended September 30. In this Official Statement the corporate entity formally known as Partners HealthCare System, Inc. is referred to as “PHS” and PHS together with all of the affiliates as to which financial information is presented on a consolidated basis herein is referred to as “Partners HealthCare.”

APPENDIX A

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TABLE OF CONTENTS AND GLOSSARY

I. OVERVIEW AND BACKGROUND OF PARTNERS HEALTHCARE .............................1

A. GENERAL ..................................................................................................................1

B. DESCRIPTION OF AFFILIATES ....................................................................................3

C. DANA-FARBER/PARTNERS CANCERCARE JOINT VENTURE .......................................7

II. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL PERFORMANCE ..............................................................................................................8

A. PARTNERS HEALTHCARE CONSOLIDATED FINANCIAL RESULTS ...............................8

B. CRITICAL ACCOUNTING POLICIES AND ESTIMATES.................................................13

C. PATIENT CARE REVENUE TRENDS ..........................................................................13

D. UNCOMPENSATED CARE .........................................................................................14

E. CONSOLIDATED PARTNERS HEALTHCARE FINANCIAL REVIEW ..............................16

F. LIQUIDITY AND CAPITAL RESOURCES .....................................................................21

G. CAPITALIZATION .....................................................................................................22

H. PENSION AND POSTRETIREMENT BENEFITS .............................................................24

I. INVESTMENTS AND INVESTMENT POLICY ................................................................25

J. VARIABLE RATE DEBT ............................................................................................27

K. DERIVATIVES ..........................................................................................................30

L. HISTORIC AND PROJECTED CAPITAL EXPENDITURES ..............................................32

M. FUNDRAISING ..........................................................................................................33

III. STRATEGIC INITIATIVES ...............................................................................................34

IV. ACUTE CARE SECTOR .....................................................................................................38

A. OVERVIEW OF THE ACUTE CARE SECTOR ...............................................................38

B. BRIGHAM AND WOMEN’S HOSPITAL .......................................................................42

C. THE GENERAL HOSPITAL ........................................................................................46

D. COOLEY DICKINSON HOSPITAL ...............................................................................50

E. BRIGHAM AND WOMEN’S FAULKNER HOSPITAL .....................................................51

F. MARTHA’S VINEYARD HOSPITAL ...........................................................................51

G. NANTUCKET COTTAGE HOSPITAL ...........................................................................51

H. NEWTON-WELLESLEY HOSPITAL ............................................................................51

I. NORTH SHORE MEDICAL CENTER ...........................................................................52

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V. REHABILITATION AND PSYCHIATRIC CARE SECTOR ..........................................52

A. REHABILITATION AND SUB-ACUTE SERVICES .........................................................53

B. SKILLED NURSING SERVICES ...................................................................................53

C. HOME CARE SERVICES ............................................................................................54

D. PSYCHIATRY AND MENTAL HEALTH SERVICES .......................................................54

VI. RESEARCH ACTIVITIES ..................................................................................................55

VII. COMPETITIVE ENVIRONMENT ...................................................................................58

VIII. EDUCATIONAL AFFILIATIONS AND PROGRAMS ................................................61

IX. NEIGHBORHOOD HEALTH PLAN .................................................................................62

X. COMMUNITY BENEFITS ...................................................................................................64

XI. GOVERNANCE AND MANAGEMENT ...........................................................................65

XII. EMPLOYEES ......................................................................................................................71

XIII. FACILITIES .......................................................................................................................72

A. PARTNERS HEALTHCARE SYSTEM, INC. ..................................................................72

B. BRIGHAM AND WOMEN’S HOSPITAL .......................................................................72

C. THE GENERAL HOSPITAL ........................................................................................72

D. OTHER PARTNERS HEALTHCARE AFFILIATES .........................................................73

XIV. THE PROJECT ..................................................................................................................73

XV. INSURANCE ........................................................................................................................73

XVI. LITIGATION AND REGULATORY MATTERS .........................................................74

XVII. SOURCES OF PATIENT SERVICE REVENUE .........................................................75

A. OVERVIEW ..............................................................................................................75

B. MEDICARE .............................................................................................................76

C. MEDICAID ..............................................................................................................82

D. HEALTH SAFETY NET TRUST FUND .......................................................................85

E. COMMERCIAL INSURANCE (INCLUDING MANAGED CARE PLANS) .........................85

F. ACCRUALS FOR ESTIMATED AMOUNTS DUE TO THIRD PARTY PAYERS .................87

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The glossary below includes certain terms that are used frequently throughout this Appendix A. A ACA Patient Protection and Affordable Care Act, as amended by the Health

Care and Education Reconciliation Act ACC ambulatory care center ACGME Accreditation Council for Graduate Medical Education ACO accountable care organization AGO Massachusetts Office of the Attorney General B BBF Brigham Building for the Future Blue Cross Blue Cross Blue Shield of Massachusetts C CMS Centers for Medicare & Medicaid Services CommCare Commonwealth Care CRICO Controlled Risk Insurance Company, LTD D DOI Massachusetts Division of Insurance DOJ Department of Justice DPH Massachusetts Department of Public Health DRG diagnosis related group E EHR electronic health record EOHHS Executive Office of Health and Human Services F FFY federal fiscal year FTE full-time equivalent employees H HMO health maintenance organization HPHC Harvard Pilgrim Health Care HSN Health Safety Net Trust Fund I iCMP Integrated Care Management Program IPPS inpatient prospective payment system L LTAC long term acute care

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M MassHealth Massachusetts Medicaid program MCOs managed care organizations MMCO Medicaid managed care organization MPFS Medicare Physician Fee Schedule MS-DRGs Medicare-Severity DRGs N NIH National Institutes of Health O OPPS outpatient PPS P Partners eCare Partners HealthCare’s electronic health and administrative information

system PCMH Patient Centered Medical Home PCP primary care physician PDR premium deficiency reserve PHM Population Health Management PPS prospective payment system S SNF skilled nursing facility T TAHP Tufts Associated Health Plans

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I. OVERVIEW AND BACKGROUND OF PARTNERS HEALTHCARE

A. General

Partners HealthCare is one of the largest charitable diversified health care services organizations in the United States. PHS was established in 1994 by an affiliation between The Brigham Medical Center, Inc., now known as Brigham and Women’s Health Care, Inc., and The Massachusetts General Hospital, in order to create an integrated health care delivery system. Partners HealthCare currently operates two tertiary and seven community acute care hospitals that comprise the largest acute health care system in Eastern Massachusetts, one hospital providing inpatient and outpatient mental health services and three hospitals providing inpatient and outpatient services in rehabilitation medicine. The tertiary hospitals are Brigham and Women’s Hospital and The General Hospital Corporation, commonly known as Massachusetts General Hospital. The community acute care hospitals are Cooley Dickinson Hospital, Faulkner Hospital, Newton-Wellesley Hospital, Salem Hospital, Union Hospital, Martha’s Vineyard Hospital and Nantucket Cottage Hospital. McLean Hospital provides inpatient and outpatient mental health services, while Spaulding Rehabilitation Hospital, Spaulding Hospital-Cambridge and Rehabilitation Hospital of the Cape and Islands provide inpatient and outpatient services in rehabilitation medicine. Shaughnessy-Kaplan Rehabilitation Hospital ceased patient care operations on September 30, 2015. Partners Continuing Care oversees the management, delivery and integration of non-acute services in the Partners HealthCare system. Partners HealthCare provides patient access, training and advisory services to public and private organizations abroad through Partners HealthCare International and Partners Medical International.

Partners HealthCare has the largest non-university-based non-profit private medical

research enterprise in the United States and is a principal teaching affiliate of the medical and dental schools of Harvard University. Partners HealthCare also operates a physician network of approximately 6,465 primary care physicians and specialists. Partners HealthCare also operates Neighborhood Health Plan, a licensed, non-profit managed care organization that provides health insurance products to the Medicaid, Massachusetts Health Connector and commercial populations. With approximately 46,348 full-time equivalent employees (FTEs), Partners HealthCare is one of the largest private employers in The Commonwealth of Massachusetts (the Commonwealth).

PHS, as the parent corporation of Partners HealthCare, provides a number of services for

its affiliates, including clinical affairs, community benefits, finance, human resources, information systems, internal audit, investments, legal, marketing, materials management, real estate, research administration and treasury. The Finance Committee of the PHS Board of Directors serves all of Partners HealthCare’s constituents and oversees a centralized operating and capital budget and business planning process. Partners HealthCare’s cash and investments are managed centrally under policies developed by the Investment Committee of the PHS Board of Directors and reviewed by the Finance Committee. PHS also coordinates the research and medical education programs of its affiliates.

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The following table sets forth the organization of PHS and its principal affiliates.

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B. Description of Affiliates

The following is a description of the principal organizations that comprise Partners HealthCare. All of the organizations described below are charitable membership corporations established under the laws of Massachusetts, except for FRC, Inc. which is a Massachusetts stock corporation and Partners HealthCare International, LLC which is a Massachusetts limited liability company. Except as noted below, all of these organizations are exempt from federal income tax as organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code). Neighborhood Health Plan, Incorporated is a tax-exempt organization under Section 501(c)(4) of the Code. Newton-Wellesley Physician Hospital Organization, Inc. is a taxable entity and Partners HealthCare International, LLC is a single member limited liability company that is disregarded for income tax purposes. Partners Community Physicians Organization, Inc. applied for and was granted tax-exempt organization status under Section 501(c)(3) of the Code effective October 1, 2015.

BWHC and its Affiliates

Brigham and Women’s Health Care, Inc. (BWHC) is the sole member of The Brigham and Women’s Hospital, Inc., Brigham and Women’s Faulkner Hospital, Inc. and Brigham and Women’s Physicians Organization, Inc. BWHC was formed to coordinate health care, research and education and performs fundraising, media relations and technology transfer services for Brigham and Women’s Hospital and Brigham and Women’s Faulkner Hospital.

The Brigham and Women’s Hospital, Inc. (BWH) operates a tertiary acute care hospital

licensed for 793 beds in the Longwood Medical Area of Boston. Over the last 29 years, BWH has been either the largest or second largest non-university recipient of research funding from the National Institutes of Health (NIH). It is a principal teaching affiliate of the medical and dental schools of Harvard University. See “Acute Care Sector” in this Appendix A for a further description of the services, operations and financial performance of BWH.

Brigham and Women’s Faulkner Hospital, Inc. (BWFH) operates an acute care

community hospital licensed for 162 beds in the Jamaica Plain area of Boston, approximately three miles from the BWH campus. It offers medical/surgical and psychiatric services and serves as an important teaching site for residents in internal medicine and surgery programs sponsored by BWH. It also serves as a training site for students of Tufts University School of Medicine (TUSM).

Brigham and Women’s Physicians Organization, Inc. (BWPO) employs approximately

1,640 physicians. Most of these physicians are full-time staff physicians at BWH and BWFH who provide health care services to patients, supervise other professional and technical personnel of BWH and BWFH and teach medical students and residents at BWH and BWFH. The BWPO also contracts with managed care organizations on behalf of its employed physicians and other members of the BWH and BWFH medical staffs who elect to become BWPO participating clinicians.

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MGH and its Affiliates

The Massachusetts General Hospital (MGH) is the sole member of The General Hospital Corporation, Massachusetts General Physicians Organization, Inc., McLean HealthCare, Inc., Cooley Dickinson Health Care Corporation, Martha’s Vineyard Hospital, Inc., Nantucket Cottage Hospital and The MGH Institute of Health Professions, Inc. The principal activity of MGH is charitable fundraising.

The General Hospital Corporation (The General or The General Hospital) operates a

tertiary acute care hospital licensed for 1,046 beds in downtown Boston. Over the last 29 years, The General has been either the largest or second largest non-university recipient of research funding from the NIH. It is a principal teaching affiliate of the medical and dental schools of Harvard University. See “Acute Care Sector” in this Appendix A for a further description of the services, operations, and financial performance of The General Hospital.

Massachusetts General Physicians Organization, Inc. (MGPO) employs approximately

2,420 physicians, most of whom are full-time staff physicians at The General Hospital. MGPO personnel provide health care services to patients, supervise other professional and technical personnel of The General Hospital and other affiliated institutions, and teach medical students and residents at The General Hospital. The MGPO also contracts with managed care organizations on behalf of its employed physicians and other members of The General Hospital medical staff who elect to become MGPO participating clinicians.

McLean HealthCare, Inc. (McLean HealthCare) is the sole member of The McLean

Hospital Corporation. The principal activity of McLean HealthCare is charitable fundraising on behalf of McLean Hospital.

The McLean Hospital Corporation (McLean) operates a tertiary psychiatric referral and

research hospital licensed for 324 beds in Belmont, a suburb of Boston. McLean, also a teaching affiliate of the Harvard Medical School, provides a continuum of inpatient, acute and long term residential, partial hospitalization and treatment-specific outpatient services to children, adolescents, adults and geriatric patients.

Cooley Dickinson Health Care Corporation (Cooley Dickinson Health Care) is the sole

member of Cooley Dickinson Hospital, Inc. The principal activity of Cooley Dickinson Health Care is to coordinate the health care and fundraising activities of Cooley Dickinson Hospital.

Cooley Dickinson Hospital, Inc. (Cooley) operates an acute care community hospital

licensed for 140 beds located in Northampton, Massachusetts, approximately 100 miles west of Boston. It offers medical/surgical, adult intensive care/critical care, obstetric, pediatric, psychiatric, and rehabilitative services at its main campus and diagnostic imaging and rehabilitation services in surrounding communities.

The MGH Institute of Health Professions, Inc. (The Institute) is authorized to offer

doctorate, master’s, bachelor’s degrees and/or certificate programs in communication sciences disorders, nursing, occupational therapy, physical therapy, physician assistant studies, rehabilitation sciences and health professions education.

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Martha’s Vineyard Hospital, Inc. (MVH) operates an acute care community hospital

licensed for 25 beds on Martha’s Vineyard, an island approximately 75 miles south of Boston. It offers inpatient and outpatient medical/surgical, orthopedic, pediatric, geriatric, gynecological, obstetrics, emergency and rehabilitation services. MVH is the sole member of Windemere Nursing & Rehabilitation Center, a skilled nursing facility (SNF) licensed for 106 beds, also on Martha’s Vineyard.

Nantucket Cottage Hospital (NCH) operates an acute care community hospital licensed

for 19 beds on Nantucket, an island approximately 100 miles south of Boston. It offers medical/surgical, obstetrics, emergency and rehabilitation services.

NSMC HealthCare and its Affiliates

NSMC HealthCare, Inc. (NSMC HealthCare) is the sole member of North Shore Medical Center, Inc. and North Shore Physicians Group, Inc. The principal activity of NSMC HealthCare is to coordinate the health care, education and fundraising activities of its two affiliated organizations.

North Shore Medical Center, Inc. (NSMC) operates two acute care community hospitals:

Salem Hospital (Salem), located in Salem approximately 20 miles north of Boston, is licensed for 268 beds; and Union Hospital (Union), located in Lynn approximately 15 miles north of Boston, is licensed for 126 beds. NSMC offers medical/surgical, cardiac, obstetrics, pediatric and psychiatric services (cardiac surgery and pediatrics offered in collaboration with The General); operates its own three-year residency program in internal medicine; serves as a training site for The General’s surgical and pediatric residency programs; and is a teaching affiliate of TUSM.

North Shore Physicians Group, Inc. (NSPG) operates a primary care and multispecialty

medical group practice that employs approximately 400 physicians at several locations north of Boston. NSPG professional staff provide medical, surgical and other health care services to patients, including but not limited to, the inpatients and outpatients of NSMC.

NWHCS and its Affiliates

Newton-Wellesley Health Care System, Inc. (NWHCS) is the sole member of Newton-Wellesley Hospital and Newton-Wellesley Physician Hospital Organization, Inc. The principal activity of NWHCS is to coordinate the health care, research, education and fundraising activities of Newton-Wellesley Hospital.

Newton-Wellesley Hospital (NWH) operates an acute care community hospital licensed

for 270 beds in Newton, approximately 10 miles west of Boston. It offers medical/surgical, obstetrics, pediatric and psychiatric services, is a teaching affiliate of TUSM, and serves as a site for medical residents of The General.

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Newton-Wellesley Physician Hospital Organization, Inc. (NWPHO) represents a cooperative effort between NWH and its affiliated physicians for contracting with managed care entities for the delivery of health care services and medical management of patients under risk based arrangements. NWPHO has participation agreements with approximately 530 physicians.

Partners Community Physicians Organization, Inc.

Partners Community Physicians Organization, Inc. (PCPO), formerly named Partners Community HealthCare, Inc., has developed a management services organization that has the infrastructure and expertise needed to manage the clinical integration and managed care strategy of the Partners HealthCare network (the Network). As of December 1, 2015, the Network consisted of all of the Partners HealthCare acute care hospitals (except for Cooley, which currently conducts its own payer contracting), two acute care community hospitals affiliated with the Network through physician hospital organizations and approximately 6,465 physicians, including approximately 1,135 community and academically-based PCPs, approximately 1,450 community-based specialists and approximately 3,880 tertiary specialists.

Partners Continuing Care and its Affiliates

Partners Continuing Care, Inc. (PCC) oversees the management, delivery and integration of non-acute and long term acute care services of Partners HealthCare. PCC is the sole member of Partners Home Care, Inc., The Spaulding Rehabilitation Hospital Corporation, Spaulding Hospital-Cambridge, Inc., Rehabilitation Hospital of the Cape and Islands Corporation and Shaughnessy-Kaplan Rehabilitation Hospital, and it is the sole stockholder of FRC, Inc.

Partners Home Care, Inc., d/b/a Partners HealthCare at Home (PHH) is a home care

agency with regional branch offices in Beverly, Waltham and Braintree. PHH employs approximately 850 staff members and is one of the largest home health care providers in New England. PHH also includes a private service business line.

The Spaulding Rehabilitation Hospital Corporation, d/b/a Spaulding Rehabilitation

Hospital Boston (Spaulding Boston), operates an inpatient rehabilitation facility licensed for 132 beds in Charlestown that serves primarily as a referral hospital for community and tertiary acute care hospitals in the greater Boston area. It is also a teaching affiliate of the Harvard Medical School. Spaulding Boston is one of the largest specialty rehabilitation hospitals in the United States. Spaulding Boston operates ten outpatient rehabilitation sites in the Boston metropolitan area.

Spaulding Hospital-Cambridge, Inc., d/b/a Spaulding Hospital for Continuing Medical Care Cambridge (Spaulding Cambridge), operates a long term acute care (LTAC) hospital licensed for 180 beds located in Cambridge. Spaulding Cambridge provides post acute hospital care including complex medical, pulmonary and oncology care, cardiac care with telemetry, ventilator weaning, neurological rehabilitation and post-organ transplant care.

Rehabilitation Hospital of the Cape and Islands Corporation, d/b/a Spaulding

Rehabilitation Hospital Cape Cod (Spaulding Cape Cod), operates an inpatient rehabilitation facility licensed for 60 beds that is located in the Cape Cod town of East Sandwich. It

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predominantly treats orthopedic, neurology and amputee patients. Spaulding Cape Cod also operates four adult outpatient sites and a pediatric outpatient site. Spaulding Cape Cod primarily serves patients from Cape Cod and Plymouth County.

Shaughnessy-Kaplan Rehabilitation Hospital, Inc., ceased providing inpatient and

outpatient care services as of September 30, 2015. Shaughnessy-Kaplan’s current activities are limited to leasing certain patient care personnel to Spaulding Boston.

FRC, Inc. (FRC) holds the licenses for a 140-bed SNF located in Boston’s North End,

operating under the name Spaulding Nursing and Therapy Center North End (Spaulding North End), and an 81-bed SNF located in West Roxbury, operating under the name Spaulding Nursing and Therapy Center West Roxbury (Spaulding West Roxbury).

Neighborhood Health Plan, Incorporated

Neighborhood Health Plan, Incorporated (NHP) is a non-profit managed care organization founded in 1986 and licensed by the Massachusetts Division of Insurance that provides health insurance products to the Massachusetts Medicaid program (MassHealth), and other subsidized and commercial populations. As of September 30, 2015, NHP had 407,357 insured lives.

International Activities

Partners HealthCare International, LLC (PHI), established in 2006, provides patients living outside of the United States access to medical care at Partners HealthCare hospitals, as well as educational and advisory services to public and private organizations abroad.

Partners Medical International, Inc. (PMI) joined Partners HealthCare in 2008 pursuant

to an agreement between Harvard University and PHS. Through PMI, Partners HealthCare has been able to expand its mission to increase access to health care around the world.

C. Dana-Farber/Partners CancerCare Joint Venture

Dana-Farber/Partners CancerCare (DF/PCC) is a joint venture in adult oncology of Dana Farber Cancer Institute, Inc. (DFCI), PHS, BWH and The General. Under the joint venture, DFCI’s licensed adult inpatient beds operate at BWH, and DFCI provides adult oncology outpatient services to its patients and those of BWH. The General Hospital continues to provide both inpatient and outpatient oncology care. Basic research continues to be conducted separately.

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II. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RECENT FINANCIAL PERFORMANCE

A. Partners HealthCare Consolidated Financial Results

Appendix B to this Official Statement sets forth the audited consolidated financial statements of Partners HealthCare for the two years ended September 30, 2014 and 2015, together with the report of PricewaterhouseCoopers LLP, independent accountants.

Summary of Revenues and Expenses

The following summary of the Statements of Operations for the three years ended September 30, 2013, 2014 and 2015 and Balance Sheets as of September 30, 2013, 2014 and 2015 was derived from the consolidated financial statements of Partners HealthCare. Consolidated balance sheets as of September 30, 2014 and 2015 and the related consolidated statements of operations, changes in net assets and cash flows for the years then ended and notes thereto appear at Appendix B to this Official Statement, “Consolidated Financial Statements of Partners HealthCare System, Inc. and Affiliates for the Years Ended September 30, 2015 and 2014.”

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Partners HealthCare System, Inc. and Affiliates Consolidated Statements of Operations

(in thousands)

Years Ended September 30,

2013 2014 2015 Operating revenue

Net patient service revenue, net of provision for bad debts $ 6,769,743 $ 7,042,558 $ 7,317,918 Premium revenue 1,349,525 1,622,392 2,034,420 Direct academic and research revenue 1,242,819 1,225,782 1,316,283 Indirect academic and research revenue 351,630 352,911 354,942 Other revenue 632,322 662,410 642,082

Total operating revenue 10,346,039 10,906,053 11,665,645

Operating expenses

Employee compensation and benefit expenses 5,224,242 5,428,352 5,655,073 Supplies and other expenses 2,108,313 2,226,663 2,325,085 Medical claims and related expenses 1,061,630 1,463,972 1,652,538 Direct academic and research expenses 1,242,819 1,225,782 1,316,283 Depreciation and amortization expenses 434,725 463,039 493,505 Interest expense 116,671 119,849 116,703

Total operating expenses 10,188,400 10,927,657 11,559,187

Income (loss) from operations 157,639 (21,604) 106,458 Nonoperating gains (expenses)

Income (loss) from investments 146,631 227,357 (37,258) Change in fair value of interest rate swaps 48,522 (109,275) (110,315) Gifts and other, net of fundraising and other expenses (56,194) (67,242) (39,468) Academic and research gifts, net of expenses 49,206 90,609 (11,406) Contribution income - affiliates 254,205 - -

Total nonoperating gains (expenses), net 442,370 141,449 (198,447)

Excess (deficit) of revenues over expenses 600,009 119,845 (91,989)

Other changes in net assets

Change in net unrealized appreciation on marketable investments 74,522 (3,309) (224,616) Change in fair value of hedging interest rate swaps 117,813 45,624 - Funds utilized for property and equipment 57,224 39,058 38,288 Change in funded status of defined benefit plans 835,651 (387,698) (639,167) Other (11,590) 5,173 1,387

Increase (decrease) in unrestricted net assets $ 1,673,629 $ (181,307) $ (916,097)

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Partners HealthCare System, Inc. and Affiliates Consolidated Balance Sheets

(in thousands)

September 30, 2013 2014 2015

ASSETS

Current assets Cash and equivalents $ 471,322 $ 457,244 $ 621,568 Investments 1,439,299 1,474,058 1,354,636 Collateral held under securities lending arrangements 229,400 - - Current portion of investments limited as to use 1,813,490 2,120,057 1,590,203 Patient accounts receivable, net 813,384 876,214 878,033 Research grants receivable 109,708 115,786 121,775 Other current assets 326,751 381,517 447,188 Receivable for settlements with third-party payers 68,854 39,082 60,374

Total current assets 5,272,208 5,463,958 5,073,777 Investments limited as to use, less current portion 2,771,216 2,927,360 2,832,744 Long term investments 957,100 1,026,538 1,061,176

Pledges receivable, net and contributions receivable from trusts, less current portion

165,095 197,975 209,064

Property and equipment, net 4,235,839 4,615,908 5,328,782 Other assets 499,442 499,353 564,898

Total assets $ 13,900,900 $ 14,731,092 $ 15,070,441 LIABILITIES AND NET ASSETS

Current liabilities Current portion of long term obligations $ 361,249 $ 238,204 $ 398,990 Accounts payable and accrued expenses 690,946 645,999 646,355 Accrued medical claims and related expenses 121,833 254,480 232,268 Accrued compensation and benefits 623,352 677,957 710,929 Collateral due under securities lending arrangements 229,400 - - Current portion of accrual for settlements with third-party payers 36,052 55,918 53,066 Unexpended funds on research grants 160,668 183,222 202,137

Total current liabilities 2,223,500 2,055,780 2,243,745 Other liabilities Accrual for settlements with third-party payers, less current portion 87,787 58,899 34,725 Accrued professional liability 443,688 455,463 482,640 Accrued employee benefits 648,128 1,066,840 1,705,287 Interest rate swaps liability 232,005 295,656 404,062 Accrued other 158,468 157,029 153,146 Long term obligations, less current portion 3,097,280 3,697,938 3,994,034

Total liabilities 6,890,856 7,787,605 9,017,639 Net assets

Unrestricted 5,805,066 5,623,759 4,707,662 Temporarily restricted 792,769 855,954 765,562 Permanently restricted 412,209 463,774 579,578

Total net assets 7,010,044 6,943,487 6,052,802

Total liabilities and net assets $ 13,900,900 $ 14,731,092 $ 15,070,441

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The following tables set forth selected inpatient and outpatient utilization data for the Acute Care Sector and the Rehabilitation and Psychiatric Care Sector for each of the three years ended September 30, 2015.

ACUTE CARE SECTOR(1)


2013 2014 2015 Inpatient:

Discharges 153,018 154,375 158,157 % Change -0.4% 0.9% 2.4%

Discharge Days(2) 804,307 820,204 824,802 % Change 3.2% 2.0% 0.6%

Average Length of Stay (Days) 5.26 5.31 5.22 % Change 3.5% 1.0% -1.7%

Patient Days 751,518 768,978 774,271 % Change 2.8% 2.3% 0.7%

Births 17,402 17,559 16,932 % Change 1.2% 0.9% -3.6%

Outpatient:

Observations(3) 37,056 39,695 35,543 % Change 16.3% 7.1% -10.5% Day Surgery(4) 64,769 67,009 66,667 % Change 1.6% 3.5% -0.5% Routine Visits(5) 1,174,508 1,177,672 1,215,926 % Change 0.6% 0.3% 3.2% Emergency Room Visits 342,503 358,558 367,560 % Change 3.3% 4.7% 2.5% Significant Procedures(6) 103,241 112,597 112,267 % Change -1.9% 9.1% -0.3% Major Imaging(7) 279,057 301,566 301,279 % Change 2.5% 8.1% -0.1% Minor Imaging(8) 1,108,843 1,235,943 1,256,918 % Change 4.5% 11.5% 1.7% Treatments(9) 541,898 553,572 566,827 % Change 4.7% 2.2% 2.4% Minor Procedures(10) 590,115 680,506 625,574 % Change 0.2% 15.3% -8.1% Therapies(11) 622,569 736,095 794,676 % Change 0.5% 18.2% 8.0% Psychiatric Services(12) 252,569 261,880 240,370 % Change 2.6% 3.7% -8.2% Laboratory Services 9,955,313 10,431,461 10,296,428 % Change -1.7% 4.8% -1.3%

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(1) Includes data from BWH, BWFH, The General, NWH, NSMC, NCH, MVH and Cooley (includes Cooley statistics for 7/1/13 -9/30/13 restated and 2014 and 2015).

(2) The total number of days each discharged patient occupied a bed during the duration of their hospital stay. (3) Patients admitted under observation status and generally discharged within 24 hours. (4) Surgical procedures performed on an outpatient basis. (5) Includes office/outpatient services, office consults, confirmatory consults, preventive medicine and prolonged visit-clinic outpatient. (6) Includes pacemaker/defibrillators/electrophysiology, ablations, coronary stents, angioplasty, peripheral vascular studies, percutaneous

valvuloplasty, atherectomy, cardiac catheterizations, endovascular repair of abdominal aortic aneurysm and gastrointestinal endoscopy procedures.

(7) Includes magnetic resonance imaging, computerized tomography scan, nuclear medicine and positron emission tomography scan. (8) Includes radiology diagnostic, ultrasound and mammography. (9) Includes chemotherapy, radiation therapy, non chemotherapy infusions, dialysis and electroconvulsive therapy. (10) Includes procedures performed in physician offices and hospital clinics, such as lesion removal, in-vitro fertilization, pain management

injections, insertion of venous catheters, photopheresis and castings. (11)

Includes respiratory therapy, physical therapy, occupational therapy, speech-language pathology, cardiac rehabilitation and nutrition. (12) Includes rehabilitation, partial hospitalizations, individual therapy, group therapy, family therapy, residential days, night care and other

therapies.

REHABILITATION AND PSYCHIATRIC CARE SECTOR

REHABILITATION(1) Years Ended September 30,

2013 2014 2015 Inpatient:

Discharges 6,782 6,635 5,995 % Change -4.3% -2.2% -9.6% Discharge Days(2) 153,175 147,620 138,680 % Change -0.5% -3.6% -6.1% Average Length of Stay (Days) 22.59 22.25 23.13 % Change 4.0% -1.5% 4.0% Patient Days 152,902 146,469 130,637 % Change -3.5% -4.2% -10.8%

Outpatient:

Routine Visits(3) 31,649 31,397 36,371 % Change -10.9% -0.8% 15.8%

Home Health(4) 875,533 913,405 940,259 % Change 0.8% 4.3% 2.9%

Therapies(5) 288,772 324,712 333,958 % Change 3.6% 12.4% 2.8%

PSYCHIATRIC Inpatient:

Discharges 5,969 5,763 5,764 % Change -1.3% -3.5% 0.0%

Discharge Days(2) 57,125 57,624 60,205 % Change -1.0% 0.9% 4.5%

Average Length of Stay (Days) 9.57 10.00 10.45 % Change 0.3% 4.5% 4.5%

Patient Days 56,916 58,769 59,988 % Change -1.9% 3.3% 2.1%

Outpatient:

Psychiatric Visits 119,014 121,181 122,430 % Change 6.3% 1.8% 1.0%

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(1) Rehabilitation sector includes Spaulding Boston, Spaulding Cambridge, Spaulding North Shore, Spaulding Cape Cod and PHH. (2) The total number of days each discharged patient occupied a bed during the duration of their hospital stay. (3) Includes office/outpatient services, office consults, confirmatory consults and preventive medicine. (4) Nurse visits, aide visits, physical therapy, occupational therapy, speech-language pathology, registered dietician, medical social work and

private duty converted hours. (5) Includes respiratory therapy, physical therapy, occupational therapy and speech language pathology.

B. Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management considers critical accounting policies to be those that require significant judgments and estimates to be made when preparing the financial statements. See Appendix B to this Official Statement, “Consolidated Financial Statements of Partners HealthCare System, Inc. and Affiliates for the Years Ended September 30, 2015 and 2014.”

C. Patient Care Revenue Trends

Partners HealthCare’s patient service revenue depends upon the volume and types of services rendered by Partners HealthCare physicians, the volume of inpatient and outpatient procedures and services and ancillary services and therapy programs ordered by physicians and provided to patients, the complexity and severity of the inpatient and outpatient services rendered (case mix), the mix of payment sources (payer mix) and the charges and negotiated payment rates for such services.

Partners HealthCare receives a significant portion of its revenues from government

health programs, principally Medicare and Medicaid, which are highly regulated and are subject to statutory and regulatory changes from time to time, some of which can be substantial, and from commercial health plans, the payment terms for which are periodically renegotiated. Future legislation and regulatory changes or interpretations affecting the government health programs, as well as renegotiated payment terms under contracts with managed care organizations, could have adverse effects on reimbursement. See “Sources of Patient Service Revenue” in this Appendix A, and “Bondowners’ Risks and Matters Affecting the Health Care Industry” in the forepart of this Official Statement.

The following table sets forth the distribution of gross patient service revenue of Partners

HealthCare by payer source for each of the three years ended September 30, 2015. This table should be read in conjunction with the consolidated financial statements and related notes included in Appendix B to this Official Statement.

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(1) Excludes: Cooley (2013), MVH, NCH and PCPO (2013 and 2014). (2) Includes Harvard Pilgrim Health Care, Tufts Associated Health Plans, national carriers & other commercial payers. (3) Includes other government, self pay and charity care.

D. Uncompensated Care

Partners HealthCare provides emergency and other care to patients regardless of their ability to pay. The cost of providing that care is reflected in the statements of operations. Services provided to charity care patients, for which acute care hospitals receive reimbursement through the statewide Health Safety Net Trust Fund (HSN), and to patients covered under the Medicare and Medicaid programs generate costs for which Partners HealthCare is not fully reimbursed. See “Sources of Patient Service Revenue” in this Appendix A for a more detailed description of each of these programs.

For charity care, Medicaid and Medicare, the total estimated cost of services provided by Partners HealthCare exceeded the net reimbursement received under these programs by $1,085.9 million, $1,148.2 million and $1,229.8 million in 2013, 2014, and 2015, respectively. The estimated cost of services provided is either obtained directly from a costing system or is based on an entity specific ratio of cost to gross charges. In the latter case, cost is derived by applying this ratio to gross charges associated with providing care to charity care, Medicaid and Medicare patients. The following summarizes, by program, the cost of services provided, net reimbursement, cost of services in excess of net reimbursement and net reimbursement as a percentage of cost of services, for each year:

Years Ended September 30,(1)

2013 2014 2015

Medicare (including Managed Care) 36.4% 36.9% 37.4% Medicaid (including Managed Care) 10.4% 11.4% 12.8% Blue Cross 22.4% 22.0% 21.5% Other Commercial(2) 24.6% 24.1% 23.1% All Other(3) 6.2% 5.6% 5.2%

Total 100.0% 100.0% 100.0%

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(in thousands) 2013 2014 2015 Cost of Services Provided

Charity Care, including assessment payments to HSN of $56,028, $60,372 and $56,176 in 2013, 2014 and 2015, respectively $ 163,326 $ 140,641 $ 136,276 Medicaid 755,114 886,706 1,008,882 Medicare 2,477,719 2,634,533 2,824,890

$ 3,396,159 $ 3,661,880 $ 3,970,048

Net Reimbursement Charity Care $ 45,069 $ 29,808 $ 40,906 Medicaid 441,939 542,078 625,761 Medicare 1,823,213 1,941,794 2,073,591 $ 2,310,221 $ 2,513,680 $ 2,740,258

Cost of Services in Excess of Reimbursement Charity Care $ 118,257 $ 110,833 $ 95,370 Medicaid 313,175 344,628 383,121 Medicare 654,506 692,739 751,299 $ 1,085,938 $ 1,148,200 $ 1,229,790

Net Reimbursement as a percentage of Costs of Services Provided Charity Care(1) 54% 47% 68% Medicaid 59% 61% 62% Medicare 74% 74% 73%

(1) Net reimbursement for charity care reflects acute care hospitals only.

In addition to charity care and inadequate funding from the Medicaid and Medicare programs, Partners HealthCare experiences significant losses resulting from self-pay patients who fail to make payment for services rendered and from insured patients who fail to remit co-payments and deductibles as required under the applicable health insurance arrangement. The provision for bad debts represents charges for services provided by Partners HealthCare that are deemed to be uncollectible and was approximately $102.4 million, $129.5 million and $129.1 million in 2013, 2014 and 2015, respectively. The estimated cost of providing these services was approximately $38.2 million, $48.7 million and $48.3 million in 2013, 2014 and 2015, respectively.

In addition to these shortfalls in relation to the costs of services provided by Partners HealthCare providers, Medicaid premium revenue paid to NHP for the care of Medicaid patients enrolled in NHP does not cover the medical expense and administrative costs of care for these enrollees. In aggregate, the premium revenue paid to NHP by Medicaid, excluding the impact of premium deficiency reserves (PDR), was $4.3 million, or 0.5%, less than the cost of care in 2013, $108.7 million or 8.6%, less than the cost of care in 2014 and $72.5 million, or 4.6%, less than the cost of care in 2015.

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E. Consolidated Partners HealthCare Financial Review

For internal financial analysis and reporting Partners HealthCare groups its affiliates into an Insurance Segment, consisting of NHP, and a Provider Segment, consisting of the following sectors:

• Acute Care Sector – BWH, The General, Cooley, BWFH, MVH, NCH, NSMC and NWH;

• Rehabilitation and Psychiatric Care Sector – Rehabilitation: Spaulding Boston, Spaulding Cambridge, Spaulding Cape Cod, Spaulding North Shore, Spaulding North End, Spaulding West Roxbury, PHH and PCC; Psychiatric: McLean;

• Network Sector – BWPO, MGPO, NSPG, PCPO and other physician groups that do not have a material amount of assets or revenues; and

• Corporate and Other Sector - BWHC, The Institute, MGH, McLean HealthCare, PHS, NSMC HealthCare, NWHCS and other affiliates that do not have a material amount of assets or revenues.

The following table sets forth the approximate contribution to income (loss) from operations for 2013, 2014 and 2015 for the Provider and Insurance Segments:

Years Ended September 30, (in millions) 2013 2014 2015

Provider Segment

BWH $ 139.4 $ 151.6 $ 63.8

The General 148.3 186.8 211.3

Community Hospitals (6.7) (1.3) (8.2)

Total Acute Care Sector 281.0 337.1 266.9

Rehabilitation and Psychiatric Care Sector (10.8) (22.3) (33.1)

Network Sector 20.5 11.2 0.3

Corporate and Other Sector (151.8) (145.9) (111.6)

Total Provider Segment 138.9 180.1 122.5

Insurance Segment 18.7 (201.7) (16.0)

Total $ 157.6 $ (21.6) $ 106.5

Results of Operations – 2014 – 2015

Partners HealthCare Consolidated

Partners HealthCare reported operating income of $106.5 million (0.9% operating margin) on total operating revenue of $11,665.6 million in 2015. Excluding the impacts of weather ($34.0 million), the implementation of Partners eCare, an integrated, electronic health and administrative information system ($75.0 million), and the net reduction in medical claims expense ($59.0 million) due to amortization of a PDR that was established for 2015 and a new PDR established for 2016 (see Insurance Segment below), operating income was $156.5 million (1.3% operating margin). In 2014, Partners HealthCare reported an operating loss of $21.6

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million (-0.2% operating margin). Excluding the $91.6 million PDR charge recorded in 2014 for anticipated losses in 2015, Partners HealthCare’s operating income was $70.0 million in 2014 (0.6% operating margin).

In 2015, total operating revenue increased $759.6 million (7.0%) to $11,665.6 million

due primarily to increases in premium revenue of $412.0 million (25.4%) to $2,034.4 million and net patient service revenue of $275.4 million (3.9%) to $7,317.9 million. Total operating expenses increased $631.5 million (5.8%) to $11,559.2 million, due to increases in compensation and benefits expense of $226.7 million (4.2%) to $5,655.1 million, medical claims expenses of $188.6 million (12.9%) to $1,652.5 million, supplies and other expenses of $98.4 million (4.4%) to $2,325.1 million and depreciation and amortization of $30.5 million (6.6%) to $493.5 million.

During 2015, Partners HealthCare absorbed $1,229.8 million in Medicare, Medicaid and

HSN shortfalls due to government reimbursements that failed to pay the full cost of providing care to Medicare, low-income, and uninsured patients, an increase of 7.1% over the shortfall absorbed in 2014. Government payers represented approximately 50% and 35% of Partners HealthCare gross and net patient service revenues in 2015, respectively.

In 2015, Partners HealthCare reported an overall loss of $92.0 million, including non-

operating expenses of $198.5 million. Non-operating activity includes gains and losses on investments and interest rate swaps, which can vary significantly from year to year, and philanthropy. Non-operating activity in 2015 included a dividend paid by CRICO of $54.8 million (see “Insurance” in this Appendix A). In 2014, Partners HealthCare reported an overall gain of $119.8 million, including non-operating income of $141.4 million.

Provider Segment Provider activity generated operating income of $122.4 million on $9,906.7 million in

revenue (1.2% operating margin) in 2015. Excluding the impacts of weather ($34.0 million in 2015) and the implementation of Partners eCare ($75.0 million in 2015), provider activity generated operating income of $231.4 million (2.3% operating margin) in 2015. In 2014, provider activity generated operating income of $180.1 million on $9,526.6 million in revenue (1.9% operating margin).

Net patient service revenue for provider activity increased $308.4 million (4.2%) to

$7,593.5 million in 2015. Increases in patient volume contributed to the growth in net patient service revenue, but was partially offset by adverse shifts in payer mix (to government payers from commercial payers) and service mix. In addition, the severe winter weather and implementation of Partners eCare reduced net patient service revenue. Adjustments to prior year estimates resulted in increases to net patient service revenue of $22.4 million and $14.6 million in 2015 and 2014, respectively. See “Sources of Patient Service Revenue” in this Appendix A.

Direct and indirect research and academic revenue increased $92.5 million (5.9%) to

$1,671.2 million in 2015 due to growth in government-sponsored research activity; however, the effective overhead recovery rate decreased from 31.5% in 2014 to 29.2%. Other operating revenue, excluding patient care and research revenue, decreased $20.9 million (-3.2%) to $642.0 million.

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Operating expenses attributable to provider activity increased $437.7 million (4.7%) to $9,784.3 million in 2015. Costs associated with the implementation of Partners eCare ($46.6 million) and higher pension expense ($48.3 million, 17.7%) contributed to an increase in employee compensation and benefits of $224.2 million (4.2%) to $5,595.0 million. Supplies and other expenses increased $95.8 million (4.4%) to $2,264.8 million, reflecting increased costs for specialty pharmaceuticals and medical devices (collectively, $66.6 million, 8.8%), partially offset by reductions in certain other expenses. Depreciation and interest increased $27.3 million (4.7%) to $608.1 million.

Insurance Segment

Premium revenue grew $412.0 million (25.3%) to $2,037.8 million in 2015, driven by a

23.3% increase in membership. NHP had 407,357 and 330,322 members as of September 30, 2015 and 2014, respectively.

In connection with the adoption of national health reform, NHP experienced a significant

increase in MassHealth adult members during 2014. In addition, the Medicaid eligibility re-determination process, which the Commonwealth initiated in early 2015 and is expected to complete in early 2016, contributed to volatility among NHP’s membership in 2015. The new MassHealth members have generated substantially higher medical claims than Commonwealth actuaries had projected and on which rates were set, resulting in significant operating losses for NHP. Based on rates set by the Commonwealth for its 2015 contract year which commenced on October 1, 2014 and in accordance with accounting requirements, Partners HealthCare recorded a $91.6 million charge in 2014 to establish a PDR for anticipated losses related to NHP’s Commonwealth contracts. Those reserves were amortized over the course of fiscal 2015, resulting in a reduction to NHP’s medical claims expense. Fiscal year 2015 also includes a charge of $31.7 million to establish a PDR for anticipated losses in fiscal year 2016.

Medical claims expense increased $219.1 million (12.8%) to $1,928.6 million in 2015.

Excluding the impact of establishing and amortizing the PDRs, NHP’s medical claims expense increased $369.7 million (22.9%) to $1,987.6 million. NHP’s medical loss ratio (the percentage of insurance premiums that are used to pay medical claims) was 97.5% in 2015 and 99.8% in 2014 (excluding the impact of establishing and amortizing the PDRs).

In 2015, general and administrative costs increased $5.2 million (4.3%) to $125.7 million

from $120.5 million in 2014. The administrative expense ratio (the percentage of insurance premiums that are used to pay general and administrative expenses) declined to 6.1% in 2015 from 7.1% in 2014, as aggressive cost management contributed to NHP’s improved operating performance in 2015.

In 2015, before the effects of intercompany eliminations, insurance activity generated an

operating loss of $15.9 million on $2,038.4 million in revenue (-0.8% operating margin). In 2014, before the effects of intercompany eliminations, insurance activity generated an operating loss of $201.7 million on $1,628.4 million in revenue (-12.4% operating margin). Excluding the impact of establishing and amortizing the PDRs, insurance activity generated operating losses of $74.9 million (-3.7% operating margin) in 2015 and $110.1 million (-6.8% operating margin) in 2014.

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Pursuant to a guaranty (the RBC Guaranty) entered into by PHS when it acquired NHP, PHS has committed to maintain NHP’s capital and surplus at a specified minimum level, measured quarterly in accordance with a Risk Based Capital (RBC) methodology permitted by the Massachusetts Division of Insurance (DOI). RBC is a methodology adopted by the National Association of Insurance Commissioners for determining the minimum level of capital and surplus deemed necessary for an insurer based upon the types of assets held and business written. The RBC Guaranty may be enforced by the DOI. Due to incurred and anticipated losses under NHP’s MassHealth contract, PHS transferred $117.1 million and $86.0 million to NHP in 2015 and 2014, respectively, pursuant to the RBC Guaranty. In addition, PHS transferred $40.3 million to NHP in November 2015 to maintain compliance with the RBC Guaranty.

Results of Operations – 2013 – 2014 Partners HealthCare Consolidated Partners HealthCare reported an operating loss of $21.6 million (-0.2% operating margin)

on total operating revenue of $10,906.1 million in 2014. Excluding the $91.6 million PDR charge, Partners HealthCare’s operating income was $70.0 million in 2014 (0.6% operating margin). In 2013, Partners HealthCare reported income from operations of $157.6 million (1.5% operating margin) on total operating revenue of $10,346.0 million.

In 2014, total operating revenue increased $560.0 million (5.4%) to $10,906.1 million,

including $147.2 million generated by Cooley; however, total operating expenses increased $739.3 million (7.3%) to $10,927.7 million, driven by higher medical claims expenses ($402.3 million) and the inclusion of Cooley for the full year in 2014 ($152.0 million).

During 2014, Partners HealthCare absorbed $1,148.2 million in Medicare, Medicaid and HSN shortfalls due to government reimbursements that failed to pay the full cost of providing care to Medicare, low-income and uninsured patients, an increase of 6% over the shortfall absorbed in 2013. Government payers represented approximately 48% and 33% of Partners HealthCare gross and net patient service revenues in 2014, respectively.

In 2014, Partners HealthCare reported an overall gain of $119.8 million, including non-operating income of $141.4 million. In 2013, Partners HealthCare reported an overall gain of $600.0 million, including non-operating income of $442.4 million, of which $254.2 million reflects the net impact of adding NHP and Cooley to the Partners HealthCare system. Accounting rules require the fair value of acquired net assets to be recognized as non-operating gains.

Provider Segment Provider activity generated operating income of $180.1 million on $9,526.6 million in

revenue (1.9% operating margin) in 2014. In 2013, Provider activity generated operating income of $138.9 million on $9,165.4 million in revenue (1.5% operating margin). Excluding the impact of deferred revenue relating to federal Medicare policy ($79.0 million), operating income was $217.9 million (2.4% operating margin) in 2013.

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On a same facility basis (excluding $146.0 million for Cooley) and before the effect of eliminations from insurance activity, net patient service revenue increased $200.4 million (2.9%) to $7,091.9 million as high inpatient acuity at the academic medical centers was partially offset by a continued payer mix shift to public payers. Adjustments to prior year estimates resulted in an increase to net patient service revenue of $14.6 million in 2014 and a decrease to net patient service revenue $17.5 million in 2013. The $17.5 million decrease to net patient service revenue in 2013 includes $79.0 million recorded as deferred revenue relating to federal Medicare policy, which requires CMS to recoup a portion of payments paid to hospitals in 2010 through 2012. See “Sources of Patient Service Revenue” in this Appendix A.

Direct and indirect research and academic revenue was essentially flat in 2014 at

$1,578.7 million, but the effective overhead recovery rate increased from 30.4% in 2013 to 31.5%. Other operating revenue, excluding patient care and research revenue, increased $27.5 million (4.4%) to $648.1 million.

Same facility operating expenses attributable to provider activity (excluding $152.0

million for Cooley) increased $168.1 million (1.9%) to $9,144.2 million in 2014. Expense increases were held to 1.9% while Partners HealthCare continued to invest in population health management programs and despite increased costs for specialty pharmaceuticals, blood products and medical devices. Excluding Cooley, employee compensation and benefits increased $104.4 million (2.0%) to $5,247.0 million and supplies and other expenses increased $62.0 million (3.0%) to $2,106.1 million.

Insurance Segment

In 2014, before the effect of intercompany eliminations, insurance activity generated an

operating loss of $201.7 million on $1,628.4 million in revenue (-12.4% operating margin). The loss of $201.7 million includes a charge of $91.6 million to establish a PDR for anticipated losses in 2015 related to NHP’s Commonwealth contracts. Excluding the impact of the PDR charge, the operating loss was $110.1 million (-6.8% operating margin). In 2013, insurance activity generated operating income of $18.7 million on $1,351.4 million in revenue (1.4% operating margin).

The 2014 operating loss at NHP was driven by unfavorable trends that developed during

2014, including: • An influx of 71,699 MassHealth adult members to NHP who generated substantially

higher medical claims than were reflected in the projections that the Commonwealth actuaries used to establish contract rates. This drove an increase of approximately $387.4 million (excluding the PDR charge) in NHP’s medical costs in 2014, driving up the medical loss ratio (the percentage of insurance premiums that are used to pay medical claims) on its MassHealth population to 105% from 91% in 2013. The medical loss ratio for the new MassHealth members was approximately 120% in 2014.

• Approximately $20.0 million in costs for a break-through drug that the FDA approved in December 2013 for treating Hepatitis C patients. The Commonwealth did not adjust its 2014 rates for Medicaid managed care organizations, including NHP, for this

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new drug even though this specialty drug was being reimbursed by the Commonwealth under the Medicaid fee for service program.

• Lost revenue of approximately $11 million resulting from the Commonwealth’s delay in effectively implementing an insurance exchange pursuant to the Patient Protection and Affordable Care Act (as amended by the Health Care and Education Reconciliation Act, the ACA).

Premium revenue grew $274.5 million (20.3%) to $1,625.8 million in 2014, driven by a

24.9% increase in membership. NHP had 330,322 and 264,462 members as of September 30, 2014 and 2013, respectively.

Medical claims expense increased $479.0 million (38.9%) to $1,709.5 million in 2014,

including the $91.6 million PDR charge recorded in accordance with accounting requirements. Excluding the impact of the PDR charge, medical claims expense would have been $1,617.9 million in 2014 compared to $1,230.5 million in 2013. In 2014, general and administrative costs increased $18.4 million (18.0%) to $120.5 million due to costs associated with the ACA and the increase in membership.

Due to losses incurred under NHP’s MassHealth and Commonwealth Care (CommCare) contracts, PHS transferred $86.0 million to NHP in 2014 pursuant to the RBC Guaranty.

F. Liquidity and Capital Resources

The following table sets forth Partners HealthCare’s total unrestricted cash, unrestricted days cash on hand, patient accounts receivable, days revenue in receivables, amounts accrued for settlements with third-party payers (less amounts receivable for settlements) and long term investments as of September 30, 2013, 2014 and 2015.

As of September 30,

(in thousands) 2013 2014 2015 Unrestricted cash(1) $ 6,896,943 $ 7,416,963 $ 6,711,586 Unrestricted days cash on hand(2) 258 days 259 days 221 days Patient accounts receivable $ 813,384 $ 876,214 $ 878,033 Days revenue in receivables(3) 44 days 45 days 44 days Amounts accrued for settlements with third-party

payers, less amounts receivable $ 54,985 $ 75,735 $ 27,417 Long term investments(4) $ 957,100 $ 1,026,538 $ 1,061,176

(1) Comprised of cash and equivalents, investments and investments limited as to use, unrecorded net unrealized appreciation on cost method investments, less externally limited funds.

(2) Unrestricted cash divided by total operating expenses, net of depreciation and amortization, and multiplied by number of days in year. (3) Net patient accounts receivable divided by net patient service revenue and multiplied by number of days in year. (4) Long term investments are restricted to donor specified use.

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G. Capitalization

As of September 30, 2015, Partners HealthCare’s balance sheet included total indebtedness of $4,393.0 million, unrestricted net assets of $4,707.7 million and consolidated net assets of $6,052.8 million. The following table sets forth the capitalization of Partners HealthCare (i) as of September 30, 2015, and (ii) adjusted to reflect the issuance of the Series Q Bonds. The discussion immediately following the table also reflects the effect of the issuance of the Series Q Bonds. Bonds issued by the Massachusetts Development Finance Agency are referred to as “Agency” bonds and bonds issued by the Massachusetts Health and Educational Facilities Authority are referred to as “Authority” bonds. Effective as of October 1, 2010 the Authority was merged into the Agency. This table should be read in conjunction with (a) the audited Consolidated Financial Statements of Partners HealthCare in Appendix B to this Official Statement; (b) the Consolidated Statements of Operations for Partners HealthCare in this Appendix A; (c) “Management’s Discussion and Analysis of Recent Financial Performance;” and (d) the forepart of this Official Statement.

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(1) Bond amounts reflect unamortized discount and premium. (2) Debt-to-Capitalization = Total Indebtedness / (Unrestricted Net Assets + Total Indebtedness).

Outstanding Long term Indebtedness (in thousands) (including Current Portion) As of September 30, 2015 Actual(1) Pro Forma PHS Authority Series D Bonds, variable rate, final maturity in 2017 $ 1,940 $ 1,940 Authority Series F Bonds, fixed and variable rate, final maturity in 2040 246,209 243,028 Authority Series G Bonds, fixed and variable rate, final maturity in 2047 319,614 311,896 Authority Series H Bonds, variable rate, final maturity in 2042 171,170 171,170 Authority Series I Bonds, fixed and variable rate, final maturity in 2044 168,686 168,686 Authority Series J Bonds, average interest rate of 5.00%, final maturity in 2039 442,110 442,110 Agency Series K Bonds, fixed and variable rate, final maturity in 2046 342,219 263,317 Agency Series L Bonds, average interest rate of 4.94%, final maturity in 2041 340,347 340,347 Agency Series M Bonds, fixed and variable rate, final maturity in 2048 507,533 507,533 Agency Series N Bonds, variable rate, final maturity in 2044 139,400 139,400 Agency Series O Bonds fixed and variable rate, final maturity in 2050 356,517 356,517 Authority, Capital Asset Program, Series P Loans, variable rate, final maturity in 2027 150,000 150,000 Agency Series Q Bonds, average interest rate of 4.79%, Final maturity in 2047 - 491,626 PHS Series 2007 Taxable Bonds, fixed rate of 6.26%, final maturity in 2037 100,000 100,000 PHS Series 2011 Taxable Bonds, fixed rate of 3.44%, final maturity in 2021 250,000 250,000 PHS 2012 Taxable Senior Notes, fixed rate of 4.11%, final maturity in 2052 400,000 400,000 PHS 2014 Taxable Senior Notes, fixed rate of 4.73%, final maturity in 2044 150,000 150,000 PHS Series 2015 Taxable Bonds, fixed rate of 4.12%, final maturity in 2055 300,000 300,000 Total PHS Debt $ 4,385,745 $ 4,787,569 Other Capital lease obligations $ 1,187 $ 1,187 Other obligations 6,092 6,092 Total Other 7,279 7,279 Total Indebtedness $ 4,393,024 $ 4,794,848 Consolidated Net Assets Unrestricted $ 4,707,662 $ 4,707,662 Temporarily Restricted 765,562 765,562 Permanently Restricted 579,578 579,578 Total Net Assets $ 6,052,802 $ 6,052,802 Total Capitalization $ 9,100,686 $ 9,502,510 Total Indebtedness $ 4,393,024 $ 4,794,848

Debt-to-Capitalization(2) 48.3% 50.5%

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The Series D through Series O Bonds, the PHS 2007, 2011 and 2015 Taxable Bonds, and the PHS 2012 and 2014 Taxable Senior Notes are, and the Series Q Bonds will be, unsecured general obligations of PHS. The Series P Loans to PHS are unsecured general obligations of PHS.

BWHC, BWH, MGH and The General (the Guarantors) have issued joint and several guarantees that support the obligations of (i) PHS on the Series P Loans that PHS has received and certain related obligations; and (ii) PHS pursuant to the PHS Series D through Series O Bonds, the PHS 2007, 2011 and 2015 Taxable Bonds, and the PHS 2012 and 2014 Taxable Senior Notes, and a $150 million credit agreement. The Guarantors will issue joint and several guarantees that support the obligations of PHS pursuant to the Series Q Bonds.

The guarantees of BWHC, BWH, MGH and The General are unsecured general obligations of each institution. Subject to certain documentation requirements and consents, these guarantees may be suspended under certain financial conditions that were met in 2002. Neither PHS nor any of the Guarantors, however, has any present intention of exercising such right of suspension.

H. Pension and Postretirement Benefits

For the years ended September 30, 2013, 2014 and 2015, total expense for Partners HealthCare’s defined benefit pension, defined contribution and post-retirement healthcare benefit plans (the Plans) consisted of the following:


(in thousands) 2013 2014 2015

Defined benefit plans $ 275,096 $ 181,748 $ 233,670

Defined contribution plans 139,973 144,747 150,745

Postretirement healthcare benefit plans 9,683 7,029 4,368

$ 424,752 $ 333,524 $ 388,783

For 2016, management estimates that defined benefit pension expense will be approximately $281.6 million.

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The funded status of the Plans as of September 30, 2013, 2014 and 2015 is as follows:

Postretirement (in thousands) Defined Benefit Pension Plans Healthcare Benefit Plans

End of Year 2013 2014 2015 2013 2014 2015 Fair value of plan assets

at measurement date $ 3,925,818 $ 4,365,566 $ 4,332,095 $ 56,761 $ 68,438 $ 73,205Benefit obligations at measurement date (4,260,555) (5,102,117) (5,678,875) (138,329) (136,502) (156,875)

Funded status $ (334,737) $ (736,551) $ (1,346,780) $ (81,568) $ (68,064) $ (83,670)

Changes in the funded status were driven by changes in the discount rate used to value the pension liability, updates to the actuarial mortality tables and investment performance. In addition, Partners HealthCare used $450.0 million of taxable bond and taxable senior note proceeds to make voluntary contributions to its defined benefit pension plans ($250 million in 2012 and $200 million in 2013). At September 30, 2013, 2014 and 2015, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets were as follows:

I. Investments and Investment Policy

Cash and investments of Partners HealthCare are managed centrally by the PHS investment office under policies developed by the Investment Committee and reviewed by the Finance Committee of the PHS Board. Whenever possible, funds are commingled and are assigned to one of three investment pools (the Money Market Pool, the Aggregate Bond Pool and the Long Term Pool, and collectively, the Pools) which have been structured to provide a range of investment objectives, risk profiles and rates of return appropriate for Partners HealthCare assets. Funds are allocated among the Pools based on expected liquidity needs of the investing organization as determined by multi-year financial plans, restrictions and management judgment. The Pools are organized as a general partnership among all participating entities (the Partnership) and operate much like mutual funds. The Money Market Pool is managed internally. Its assets are invested across a number of approved AAA rated government or prime money market funds which can be purchased or redeemed to meet daily operational cash flows. The Aggregate Bond and Long Term Pools are managed by professional investment management firms selected by the Investment Committee consistent with approved policies. The former Short Term and Intermediate Term Pools were merged into the Aggregate Bond Pool in 2014. The Investment Committee establishes benchmarks for each Pool and from time to time

Accumulated Benefit Obligation In Excess of Plan Assets(1)

(in thousands) 2013 2014 2015

Projected benefit obligation $3,042,196 $5,102,117 $5,678,875

Accumulated benefit obligation 2,943,202 4,806,399 5,371,220

Fair value of plan assets 2,791,146 4,365,566 4,332,095

(1) Excludes an overfunded plan in 2013.

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adjusts the composition of these benchmarks to reflect changes in economic/systemic risk as well as changes in the expected risks and return of various asset classes. Pool and manager performance and related analytics are reviewed on a monthly basis and compared to appropriate benchmarks.

Investments and investments limited as to use are reported at either fair value or on the equity or cost methods of accounting. Additional information concerning investment valuation is set forth in the Consolidated Financial Statements of Partners HealthCare in Appendix B to this Official Statement.

The following table sets forth the composition of these investments, segregated between pooled investments and those that are separately invested as of September 30, 2015:

September 30, 2015

(in thousands) At Fair Value On Equity Method

On Cost Method

Total

Pooled investments

Invested cash equivalents $ 34,049 $ - $ - $ 34,049 Separately managed investments 1,834,357 - - 1,834,357 Mutual funds 365,035 - - 365,035 Commingled funds 1,157,965 - - 1,157,965 Private partnerships - 744,139 1,991,206 2,735,345

3,391,406 744,139 1,991,206 6,126,751 Separately invested

Invested cash equivalents $ 135,640 $ - $ 16 $ 135,656 Equities 6,247 - 46,237 52,484 U.S. Government and domestic fixed income securities 32,330 - - 32,330 Mutual funds 397,539 - - 397,539 Other 17,416 - 76,583 93,999

589,172 - 122,836 712,008 $ 3,980,578 $ 744,139 $ 2,114,042 $ 6,838,759

The Partnership invests in private partnerships whose assets include equity, fixed income and other investments. At September 30, 2015, approximately $3,246 million, or 43%, of Partners HealthCare’s total investments were invested in private partnerships, 72% of which were comprised of 20 hedge funds employing diverse investment strategies, 23% of which were comprised of 165 private equity/debt limited partnerships, and 5% of which were comprised of two other partnerships that invest primarily in long only equity strategies. Hedge funds generally invest in marketable securities and utilize short sales and/or derivatives and varying amounts of leverage to generate returns and/or reduce risk to achieve their desired investment objective. The use of leverage in the portfolio is monitored regularly and capped to preclude non-cash net market exposure from exceeding the aggregate capital allocation of the Pool. As of September 30, 2015, the largest single partnership investment represented less than 5.0% of total Partnership investments.

The tiered time horizon structure of the Pools is designed to meet anticipated and

contingent liquidity needs. The following table sets forth the periods within which funds (including $863.1 million of unrecorded net unrealized appreciation on cost method investments) are available to meet liquidity needs and the investment Pools from which such funds would be drawn as of September 30, 2015:

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As of September 30, 2015, the market value of the Money Market Pool was $528.5

million, all of which was comprised of same day available funds. As of September 30, 2015, the market value of the Aggregate Bond Pool was $1,406.2 million, of which $536.6 million was comprised of same day available funds, which include cash and U.S. Treasuries. Of the remaining $869.7 million, $285.7 million was comprised of separately managed mortgage and asset-backed securities and corporate bonds, while $584.0 million was invested with various fixed income managers, of which $345.2 million could be liquidated within one week.

As of September 30, 2015, the Partnership had unfunded commitments to various general

partners for private equity/debt and hedge fund partnerships in the Long Term Pool of approximately $657.0 million. The draw down period for these commitments is expected to be over the next several years and the maximum annual drawdown is expected to be less than 2% of investments and investments limited as to use.

In 2014, Partners HealthCare ceased participating in securities lending activities.

J. Variable Rate Debt

The following table sets forth Partners HealthCare’s fixed and variable rate long term debt balances, interest rate swaps, average interest rates and the impact of a 1.0% change in interest rates as of September 30, 2013, 2014 and 2015 and pro forma to reflect the issuance of the Series Q Bonds:

(in thousands) Funds Available

Investment Pool

Same Day 1 Week 1 Month 3 Months 1 Year >1 Year Total

Money Market

$528,515 - - - - - $528,515

Aggregate Bond

536,550 630,882 - 155,339 17,657 65,790 1,406,217

Long Term

71,544 1,428,519 984,522 879,152 688,883 1,490,991 5,543,611

Total $1,136,609 $2,059,401 $984,522 $1,034,491 $706,540 $1,556,780 $7,478,344

Cumulative Total

$1,136,609 $3,196,010 $4,180,533 $5,215,024 $5,921,564 $7,478,344

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As of September 30,

(in thousands) 2013 2014 2015 Pro Forma

Underlying long term debt:

Fixed rate(1) $ 2,292,961 $ 2,661,794 $ 3,084,510 $ 3,486,334 Variable rate 1,178,540 1,265,665 1,301,235 1,301,235 Total long term debt $ 3,471,501 $ 3,927,459 $ 4,385,745 $ 4,787,569

Interest rate swaps(2):

Variable-to-fixed rate $ 813,000 $ 801,200 $ 838,600 $ 838,600

Long term debt inclusive of swaps: Fixed rate(1) 3,105,961 3,462,994 3,923,110 4,324,934 Variable rate 365,540 464,465 462,635 462,635 Total long term debt $ 3,471,501 $ 3,927,459 $ 4,385,745 $ 4,787,569

Average interest rate inclusive of swaps:

Fixed rate(1)(3) 4.47% 4.51% 4.47% 4.50% Variable rate(4) 0.25% 0.24% 0.35% 0.35% Total debt 4.03% 4.00% 4.03% 4.10%

Impact of 1.0% change in rates on variable rate debt

+/- 1%(5) $ 3,655 $ 4,645 $ 4,626 $ 4,626

(1) Fixed rate includes $118.2 million Term Rate bonds for 2013, 2014 and 2015; Pro Forma includes $43.3 million Term Rate Bonds. (2) Excludes $150 million in forward starting swaps effective April 1, 2016 through July 1, 2017. (3) Fixed rate reflects average coupon. (4) Variable rate reflects average interest rate for 2013, 2014 and 2015. (5) The impact of a 1.0% change in rate on swapped variable rate debt is assumed to be offset by an equivalent change on the swap

receipts.

The following table sets forth the balances of Partners HealthCare’s variable rate debt and bonds subject to mandatory tender as of September 30, 2015 by underlying mode and indicates whether the bonds are enhanced by third party credit or liquidity support. The VRDB mode refers to variable rate demand bonds whose interest rates reset either daily or weekly. Interest rates on ARS reset weekly. Interest rates on flexible rate bonds reset on the day they mature. Interest rates on index floating rate bonds reset weekly at a spread to the SIFMA Index. Interest rates on term rate bonds are fixed through respective mandatory tender dates.

(in thousands) Enhanced Unenhanced Total

VRDB - Daily $50,000 $1,940 $51,940

VRDB - Weekly 439,400 - 439,400

ARS - 7 day 225,000 - 225,000

Flexible Rate - 171,320 171,320

Index Floating Rate(1) - 372,225 372,225

Term Rate(2) - 118,195 118,195

Total $714,400 $663,680 $1,378,080

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(1) Index Floating Rate bonds are subject to mandatory tender on June 29, 2017 ($80,000), January 30, 2018 ($144,175), January 29, 2020 ($50,000) and August 2, 2021 ($98,050). Partners HealthCare also has $41,350 Index Floating Rate bonds that are not subject to mandatory tender prior to maturity.

(2) Term Rate bonds are subject to mandatory tender on January 14, 2016 ($74,855) and January 18, 2018 ($43,340).

As of September 30, 2015, $663.7 million unenhanced variable rate bonds are supported

by Partners HealthCare’s liquidity, of which $248.1 million can be put to Partners HealthCare within one year. The following table sets forth the amount subject to payment within various periods as of September 30, 2015. Daily VRDBs are subject to payment the same day they are tendered. Weekly VRDBs are subject to payment seven days after notice of tender; however, a notice of failed remarketing is subject to payment the same day it is received. Flexible rate bonds are subject to payment on the day they mature. Partners HealthCare limits daily maturities on its flexible rate bonds to $20 million. Index floating rate and term rate bonds are subject to payment on their respective mandatory tender dates. Partners HealthCare intends to refinance the $74.9 million Term Rate bonds that are subject to mandatory tender on January 14, 2016 with proceeds of the Series Q Bonds. The Money Market Pool and portions of the Aggregate Bond Pool are the primary sources of funds in the event of a failed remarketing of unenhanced variable rate bonds. See “Investments and Investment Policy” in this Appendix A.

As of September 30, 2015, $489.4 million of VRDBs were supported by standby bond purchase agreements (SBPAs) or letters of credit (LOCs). The following table sets forth the bonds supported by SBPAs and LOCs, the liquidity or credit provider and the year of expiration as of September 30, 2015.

Bond Series Par Amount

(in thousands) Credit

Support Liquidity Provider

Calendar Year of

Expiration

Series 1997 P1 $75,000

SBPA JPMorgan Chase Bank, N.A. 2016

Series 2005 F3 89,400

LOC TD Bank, N.A. 2016

Series 1997 P2 75,000

SBPA JPMorgan Chase Bank, N.A. 2017

Series 2009 I2 50,000

SBPA U.S. Bank, N.A. 2017

Series 2011 K1 50,000

SBPA Wells Fargo Bank, N.A. 2017

Series 2011 K2 50,000

SBPA Barclays Bank PLC 2017

Series 2014 M1 50,000

LOC U.S. Bank, N.A. 2019

Series 2014 M2 50,000

LOC Bank of New York Mellon 2019

Total $489,400

Funds Required (in thousands) as of September 30, 2015

Debt Mode Same Day 1 Week 1 Month 3 Months 1 Year >1 Year Total

Daily VRDBs $1,940 - - - - - $1,940

Weekly VRDBs - - - - - - -

Flexible Rate - 31,540 12,500 39,790 87,490 - 171,320

Index Floating Rate - - - - 372,225 372,225

Term Rate - - - - 74,855 43,340 118,195

Total $1,940 $31,540 $12,500 $39,790 $162,345 $415,565 $663,680

Cumulative Total $1,940 $33,480 $45,980 $85,770 $248,115 $663,680

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Partners HealthCare maintains a $150 million Credit Agreement (the Credit Agreement) that provides access to same day funds. Advances under the Credit Agreement bear a variable rate of interest based on the London Interbank Offered Rate (LIBOR). There were no amounts outstanding under the Credit Agreement as of September 30, 2015. The Credit Agreement expires in June 2017.

K. Derivatives

Partners HealthCare utilizes swap contracts to manage fluctuations in cash flows resulting from interest rate risk on certain of its variable rate bonds. These bonds expose Partners HealthCare to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of its interest payments. To meet this objective and to take advantage of low interest rates, Partners HealthCare entered into various swap contracts involving the exchange of fixed rate payments by Partners HealthCare for variable rate payments from several counterparties based on a percentage of LIBOR.

By using swap contracts to manage the risk of changes in interest rates, Partners HealthCare exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the swap contracts. When the fair value of a swap contract is positive, the counterparty has a liability to Partners HealthCare, which creates credit risk. Partners HealthCare minimizes its credit risk by entering into swap contracts with several counterparties and requiring the counterparty to post collateral for the benefit of Partners HealthCare based on the credit rating of the counterparty and the fair value of the swap contract. When the fair value of a swap contract is negative, Partners HealthCare has a liability to the counterparty and, therefore, it does not possess credit risk, but under certain circumstances Partners HealthCare may be required to post collateral for the benefit of the counterparty. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate changes is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The following is a summary of the outstanding positions under these swap contracts as of September 30, 2015:

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(1) 1M refers to 1-month LIBOR, 6M refers to 6-month LIBOR.

As of September 30, 2014, Partners HealthCare elected to stop applying hedge accounting treatment for its swap contracts; accordingly, changes in the fair value of interest rate swaps are recognized as nonoperating gains (expenses). As a result of this election and in accordance with accounting guidance for derivative instruments, losses of $81.6 million which were previously recognized as a change in unrestricted net assets were reclassified to nonoperating gains (expenses) in the consolidated statement of operations.

The fair value of swap contracts is recorded in the interest rate swap liability on the balance sheet. Partners HealthCare’s swap contracts contain provisions that require collateral to be posted if the fair value of the swap exceeds certain thresholds. The collateral thresholds reflect the current credit ratings issued by major credit rating agencies on Partners HealthCare’s and the counterparty’s debt. Declines in Partners HealthCare’s or the counterparty’s credit ratings would result in lower collateral thresholds and, consequently, the potential for additional collateral postings by Partners HealthCare or the counterparty. As of September 30, 2014 and 2015, the aggregate derivative liabilities were $295.7 million and $404.1 million, respectively, for which Partners HealthCare had posted collateral of $58.9 million and $128.2 million, respectively. Partners HealthCare has established procedures to ensure that liquidity is available to meet collateral posting requirements.

Upon the occurrence of certain events of default or termination events identified in the

swap contracts, either Partners HealthCare or the counterparty could terminate the contracts in accordance with their terms. Termination results in the payment of a termination amount by one party that attempts to compensate the other party for its economic losses. If interest rates at the time of termination are lower than those specified in the swap contract, Partners HealthCare would make a payment to the counterparty. Conversely, if interest rates at such time are higher, the counterparty would make a payment to Partners HealthCare.

Effective Date

Notional Amount

(in thousands)

Maturity Date

(July 1) Rate Paid Rate Received(1)

5/1/03 $150,000 2035 4.40% 67% 1M LIBOR

7/1/05 150,000 2040 3.63% 67% 1M LIBOR

7/1/05 38,600 2025 5.11% 67% 6M LIBOR

7/1/07 150,000 2042 3.46% 67% 1M LIBOR

7/1/09 100,000 2044 3.71% 67% 1M LIBOR

7/1/11 100,000 2046 3.74% 67% 1M LIBOR

7/1/13 100,000 2048 3.80% 67% 1M LIBOR

7/1/15 50,000 2050 3.80% 67% 1M LIBOR

4/1/16 50,000 2050 3.93% 67% 1M LIBOR

4/1/16 50,000 2052 3.59% 67% 1M LIBOR

7/1/17 50,000 2052 3.74% 67% 1M LIBOR

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L. Historic and Projected Capital Expenditures

Partners HealthCare utilizes a centralized operating and capital budgeting process. Capital investments are made within parameters established by management and approved by the PHS Board of Directors to enable Partners HealthCare to maintain its financial balance. Management employs a financial framework to quantify net cash available for discretionary spending initiatives, subject to maintenance of certain key financial ratios, including days cash on hand, debt to capitalization and debt service coverage, and to ensure that Partners HealthCare’s capital investment needs are deployed appropriately throughout the organization. Funds allocated pursuant to the financial framework are used to support affiliate capital expenditures, as well as investments that are considered to have system-wide benefits.

Partners HealthCare invests in information technology to support its healthcare and insurance operations, and in other capital projects to improve the quality and efficiency of patient care. In addition, certain investments in facilities are required to ensure sufficient capacity for patient care, particularly for outpatient procedures and visits, and for research activities. For the three years ended September 30, 2013, 2014 and 2015, Partners HealthCare’s total capital expenditures were $703.1 million, $835.0 million, and $1,198.0 million respectively. Partners HealthCare’s capital budget for 2016 is $1,377.7 million. Management estimates that Partners HealthCare’s capital expenditures for the five years through 2020 will aggregate approximately $5,160.8 million for existing operations, subject to the ongoing evaluation of potential projects and spending capacity based upon the financial framework employed by management.

Major capital projects that are under construction or development and that are expected to be partially funded by proceeds of the Series Q Bonds include the following:

Partners HealthCare is constructing an approximately 750,000 square foot administrative building and approximately 2,000 space parking garage at Assembly Row in Somerville, Massachusetts that will allow for consolidation into a single cost effective location of multiple leased sites currently being used for administrative functions. The budget for the project is approximately $467.4 million with initial occupancy scheduled for summer 2016.

Partners HealthCare is in the process of developing and implementing a system wide integrated revenue processing and clinical application system, called Partners eCare, which will provide a single, complete and up-to-date electronic record for all Partners HealthCare patients and providers and enable a seamless flow of clinical and administrative information. The budget for the Partners eCare project is approximately $1.3 billion.

BWH is constructing the Brigham Building for the Future (BBF) (approximately 384,000 square feet) that will expand research and clinical space on the BWH campus, with a focus on the neuroscience and musculoskeletal programs, and increase flexibility for future campus redevelopment while allowing for lease consolidation. The associated land is leased to BWH by the Commonwealth through 2105. Construction of the BBF began in 2013 and is expected to cost approximately $511.5 million with occupancy scheduled for late 2016.

BWH is renovating a 46-bed level III neonatal intensive care unit and constructing a 20-bed level II special care nursery comprising approximately 34,032 square feet to address demand

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for neonatal care. The total cost of the project is expected to be approximately $50.0 million and it is scheduled to be completed by August 2017.

Partners HealthCare expects to fund these expenditures from internally generated funds, fundraising, the proceeds of the Series Q Bonds and, if deemed appropriate by management, future borrowings.

M. Fundraising

Partners HealthCare depends extensively on private fundraising to support its mission of excellence in patient care, research, education and community support. Partners HealthCare’s Development Office coordinates fundraising efforts for certain specialized or system-wide programs. Fundraising for each entity is managed in that entity’s development office. Total gifts and pledges for Partners HealthCare were $247.7 million in 2013, $314.0 million in 2014, and $360.4 million in 2015.

Total gifts and pledges for The General were $147.9 million in 2013, $178.8 million in 2014, and $245.9 million in 2015. In 2009, The General executed an agreement (Ragon Agreement) with The Massachusetts Institute of Technology (MIT), Harvard and The Phillip T. and Susan M. Ragon Foundation (Ragon Foundation) to establish the Phillip T. and Susan M. Ragon Institute (Ragon Institute) as a joint research center of The General, MIT and Harvard. The Ragon Foundation has committed to provide funding for the Ragon Institute of $100.0 million over 10 years through The General (as the administrative home for the Ragon Institute), which began in 2008. The Ragon Institute seeks to combat and conquer human diseases, with its main initial focus on the development of an AIDS vaccine, integrate biomedical research with emerging engineering technologies, and educate and train scientists. As of September 30, 2015, The General had received $84.9 million of this $100.0 million pledge, with $10.9 million received for the year ended September 30, 2015. In addition, The General received a $57.0 million gift from Mr. Phillip T. and Mrs. Susan M. Ragon in 2015 in support of the Ragon Institute, of which $7.0 million funded an endowed professorship at Harvard University.

Total gifts and pledges for BWH and BWFH were $61.1 million in 2013, $85.4 million in

2014, and $79.7 million in 2015. In 2013, the BWH Board of Trustees approved a $1 billion fundraising campaign (expanding a prior $500 million campaign) for a number of hospital strategic objectives encompassing patient care, research, and medical education, including cardiovascular medicine, women’s health, the neurosciences, cancer care, biomedical research, patient safety, community health and global health. As of September 30, 2015, $881.9 million had been raised toward the $1 billion goal.

Partners Continuing Care (which includes Spaulding Boston, Spaulding Cape Cod and

Partners HealthCare at Home) raised $4.6 million in gifts and pledges in 2013, $8.0 million in 2014, and $5.9 million in 2015.

NWH raised $8.7 million in 2013, $7.9 million in 2014, and $10.1 million in 2015.

NWH is currently in a capital campaign to raise $8.0 million for the Elfers Cardiovascular Center, which partially opened in 2015 and is scheduled to be in full operation in the fall of 2016. As of September 30, 2015, $6.9 million had been raised toward the $8.0 million goal. In

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addition, $10.0 million has been raised for the endowment for the Child and Adolescent Psychiatry Service.

Total gifts and pledges for McLean were $19.5 million in 2013, $28.8 million in 2014,

and $16.2 million in 2015. In 2012, McLean launched a $75 million campaign for the seven centers of excellence at the core of McLean’s strategic plan; basic neuroscience; substance use disorders; psychotic disorders; child and adolescent psychiatry; depression, anxiety and stress disorders; geriatric psychiatry; and women’s mental health. Having surpassed $75 million in the spring of 2015, the Board of Trustees raised the goal to $100 million. As of September 30, 2015, $83.7 million had been raised toward the $100 million goal.

III. STRATEGIC INITIATIVES

Several years ago, Partners HealthCare launched a series of strategic initiatives to redesign care with an emphasis on improving quality and affordability. Multi-disciplinary teams from PHS and from Partners HealthCare hospitals were assembled to develop and implement strategies for change that focused on care redesign initiatives to improve patient care quality and outcomes and on patient affordability initiatives to manage cost growth and reduce per-unit costs in direct patient care and overhead. Since Partners HealthCare began those initiatives, the pressure to reduce healthcare costs has continued, and the healthcare industry has also been characterized by the growth of alternative payment models that emphasize cost control and quality improvement over volume, by tighter referral management by provider networks that are participating in risk contracts, and by increased price sensitivity on the part of consumers, employers and provider groups. Building on the care redesign and patient affordability initiatives that were started several years ago, Partners HealthCare is committed to continuing to be a leader in clinical care and system innovation and to lead in the shift to value-driven healthcare in Massachusetts through the following strategic initiatives:

1) Population Health Management 2) Network Strategy 3) Contracting and Insurance Models 4) Referral Networks 5) Patient Affordability/Cost Management

1. Population Health Management (PHM). Partners HealthCare has adopted a population-level approach to clinical care, responding to market pressures by implementing programs intended to improve outcomes while also controlling total medical expense through preventive services, chronic illness care and high-risk case management. This PHM strategy includes an array of activities that are not reimbursable in the traditional fee-for-service model, but are important in the care delivered to Partners HealthCare patients. Partners HealthCare has invested in the resources and technology to enable its hospitals and community-based practices to implement PHM across all phases of care and has organized its PHM activities into five key areas:

1) Primary Care: Supporting primary care practices in practice redesign (patient-centered medical home) and coordination of care for patients with complex care needs (integrated Care Management Program)

2) Specialty Care: Improving care coordination between primary care and specialty practices and enhancing access to specialty services

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3) Non-Hospital Care: Providing home-based care for patients with acute illness and developing services to better manage transitions of care among nursing facilities, hospital, and home

4) Patient Engagement: Offering providers and patients tools to improve communication, education, and patient self-care

5) Analytics and Technology: Creating a single, centralized electronic health record with decision-support tools and a data warehouse for analytics and performance reporting

Initial PHM efforts were focused in primary care and led to the development and implementation of two signature programs (1) the Integrated Care Management Program (iCMP) that coordinates treatment for high-risk patients across the continuum of care through improved information sharing and active case management; and (2) the team-based Patient Centered Medical Home (PCMH) model for Partners HealthCare primary care providers, called “Partners in Care,” that increases patient access to preventative care, reduces utilization of unnecessary testing, hospital admissions and specialty services and moves low acuity care into appropriate community settings. More recently, Partners HealthCare has expanded its PHM strategy to include activities in behavioral health integration, specialty care, non-hospital care, patient engagement and data analytics and performance reporting. Areas of focus include:

• integration of mental health services to improve screening, provider education and access to specialists, including the use of self-service therapy available for lower acuity conditions;

• virtual visits (video or email-based questionnaire) in primary care and specialty care to augment office-based consults;

• referral management designed to assess the appropriateness and urgency of referrals, to inform pre-visit planning, and to provide alternative visit options when available and clinically appropriate;

• surgical appropriateness decision support and collection of patient-reported outcomes; • telemonitoring for patients with congestive heart failure and mobile observation units

designed to avoid unnecessary hospital admissions for conditions that can be treated at home;

• appropriate and efficient use of post-acute services, including improving transitions from hospitals to skilled nursing facilities;

• shared decision making tools, including short videos and on-line communications, to educate and aid patients in making personalized medical decisions; and

• development of data warehouse and analytic tools to improve reporting capabilities.

In 2015, Partners HealthCare established a strategic collaboration with Health Catalyst, a leader in health care data warehousing and analytics, aimed at fostering and accelerating the national adoption of PHM strategies. This initiative will support the development and testing of innovative PHM strategies at Partners HealthCare and, in collaboration with Health Catalyst, will facilitate the transfer of these strategies to other health care providers. The agreement also includes the development of a new Center for Population Health at Partners HealthCare.

2. Network Strategy. A successful PHM model hinges on creating a large and diverse population of patients. As of September 30, 2015, Partners HealthCare was managing approximately

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935,000 lives in various accountable care relationships, including 567,000 covered by various commercial contracts, 280,000 covered by Medicaid and 88,000 covered by the Medicare Pioneer ACO program. Partners HealthCare’s strategy is to enhance its provider network across Eastern Massachusetts by developing primary care, by strengthening existing clinical collaborations with other providers and by creating new ambulatory care centers and urgent care sites.

Primary Care: By expanding its primary care network, Partners HealthCare will be better positioned to coordinate the care of its patients and achieve its PHM objectives. An expanded network of providers will also improve patient access to primary care services in Massachusetts. By adding covered lives, Partners HealthCare will mitigate the potential impact of lower utilization per patient, spread actuarial risk, produce economies of scale for the investments needed for PHM and generate efficiencies across a larger patient population. The tighter integration (through employment by PCPO) of the formerly affiliated Pentucket Medical Associates physicians in February 2015 and the acquisition of Harbor Medical Associates, P.C. (Harbor) in March 2015, are examples of steps being taken in pursuit of this primary care development strategy.

ACCs and Urgent Care: Because of their lower cost profiles, shorter wait times and convenient locations, ACCs and urgent care centers are often the most appropriate settings for care and are preferred by patients, factors that are consistent with the industry trend of declining inpatient volume and a shift toward outpatient care. Partners HealthCare itself has extensive experience in developing community-based, lower cost delivery models, such as its ambulatory centers in Foxborough and Danvers, and is actively assessing potential areas for further ambulatory center development in Eastern MA. Partners HealthCare has entered into a joint venture with MedSpring, a multi-state operator of urgent care centers, to expand the availability of urgent care services in Eastern Massachusetts. In 2015, the joint venture opened urgent care centers in Brookline, Watertown and Newton and plans to open nine additional urgent care centers over the next two years. To further increase patient access and manage costs, Partners HealthCare and MedSpring are also assessing platforms to provide virtual visits for urgent care patients.

3. Contracting and Insurance Models. Continuing and expanding on the strategy that began in 2009, Partners HealthCare providers continue their participation in risk contracts with Blue Cross Blue Shield of Massachusetts (Blue Cross), Harvard Pilgrim Health Care (HPHC) and Tufts Associated Health Plans (TAHP). The contracts with Blue Cross and HPHC have recently been renewed through December 31, 2018 and starting in 2016, the scope of the upside shared savings under the Blue Cross contract will expand to include PPO covered lives. The current TAHP contract runs through December 31, 2016.

Partners HealthCare, as both the provider and the insurer, is also developing innovative

ways to manage the care of patients, especially those at high risk of acute episodes, by extending its PHM programs through NHP. NHP and Partners HealthCare are also exploring new commercial, Medicaid and Medicare products that will provide value to members, employees and employers, and commercial administrative services offerings for self-insured mid to large groups.

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4. Referral Networks. Partners HealthCare has created a robust regional referral network, with clinical affiliations throughout greater New England that provide web-based cardiac care, tele-stroke services, joint cancer centers and subspecialty expertise. This referral network draws appropriate high-acuity, rare and complex cases to BWH and The General for state-of-the-art treatment and provides opportunities for Partners HealthCare to facilitate the development of PHM programs by these regional partners. The maintenance and expansion of these referral networks as well as efforts to create and expand strategic relationships with national and international clients is a strategic focal point of Partners HealthCare.

5. Patient Affordability/Cost Management. As the industry moves to new payment

models, Partners HealthCare continues to focus on ways to manage utilization and costs, resulting in savings for its patients and a reduction in the overall health care cost trend. Through multi-disciplinary, system-wide teams, Partners HealthCare continues to identify opportunities for non-labor savings. In addition, teams are involved in improving clinical and operational processes, redesigning care delivery and unifying the “Patient Journey” continuum. These efforts are closely aligned with the implementation of Partners eCare, the integrated clinical and revenue system that Partners HealthCare is currently implementing. Teams continue to identify ways that Partners HealthCare can establish and adopt best practices and become more efficient while maintaining or improving the highest quality of care. Examples include:

• Increased perioperative savings and expansion of the success to other procedural areas, resulting in clinician and administrative collaboration on medical supplies.

• Continued progression on the strategic energy master plan to reduce consumption and cost while adopting “green” standards and conservation best practices, including LEEDS certification for all new buildings and renovations.

• Launch of a Corporate Process Improvement program to increase efficiency, reduce costs and improve service using Lean and change acceleration principles.

• Consolidating PHS administrative functions into one new, owned location that is projected to achieve annual space cost savings and logistical efficiencies.

• Establishing a system-wide pharmacy leadership group to develop strategies to manage recent significant pharmacy cost increases on behalf of Partners HealthCare patients and employees.

• Plans to consolidate NSMC’s hospital-based medical, surgical and behavioral health services on one campus at NSMC’s Salem Hospital and to cease providing inpatient services at Union Hospital in Lynn.

In addition to these efforts, Partners HealthCare has also set a minimum cost reduction

target of $500 million (approximately 6% of clinical and administrative expenses) over the next three to five years to better align its clinical and administrative expenses with payment rates for patient care that are expected to grow more slowly than inflation and to optimize shared functions across the system.

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IV. ACUTE CARE SECTOR

A. Overview of the Acute Care Sector

Partners HealthCare’s Acute Care Sector includes two of the most well respected academic medical centers in the United States, BWH and The General, and seven acute care community hospitals: Cooley, BWFH, MVH, NCH, NWH and NSMC’s Salem and Union Hospitals. Together these form the largest acute care delivery system in Eastern Massachusetts.

BWH and The General are renowned for their excellence in patient care, innovative and far-reaching research efforts and educational programs. In July 2015 each was cited again among the nation’s top 10 medical centers by U.S. News & World Report. The two were the only Massachusetts acute care hospitals to make the elite Honor Roll list.1 In addition, The General has been ranked first or second nationally for psychiatric services by U.S. News & World Report for the past 20 years.2

BWH and The General serve both as community hospitals for portions of metropolitan Boston and as providers of tertiary and quaternary services, primarily to Eastern Massachusetts and adjacent portions of contiguous states, but also to the remainder of Massachusetts, New England, other parts of the United States and the world. BWH and The General provide many of the same tertiary and secondary services, but serve distinct service areas. See “Competitive Environment” in this Appendix A.

Among the tertiary services that Partners HealthCare offers through BWH and The General are all forms of organ transplants, including face, hand, arm, heart, lung, heart-lung, liver, kidney, bone marrow, small bowel and pancreas transplants. The Burn and Level I Trauma units (for treatment of the most serious cases) at BWH and The General represent two of only three such units in Massachusetts and are among the largest in New England.

Proton Therapy. The Francis B. Burr Proton Therapy Center, located on The General’s campus, is the only one of its kind in New England and one of only 16 such facilities in the country. Proton beam therapy has virtually no exit dose beyond the tumor target, thus often reducing radiation to the adjacent normal tissue and thereby potentially reducing the risk of damage to healthy tissues and organs that can occur with radiation therapy done with photons (x- 1 Best Hospitals 2015-2016: an Overview, U.S. News & World Report, July 21, 2015, at http://health.usnews.com/health-news/best-

hospitals/articles/2015/07/21/best-hospitals-2015-16-an-overview?int=ab2909&int=ad4609. The rankings cover nearly 5,000 medical centers

across the country and span 16 medical specialties. From the starting pool of 4,716, a hospital had to meet any of four possible criteria to qualify

for consideration in the data-driven specialties: teaching-hospital status, medical school affiliation, bed size of 200 or more, or bed size of 100 or

more plus availability of four of eight specific types of medical technology such as a PET/CT scanner and certain precise radiation therapies.

2,265 hospitals, or 48% of the initial number, met the test. For 12 of the 16 specialties, the rankings are based on an extensive analysis that

combines measures of performance in three primary dimensions of healthcare: structure, process, and outcomes. Rankings in the other four

specialties (Ophthalmology, Psychiatry, Rehabilitation, and Rheumatology) are based on hospital reputation as determined by a physician survey.

137 different hospitals earned a ranking in at least one specialty. Fifteen of the 137 qualified for the Honor Roll by ranking very high in six or

more specialties. “Very high” was defined in the 12 data-driven specialties as ranking among the top 20 hospitals and in Ophthalmology,

Psychiatry, Rehabilitation and Rheumatology as ranking among the top 10. The General scored in 16 specialties and BWH scored in 12

specialties.

2 Best Hospitals 2015-2016: Best Hospitals for Adult Psychiatry, U.S. News & World Report, July 21, 2015, at http://health.usnews.com/best-hospitals/rankings/psychiatry.

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rays). In 2015, 13,666 treatments were completed at the Proton Therapy Center, which has two rotational gantries and one fixed beam room for treatment of eye and intracranial tumors, a 2.2% increase over the previous year. A new facility with a single gantry is currently under construction at The General and is expected to be operational in January 2017.

Partners Connected Health (PCH). PCH develops solutions for delivering quality patient care outside of the traditional medical setting, engages in research in a wide range of connected health-related areas and works to advance the field through its convening and publishing activities.

PCH programs use a combination of remote-monitoring, online communications and intelligence, and technology applications to improve patient adherence and engagement, provider involvement and clinical outcomes. It has made important strides in integrating connected health solutions into the care of patients with heart failure, diabetes and hypertension. PCH also offers programs for the employee population, providing self-management tools to guide positive lifestyle and health behavior changes. In 2013, PCH launched Wellocracy, a clinically-based source of impartial, easy-to-understand information on new personal “self-health” technologies such as health and fitness trackers and mobile apps. Wellocracy's goal is to empower consumers to self-manage their health, create and maintain individual wellness goals and achieve a greater quality of life. In addition, PCH has developed a secure online platform that has facilitated the provision of specialty consultations to clinicians in over 50 countries since its inception in 1995.

International Activities. By creating strategic relationships with foreign clients through PHI and PMI, Partners HealthCare seeks to ensure its position as a world leader in patient care, clinical education and biomedical research and to create revenue-generating opportunities.

Partners HealthCare established PHI in 2006 as the entity through which it provides a broad array of patient facilitation and advisory services to public and private organizations abroad. PHI is responsible for international marketing, business development and relationship management services for Partners HealthCare and DF/PCC. PMI joined Partners HealthCare in 2008, enabling Partners HealthCare to expand its mission to increase access to health care around the world. PMI broadens Partners HealthCare’s formal structure for advisory engagements in academic and healthcare delivery client environments. The alignment and integration of PMI and PHI activities and staff have brought greater efficiencies to Partners HealthCare’s international mission. Collectively, PHI and PMI have developed more than 40 programs since their inception.

PHI focuses on marketing inpatient and outpatient services provided at Partners HealthCare hospitals and remote consultations to patients in the Middle East, Southern Europe, India, Bermuda and South America, where Partners HealthCare has developed a number of comprehensive relationships with government agencies, health care providers, insurers and multi-national corporations. In addition, it has established robust referral relationships in China to facilitate access to treatment for residents interested in obtaining medical care outside of China.

PHI supports the international objectives of BWH and The General by providing market

evaluation, business intelligence and development, account management, contracting,

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compliance, and activity reporting. Its work also includes the development and management of programs with referring organizations in priority markets: Bermuda, Saudi Arabia, Kuwait, UAE, Qatar, and China. In 2015, BWH and The General cared for 5,425 total international patients, of which 41% originated from five markets – Bermuda, China, Kuwait, Saudi Arabia and UAE.

PHI and PMI establish relationships with health care delivery organizations, academic

medical institutions, governmental and non-governmental agencies, and other stakeholders from around the world that are dedicated to transforming health care in their own countries and globally. The relationships are typically long term engagements and PHI’s and PMI’s involvement in such initiatives often include strategic planning, academic and clinical programming, professional development, and infrastructure and systems planning, all with the objective of supporting sustainable, high-quality patient care, education, and research. Partners HealthCare is currently engaged in 20 global initiatives around the world, including locations in China, Qatar, Malta, India and the Ivory Coast, among others.

China. In 2015 PHI extended its long term collaboration with Carebridge (formerly

known as Trustbridge) with the signing of new agreements with BWH and The General to develop innovative clinical programs for future patients of Jiahui International Hospital (JIH). In 2015, JIH, BWH and PHI executed a Memorandum of Understanding pertaining to a women’s health affiliation, including the development of obstetric, gynecology, and in vitro fertilization programs, as well as a neonatal ICU and integrated women’s health center. In 2015, The Massachusetts General Hospital Cancer Center, JIH and PHI announced plans to develop a Breast Cancer Center of Excellence and collaborate on thyroid and colorectal cancer care. PHI continues to expand its footprint in China with the development of a partnership with China Creations Holding Group in November 2015 to focus on strategic oversight and implementation planning, clinical program development, facilities planning, and professional staff development planning.

Qatar. PHS’s long-standing advisory relationship with Hamad Medical Corporation, the principal delivery system for national healthcare in Qatar, has been expanded to include major incident planning and emergency preparedness workshops through The General’s Division of Emergency Preparedness and research governance through Partners HealthCare Research Management.

Malta and Ivory Coast. In November 2015, PHI entered into a collaborative partnership

with Vitals Global Healthcare (VGH) to enhance health care in Malta and West Africa. PHI will work with VGH to develop clinical quality and patient standards, clinical systems, and clinical education at three of Malta’s hospitals. The partnership between PHI and VGH will also be coordinated with Barts School of Medicine and Dentistry, a preeminent medical school located in the United Kingdom that is opening its first off-shore campus in Malta.

PHI signed a strategic agreement with the Université Felix Houphouet-Boigny (UFHB)

in Abidjan, Ivory Coast to co-develop an advanced model of health care dedicated to the region’s unique population needs. In its work with UHFB, PHI will focus on the planning of the university’s new academic hospital as part of its medical school.

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India. PMI continues its 13-year relationship with Wockhardt Hospitals Limited, a collaboration that focuses on clinical improvements in congestive heart failure, stroke, emergency department/critical care, nurse training and quality. Other initiatives include Sakra World Hospital in Bangalore, where PMI provides strategic assessment and curriculum enhancement services; Yuva Nursing Skilling Institute where PMI provides curriculum work for a new venture in nursing training/skills development centers; Amity University in Delhi, where PMI assists with the development of a new medical school, including review of facility planning and curriculum development; Sri Ramaswamy Memorial University in Chennai, where PMI provides assessment and enhancement of curriculum for the medical school and emergency/trauma clinical service; and Sri Balaji Vidyapeeth University in Pondicherry where PMI provides strategic assessment and curriculum enhancement services.

Other Markets. Dana-Farber/Brigham and Women’s Cancer Center (BWCC), PHI, and

the Bermuda Cancer and Health Center (BCHC) are collaborating on the development of a radiotherapy program. DF/BWCC is advising BCHC on issues related to the development of the program, including design of a facility, the creation of clinical radiation oncology policies, procedures and safety protocols and the development of a training and education program. Additionally, BWH is working with BCHC to explore participation in research opportunities as well as a telemedicine program.

PHI also maintains relationships with long term partners Alfaisal University in Saudi

Arabia to provide medical school maintenance and to develop a new medical, pharmacy and dental school in Jeddah, and with Tokyo Medical Dental University on a leadership development program for university faculty.

Ambulatory Care. Each of Partners HealthCare’s nine acute care hospitals provides emergency, ambulatory and outpatient care across major specialties. Combined, they comprise the largest outpatient network in Eastern Massachusetts. In 2015, Partners HealthCare acute care hospital based and non-hospital based ambulatory care programs resulted in approximately 1,215,000 routine visits, approximately 367,560 emergency services visits and approximately 940,259 home health visits.

BWH provides outpatient services, including primary care, specialty care, diagnostics, imaging and ambulatory procedures at 127 ambulatory practices in 20 locations. Four practice sites on the BWH distributed main campus and the Brigham and Women’s Ambulatory Care Center in Chestnut Hill house the majority of these practices, and the remainder are in satellites located southwest and south of Boston, including the Brigham and Women’s/Mass General Health Care Center located at Patriot Place in Foxborough, Massachusetts. In addition, BWH operates two neighborhood health centers in the Jamaica Plain section of Boston near its hospital facilities and serves as a referral facility for both health centers. These community health centers provide comprehensive services similar to those offered by satellite practices and include primary care, dentistry, pediatrics, podiatry, obstetrics, gynecology, mental health, nutrition, outpatient substance abuse counseling and social services.

The General provides many of its ambulatory care services in the Yawkey Center for Outpatient Care, the Wang Ambulatory Care Center, the Emergency Services Department and the MGH Cancer Center, all located on its main campus; at MGH West, an ambulatory care

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facility in Waltham; at Mass General/North Shore Center for Outpatient Care in Danvers; and at off-campus health centers in Boston’s Back Bay and in Charlestown, Chelsea and Revere. In addition, physicians practicing privately through the MGPO provide professional services in the MGH Professional Office Building, in space on The General’s campus and in private offices adjacent to The General, and in various locations throughout the Boston metro area.

Partners HealthCare community hospitals also offer extensive ambulatory care services. BWFH offers an outpatient center in breast healthcare, and outpatient services at NWH include a cancer center, spine center, women’s imaging center, breast center, cardiovascular health center, minimally invasive gynecology center, assisted reproductive technology program, maternal fetal medicine program, joint reconstruction center, diabetes center, bariatric center, wound/ostomy program, multiple sclerosis clinic, gastrointestinal screening (endoscopy), ambulatory surgical service, and an adult sleep center. At its Salem and Union campuses, NSMC offers imaging services, cardiology testing, and surgical suites designed exclusively for outpatient surgery and diagnostic endoscopic procedures. The North Shore Women’s Health Center in Danvers provides comprehensive services for women including imaging services.

B. Brigham and Women’s Hospital

BWH is the result of a 1975 merger of the Peter Bent Brigham Hospital, the Robert Breck Brigham Hospital and the Boston Hospital for Women, whose inpatient facilities were physically consolidated in 1980.

BWH is licensed by the Massachusetts Department of Public Health (DPH) to operate 763 beds, all of which were staffed as of September 30, 2015. As part of the DF/PCC joint venture, BWH operates an additional 30 beds, although they remain under DFCI’s license. As of September 30, 2015, all of these beds were staffed. Beds are currently allocated among the following services:

Services Licensed Beds(1)

Medical/Surgical 517 Intensive Care 90 Coronary Care 10 Burn Unit 10 Obstetrics 90 Neonatal Intensive Care 46 DFCI 30

Total 793

(1) Total includes both BWH and DFCI licensed beds.

For 2014 and 2015, BWH’s case mix index, a measure of the severity of illness, was 1.73 and 1.75, respectively.

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Financial Information

The following summary of the Statements of Operations for the three years ended September 30, 2015 was derived from the financial statements of BWH, which are included within the consolidating financial statements of Partners HealthCare System, Inc. and Affiliates.

The Brigham and Women’s Hospital, Inc. Statements of Operations

(in thousands)



Net patient service revenue, net of provision for bad debts $ 1,764,954 $ 1,797,399 $ 1,811,932 Direct academic and research revenue 521,515 506,188 556,703 Indirect academic and research revenue 143,177 144,240 145,559 Other revenue 66,675 68,114 71,584


Operating expenses

Employee compensation and benefit expenses 896,348 906,532 950,390 Supplies and other expenses 795,437 811,280 865,082 Direct academic and research expenses 521,515 506,188 556,703 Depreciation and amortization expenses 113,694 113,755 121,841 Interest expense 29,957 26,546 27,946

Total operating expenses 2,356,951 2,364,301 2,521,962

Income from operations 139,370 151,640 63,816

Nonoperating gains (expenses)

Income from investments 105 208 (3,004) Gifts and other, net (428) (191) (12)

Total nonoperating gains (expenses), net (323) 17 (3,016)

Excess of revenues over expenses 139,047 151,657 60,800


Funds utilized for property and equipment 15,898 23,122 18,846 Change in funded status of defined benefit plans 254,461 (112,695) (197,781) Other - (3,630) (4,226) Transfers to affiliates, net (188,788) (122,548) 25,728

Increase (decrease) in unrestricted net assets $ 220,618 $ (64,094) $ (96,633)

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Utilization

Summary inpatient, ancillary and outpatient service utilization data for BWH for the three years ended September 30, 2015 are presented in the following table:


2013 2014 2015

Licensed beds (2) 793 793 793 Discharges:

Medicine 15,263 14,230 15,506 Surgical 9,610 8,741 8,926 Obstetrics 8,273 7,118 6,944 Gynecology 977 823 791 Orthopedics 2,976 2,882 2,732 Neurology 1,517 1,451 1,531 Neurosurgery 1,825 2,004 1,919 Urology 766 742 785 Nursery 7,002 6,012 5,778 NICU 951 906 870 DFCI 990 1,059 1,258

Total 50,150 45,968 47,040 Average length of stay (days) 5.54 5.83 5.63 Patient days 257,512 251,700 249,660 Average occupancy rate 89.0% 87.0% 86.3% Total surgeries 31,591 31,368 30,475 Births 7,867 6,794 6,327 Outpatient:

Observations 10,708 11,815 10,350 Day surgery 13,222 13,227 12,844 Routine visits 454,222 464,285 466,375 Emergency visits 60,134 59,876 60,083 Significant procedures 24,788 26,750 26,245 Major imaging 62,399 65,138 73,077 Minor imaging 270,734 279,744 290,028 Treatments 112,921 109,408 103,413 Minor procedures 155,553 171,755 160,044 Therapies 175,026 186,147 175,488 Psychiatric services 48,478 58,022 56,651 Laboratory services 1,979,628 1,985,710 1,915,488

(1) See footnotes to Acute Care Sector utilization table in “Management’s Discussion and

Analysis of Recent Financial Performance.” (2) Includes DFCI licensed beds transferred as part of the DF/PCC joint venture.

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Sources of Patient Service Revenue

The following table shows BWH’s payer mix based on gross patient service revenue for the three years ended September 30, 2015:

(1) Includes HPHC, TAHP, national carriers & other commercial payers. (2) Includes other government, self pay and charity care.

BWH participates in Network-wide managed care contracts with Blue Cross, HPHC and TAHP that expire on September 30, 2018, December 31, 2018 and December 31, 2016, respectively, and also contracts with numerous other managed care plans. Contract terms end on stated dates absent action by either party to terminate the agreement, renew it or replace it with successor agreements. The Network-wide managed care contracts with Blue Cross, HPHC and TAHP now involve the assumption of risk that is based on Partners HealthCare’s ability to control increases in medical expense trend. No individual health maintenance organization (HMO) accounts for more than 10% of total gross patient service revenue at BWH.

Medical Staff

As of September 30, 2015, the medical staff of BWH consisted of 7,076 physicians of whom 1,925 were members of the Active Staff; 1,188 were members of the Research Staff; 191 were members of the Adjunct, Courtesy or Honorary Staff; 903 were Affiliate Staff; 759 were House Staff; and 2,110 were residents, clinical fellows, research fellows and others. Active and Research Staff Members are required to have current Harvard University appointments. Of the 1,925 members of the Active Staff, approximately 95% were Board Certified in their specialty. The BWPO delegates to PCPO the authority to enter into Network-wide managed care contracts on behalf of the BWPO’s members.

The Medical Staff is organized into the following departments with the corresponding number of active staff as of September 30, 2015:


2013 2014 2015

Medicare (including Managed Care) 34.8% 36.1% 36.5%Medicaid (including Managed Care) 10.3% 11.4% 12.4%Blue Cross 24.1% 23.2% 22.7%Other Commercial(1) 24.3% 23.6% 22.8%All Other(2) 6.5% 5.7% 5.6%

Total 100.0% 100.0% 100.0%

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Department

Number Active Staff

Anesthesiology 165 Dermatology 36 Emergency Medicine 62 Medicine 821 Neurology 95 Neurosurgery 20 Newborn Medicine 58 Obstetrics and Gynecology 108 Orthopedic Surgery 56 Pathology 86 Psychiatry 77 Radiation Oncology 45 Radiology 138 Surgery 158

Total 1,925

As of September 30, 2015, the average age of the Active Staff was approximately 48

years, with 50% being 45 years of age or younger, and with 10% being 65 years of age or older.


BWH is licensed by the DPH and is accredited by the Joint Commission for a three year period following a survey in February 2013.

BWH is accredited by the Accreditation Council for Graduate Medical Education (ACGME); the most recent site visit occurred in February 2012 and the ACGME Institutional Review Committee granted Continued Accreditation effective April 13, 2012. BWH sponsors 15 core residency programs, and 37 fellowship programs accredited by the ACGME. The dental residency is integrated with The General and accredited by the Commission on Dental Accreditation. BWH serves as the sponsoring institution for four core residency and six fellowship programs accredited by the ACGME that are integrated with The General. Additionally, it offers 66 non-ACGME-accredited programs, six of which are nationally accredited by certifying bodies other than the ACGME.

C. The General Hospital

Originally a division of MGH, which was founded by special act of the Massachusetts Legislature in 1811, The General was separately incorporated as a subsidiary of MGH in 1980. The General Hospital admitted its first patient in 1821. It is the third oldest general, non-military hospital in the United States and the oldest in New England.

The General Hospital is licensed by the DPH to operate 1,046 beds, 999 of which were staffed as of September 30, 2015. The licensed beds are presently allocated among the following services:

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Services

Licensed Beds

Medical/Surgical 792 Intensive Care Unit 101 Coronary Care Unit 16 Burn 15 Pediatric 44 Pediatric Intensive Care Unit 13 Obstetrics 27 Neonatal Intensive Care Unit 14

Psychiatric 24 Total 1, 046

For 2014 and 2015, The General’s case mix index, a measure of the severity of illness,

was 1.03 and 1.05, respectively.

Financial Information

The following summary of the Statements of Operations for the three years ended September 30, 2015 was derived from the financial statements of The General, which are included within the consolidating financial statements of Partners HealthCare System, Inc. and Affiliates.

The General Hospital Corporation Statements of Operations

(in thousands)



Net patient service revenue, net of provision for bad debts $ 2,274,628 $ 2,330,878 $ 2,452,011 Direct academic and research revenue 670,009 665,282 700,088 Indirect academic and research revenue 194,872 195,615 196,509 Other revenue 107,694 108,972 114,560


Operating expenses

Employee compensation and benefit expenses 1,306,958 1,289,429 1,315,092 Supplies and other expenses 924,055 959,390 1,030,813 Direct academic and research expenses 670,009 665,282 700,088 Depreciation and amortization expenses 169,652 172,832 180,508 Interest expense 28,272 27,014 25,370

Total operating expenses 3,098,946 3,113,947 3,251,871 Income from operations 148,257 186,800 211,297

Nonoperating gains (expenses)

Income (loss) from investments 972 (45) (10,147) Gifts and other, net (58) 13,331 (26)

Total nonoperating gains (expenses), net 914 13,286 (10,173) Excess of revenues over expenses 149,171 200,086 201,124


Funds utilized for property and equipment 22,805 13,286 13,116 Change in funded status of defined benefit plans 14,810 15,633 (4,962) Transfers to affiliates, net (255,869) (113,177) (1,501)

Increase (decrease) in unrestricted net assets $ (69,083) $ 115,828 $ 207,777

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Summary inpatient, ancillary and outpatient service utilization data for The General for the three years ended September 30, 2015 are presented in the following table:


2013 2014 2015 Licensed beds 1,046 1,046 1,046 Discharges:

Medicine 20,083 20,787 22,083 Surgical 9,243 9,308 9,311 Obstetrics 3,856 4,124 3,984 Gynecology 1,175 883 839 Pediatrics 2,716 2,752 2,838 Orthopedics 4,297 4,190 4,530 Neurology 2,525 2,777 2,859 Neurosurgery 2,480 2,155 2,129 Urology 1,313 1,141 1,078 Psychiatry 893 901 920 NICU/Nursery 3,789 4,099 3,876 Other 117 149 121 Total 52,487 53,266 54,568

Average length of stay (days) 5.87 5.82 5.79 Patient days 295,721 296,618 302,438 Average occupancy rate 83.0% 81.3% 82.9% Total surgeries 42,167 41,739 42,465 Births 3,695 3,950 3,840 Outpatient:

Observations 13,807 12,842 11,745 Day surgery 22,491 23,016 23,118 Routine visits 657,837 649,494 644,425 Emergency visits 100,519 100,483 106,580 Significant procedures 37,162 39,800 39,680 Major imaging 120,765 125,031 114,968 Minor imaging 337,026 354,139 366,850 Treatments 368,454 366,124 368,951 Minor procedures 188,344 213,003 207,429 Therapies 274,816 253,194 274,632 Psychiatric services 152,400 144,897 121,586 Laboratory services 3,582,473 3,503,611 3,559,220

(1) See footnotes to Acute Care Sector utilization table in “Management’s Discussion and Analysis of Recent Financial Performance.”

Sources of Patient Service Revenue

The following table shows The General’s payer mix based on gross patient service revenue for the three years ended September 30, 2015:

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(1) Includes HPHC, TAHP, national carriers & other commercial payers. (2) Includes other government, self pay & charity care.

The General participates in Network-wide managed care contracts with Blue Cross,

HPHC and TAHP that expire on September 30, 2018, December 31, 2018 and December 31, 2016, respectively, and also contracts with numerous other managed care plans. Contract terms end on stated dates absent action by either party to terminate the agreement, renew it or replace it with successor agreements. The Network-wide managed care contracts with Blue Cross, HPHC and TAHP now involve the assumption of risk that is based on Partners HealthCare’s ability to control increases in medical expense trend. No individual HMO accounts for more than 10% of total gross patient service revenue at The General.

Professional Staff

As of September 30, 2015, the professional staff of The General numbered 7,325 including: 2,109 physicians and dentists comprising the active medical staff, 1,508 of whom had admitting privileges; 967 other staff physicians consisting of senior and honorary staff, clinical associates, clinical assistants, consultants, psychologists, podiatrists and graduate assistants, 201 of whom had admitting privileges; 1,526 non-clinical professional staff; and 2,723 residents, clinical fellows and research fellows.

Of the active staff physicians, approximately 89% are Board Certified in their specialty and approximately 92% also serve as members of the faculty of Harvard Medical School. Approximately 99% of the members of the active staff are participating clinicians of the MGPO, thus enabling the MGPO to contract on their behalf with managed care organizations and to implement medical management programs on a coordinated basis with The General. The MGPO delegates to PCPO the authority to enter into Network-wide managed care contracts on behalf of the MGPO’s members.

The General is organized into 17 major clinical services, plus the department of Molecular Biology, which does not provide clinical services.


2013 2014 2015

Medicare (including Managed Care) 37.8% 38.2% 39.2% Medicaid (including Managed Care) 10.8% 11.8% 13.4% Blue Cross 21.8% 21.5% 21.3% Other Commercial(1) 22.5% 22.1% 20.7% All Other(2) 7.1% 6.4% 5.4%

Total 100.0% 100.0% 100.0%

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Department

Number Active Staff

Anesthesia & Critical Care 160 Dermatology 38 Emergency Medicine 49 Medicine 771 Neurology 136 Neurosurgery 17 Obstetrics and Gynecology 63 Oral and Maxillofacial Surgery 15 Orthopedic Surgery 75 Pathology 63 Pediatrics 194 Physical Medicine and Rehabilitation 16 Psychiatry 213 Radiation Oncology 37 Radiology 125 Surgery 117 Urology 20

Total 2,109

As of September 30, 2015, the average age of the Active Staff was approximately 49

years, with 47% being 45 years of age or younger, and 12% being 65 years of age or older.


The General is licensed by the DPH and is accredited by the Joint Commission for a three year period, following a survey in April 2015.

The General is accredited by ACGME; the latest institutional site visit occurred in May 2012, and The General was awarded Continued Accreditation effective October 17, 2012 and a five-year review cycle. The General sponsors 18 core residency programs, and 41 fellowship programs accredited by ACGME. The General serves as the sponsoring institution for four core residencies and four fellowship programs accredited by the ACGME that are integrated with BWH. The General co-sponsors two ACGME-accredited core residency programs with McLean. The Department of Oral and Maxillofacial Surgery at The General sponsors a residency program accredited by the Council on Dental Accreditation. Additionally, The General offers 76 non-ACGME accredited programs, 18 of which are nationally accredited by certifying bodies other than ACGME.

D. Cooley Dickinson Hospital

Cooley is a 140-bed acute care community hospital offering medical/surgical, adult intensive care/critical care, obstetric, pediatric, psychiatric, outpatient surgery, radiology, other ancillary services, and the Massachusetts General Cancer Center at its Northampton campus; and diagnostic imaging, phlebotomy, and rehabilitation services in satellite offices in surrounding communities. Cooley also provides residency and work experience programs for nursing, social work, occupational therapy and other students through a number of affiliations in the greater Northampton area. As of September 30, 2015, Cooley’s medical staff consisted of 508 practicing physicians, midlevels and dentists.

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E. Brigham and Women’s Faulkner Hospital

Brigham and Women’s Faulkner is a 162-bed acute care community teaching hospital located in the Jamaica Plain area of Boston, approximately three miles from the BWH campus. BWFH offers medical/surgical and psychiatric services, comprehensive services in orthopedics, radiology and emergency medicine and specialized programs in breast cancer detection and treatment. BWFH and BWH integrated certain programs, services and practices, including cardiology, psychiatry, pulmonary medicine and neurology. BWFH attracts patients primarily from the Jamaica Plain, West Roxbury, Roslindale, Hyde Park and Dedham communities, which are to the south and west of downtown Boston. As of September 30, 2015, BWFH’s active and adjunct medical staff totaled 1,098. Approximately 86% of BWFH’s 524 active medical staff members were Board Certified in their specialties. BWFH provides residency training in internal medicine and surgery in programs sponsored by BWH. It also serves as a training site for students of TUSM.

F. Martha’s Vineyard Hospital

MVH is a 25-bed acute care, critical access community hospital located on Martha’s Vineyard, an island approximately 75 miles south of Boston. MVH provides inpatient and outpatient medical/surgical, orthopedic, pediatric, geriatric, gynecological, obstetrical, emergency and rehabilitation services. An affiliate of MVH operates the 106-bed Windemere Nursing & Rehabilitation Center, located on the main campus of MVH. MVH’s active medical staff includes 14 primary care physicians, three general surgeons, two obstetrician/gynecologists, two orthopedists, four dentists, two psychiatrists, and seven emergency medicine physicians. MVH has long-standing collaborations with The General in such specialties as cardiology, neurology, dermatology, and emergency services and is connected to The General through telemedicine links for stroke, newborn nursery and pain medicine. The General also provides medical oncology, radiology and anesthesia services to MVH.

G. Nantucket Cottage Hospital

NCH is a 19-bed acute care community hospital located on Nantucket, an island approximately 100 miles south of Boston. NCH offers inpatient and outpatient medical/surgical, obstetrics, emergency, diagnostic, and physical rehabilitation services. Specialized departments include dialysis, chemotherapy and palliative care. NCH’s medical staff includes six full-time physicians, while more than 50 physicians representing a variety of specialties, serve in a consulting capacity or schedule regular visits to the island. NCH has long-standing collaborations with The General in such specialties as cardiology, neurology, dermatology and emergency services and is connected to The General through telemedicine links. The General also provides radiology services to NCH.

H. Newton-Wellesley Hospital

NWH is a 270-bed acute care community teaching hospital located in Newton, approximately 10 miles west of Boston. NWH provides inpatient and outpatient medicine/surgery, obstetrics/gynecology, psychiatry and pediatric services. Specialized services include minimally invasive gynecological surgery, a spine center in collaboration with The General, advanced imaging services for women, and a separate emergency department designed

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just for children. NWH has developed collaborations with The General in cancer and pediatrics and with BWH’s obstetrics/gynecology specialists. NWH attracts patients primarily from Newton, Waltham, Wellesley, Needham, Natick, Weston, Medfield and Wayland, which are west and south of Boston.

As of September 30, 2015, NWH’s medical staff totaled approximately 1,082 active, provisional and courtesy staff members. Approximately 97% of NWH’s 709 active staff physicians were Board Certified in their specialties. NWH is a teaching affiliate of TUSM and is a training site for physical medicine and rehabilitation residents of Spaulding and orthopedics residents of Tufts Medical Center. NWH also sponsors a transitional year residency program, sponsors three non-ACGME fellowships, and serves as a training site for residents and fellows in nine specialties who are in The General or BWH sponsored programs.

I. North Shore Medical Center

NSMC operates two acute care community hospitals. Salem Hospital is licensed for 268 beds and is located in Salem, approximately 20 miles north of Boston. Union Hospital is licensed for 126 beds and is located in Lynn, approximately 15 miles north of Boston.

NSMC offers medical/surgical, cardiac, obstetrics/gynecology, pediatric and psychiatric services; operates its own three-year residency program in internal medicine; serves as a site for four residency programs and one fellowship program of The General; and it is a teaching affiliate of TUSM. As of September 30, 2015, NSMC’s medical staff numbered 916, of which approximately 95% of the 588 active staff physicians were Board Certified in their specialties.

Salem Hospital. At Salem Hospital, NSMC provides adult medical/surgical, obstetrical, neonatal, gynecological, pediatric, adult psychiatry, emergency, ambulatory, and substance abuse services, and it is also a regional referral center for cardiology, oncology, neurosurgery, orthopedics, chest and vascular surgery services. In collaboration with surgeons from The General, NSMC provides open-heart surgical services to enable residents of the North Shore to avoid traveling to Boston for cardiac surgical care. Salem Hospital attracts patients primarily from Salem, Danvers, Lynn, Marblehead, Peabody and Swampscott, which are north of Boston.

Union Hospital. At Union Hospital, NSMC provides adult medical/surgical, pediatric and geriatric psychiatry services, intensive care, emergency and outpatient services, including outpatient surgery and diagnostic testing. Union attracts patients primarily from Lynn and its surrounding communities. As part of a plan to restructure the delivery of care at NSMC, which plan is subject to approval by DPH, inpatient services currently provided at Union Hospital will be consolidated at Salem Hospital over the next three years and Union will cease to provide inpatient services.

V. REHABILITATION AND PSYCHIATRIC CARE SECTOR

PCC oversees the management, delivery and integration of rehabilitation, sub-acute and home health services throughout the Partners HealthCare system. PCC is the sole member of Spaulding Boston, Spaulding Cambridge, Spaulding Cape Cod, and PHH, and is the sole stockholder of FRC, Inc., which holds the license for two skilled nursing facilities.

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A. Rehabilitation and Sub-Acute Services

Spaulding Boston. Spaulding Boston is certified by Medicare as an inpatient rehabilitation facility (IRF). Spaulding Boston operates 132 IRF beds, 12 of which are for pediatric patients. It treats musculoskeletal, stroke, spinal cord injury, traumatic brain injury, amputee, and neurology patients.

Spaulding Boston has 10 outpatient rehabilitation sites in the Boston metropolitan area with each location offering a full range of outpatient rehabilitation services, including physical therapy, occupational therapy and speech therapy. Spaulding also operates outpatient rehabilitation sites in Salem, Lynn, Peabody, Danvers, Marblehead (2 sites), Middleton and Gloucester. A full range of outpatient rehabilitation services, including physical therapy, occupational therapy and speech therapy, is provided at these sites.

Spaulding Boston is the principal training site for Harvard Medical School’s Department of Physical Medicine and Rehabilitation and sponsors an ACGME-accredited residency program in Physical Medicine and Rehabilitation. Spaulding Boston also sponsors three ACGME-accredited fellowships, one non-ACGME fellowship, and provides training for residents from The General and BWH. In July 2015, U.S. News & World Report ranked Spaulding Boston 6th among the nation’s rehabilitation hospitals, placing it on the list of the top 20 rehabilitation hospitals for the twenty-first year in a row.3

Spaulding Cambridge. Spaulding Cambridge operates a 180-bed LTAC in Cambridge. Spaulding Cambridge works collaboratively with the tertiary hospitals in Boston to provide comprehensive care to critically ill patients that require extended recuperation time.

Spaulding Cape Cod. Spaulding Cape Cod is an IRF licensed for 60 beds that is located in East Sandwich. It predominantly treats orthopedic, neurology and amputee patients. Spaulding Cape Cod is the only facility providing comprehensive, hospital-level rehabilitation on Cape Cod. Spaulding Cape Cod operates a pediatric outpatient site in Sandwich as well as adult outpatient sites in Orleans, Sandwich, Yarmouth and Plymouth. Spaulding Cape Cod provides inpatient care for more than 1,000 inpatients each year and has more than 15 specialty inpatient and outpatient programs to serve children and adults.

Spaulding Boston attracts patients from the Boston metropolitan area and Eastern Massachusetts as well as the New England region, while Spaulding Cape Cod’s patients come primarily from its surrounding communities. Spaulding Cambridge’s patients are primarily from the greater Boston area. Patients typically are referred to all three facilities following their discharge from a general acute care hospital.

B. Skilled Nursing Services

Partners HealthCare owns both hospital-based and free-standing SNFs to accommodate a limited number of both short term and longer-term patient needs. Free-standing SNFs include 3 Best Hospitals 2015-2016: The Honor Roll, U.S. News & World Report, July 2015, at http://health.usnews.com/best-hospitals/rankings/rehabilitation. To be ranked, a hospital had to be named by at least 5% of rehabilitation specialists who responded to U.S. News surveys in the past three years.

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Spaulding North End, Spaulding West Roxbury and The Clark House. Spaulding North End is a 140-bed SNF located in Boston’s North End. Spaulding West Roxbury is an 81-bed SNF located in West Roxbury. The MGH Health Services Corporation is a general partner in Fox Hill Village Partnership which operates The Clark House, a 70-bed SNF located in Westwood, Massachusetts on the campus of the Fox Hill Village retirement community.

C. Home Care Services

Home health care is an essential part of the continuum of care. It supports the transition of patients back into the community, promotes their independence, reduces the need for hospitalization and institutionalization and is a cost-effective alternative to inpatient care. PHH serves a geographic area from Newburyport to the north of Boston, to Framingham in the west, and Plymouth in the south. With regional branch offices in Beverly, Waltham and Braintree, PHH employs approximately 850 staff members and is one of the largest home health care providers in Eastern Massachusetts. PHH’s Medicare-certified division is accredited by the Joint Commission. PHH also operates Partners Private Duty, a private service division.

D. Psychiatry and Mental Health Services

McLean Hospital is a freestanding psychiatric hospital that provides a continuum of inpatient, acute and longer-term residential, partial hospitalization and treatment-specific outpatient services. In addition, it has two specialized schools for children and adolescents that offer a range of therapeutic services. McLean offers both biological and psychosocial treatment and provides its services to children, adolescents, adults and geriatric patients. It is the largest psychiatric affiliate of Harvard Medical School. In July 2015, U.S. News & World Report ranked McLean as the best freestanding psychiatric hospital in the nation.4

McLean attracts patients primarily from the Boston metropolitan area and Eastern Massachusetts but also draws patients nationally and internationally. These individuals include: patients referred for treatment comparable to what is available at other psychiatric facilities or for treatment in several specialized areas; patients who need more sophisticated psychopharmacological and psychological diagnosis and treatment than is available in other facilities; patients with concurrent substance abuse or developmental disabilities; patients with psychiatric disorders requiring sustained management and treatment; and patients with psychiatric disorders combined with other medical disorders. McLean’s referral sources include other Partners HealthCare facilities; other hospitals, including other psychiatric hospitals; McLean and community clinicians, including primary care physicians; nursing homes; and a wide array of community mental health service agencies.

For each of the last 18 years, McLean has received more NIH research funding than any private psychiatric hospital in the country. McLean’s research focus is on basic benchtop, preclinical, translational and clinical neuroscience. Technology available to support research includes a transgenic facility and a continuum of MRI capabilities. All of McLean’s active staff physicians and psychologists hold Harvard Medical School appointments. McLean, in 4 Best Hospitals 2015-2016: The Honor Roll, U.S. News & World Report, July 2015, at http://health.usnews.com/best-hospitals/rankings/psychiatry. To be ranked, a hospital had to be named by at least 5% of the psychiatric specialists who responded to U.S. News surveys in the last three years.

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conjunction with The General, operates training programs for residents in adult, child and adolescent psychiatry. In addition, McLean offers programs for predoctoral and postdoctoral students in psychology and for fellows in geriatric psychiatry, substance abuse treatment and neurology and neuropsychology.

McLean offers a number of additional programs, both on and off campus. On the main Belmont campus McLean operates a fully accredited high school, the Arlington School, for students with psychological disorders who cannot be taught in traditional settings, as well as the Pathways Academy, which offers specialized services for children and adolescents with neuro-integrative disabilities such as autism, Asperger’s Disorder and nonverbal learning disabilities. Both schools have been approved by the Massachusetts Department of Education for special education funding.

Off campus, McLean maintains the following satellite programs: the McLean Ambulatory Treatment Center at Naukeag, a 26-bed residential and partial hospital facility in Ashburnham, offering drug and alcohol treatment; the McLean Center at Fernside in Princeton, a self-pay residential program for individuals with substance use disorders; McLean SouthEast, located in Middleborough, a 30-bed inpatient and partial hospital general adult psychiatric facility and a 22-bed acute adolescent residential treatment program; the Gunderson Residence in Cambridge, a self-pay residential treatment program for women with borderline and other complex personality disorders; McLean Borden Cottage in Camden, Maine, a self-pay residential treatment program for adults with substance use disorder; McLean Pavilion Annex in Waltham, a self-pay program for adults in need of an intensive evaluation and diagnostic program; and the McLean Residence at Lincoln, an eight-bed therapeutic residential program setting for men and women, ages 18 and older, receiving partial hospital or intensive outpatient care for mood, anxiety and other related disorders on the McLean Hospital, Belmont campus and elsewhere in the community.

McLean also manages the inpatient, and partial hospital services for children and

adolescents at Franciscan Children’s Hospital in Brighton.

VI. RESEARCH ACTIVITIES

The conduct of biomedical research constitutes one of Partners HealthCare’s core missions and activities. It includes fundamental bench research in all of the life sciences disciplines, patient-centered research within the inpatient and outpatient services of Partners HealthCare hospitals, clinical trials of new drugs and devices, health services and epidemiological research.

Each Partners HealthCare affiliate with major research operations – The General, BWH, Spaulding Boston and McLean – act as separate research grant recipients. However, PHS coordinates system-wide research activities. Partners HealthCare has developed the infrastructure to support its commitment to clinical/translational research. The Partners HealthCare Clinical Trials Office develops, negotiates and executes clinical research agreements and associated budgets between Partners HealthCare hospitals and outside parties, including pharmaceutical and biotechnology companies. PHS also seeks synergies in obtaining funding and in the conduct of research across the system, including PCPO and other affiliates. Partners HealthCare also provides

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a system-wide approach to creating and facilitating affiliations with pharmaceutical and biotechnology companies.

Partners HealthCare has the largest non-university-based, non-profit private medical research enterprise in the United States. In 2015, Partners HealthCare’s total research expenditures were $1,495.1 million, of which approximately $783.4 million (52%) was funded by NIH and other federal agencies. As of September 30, 2015, Partners HealthCare’s committed future research funding was approximately $2.9 billion.

In addition, DFCI, Partners HealthCare’s joint venture partner in DF/PCC, received $125

million in NIH funding in 2015. Although DFCI is not a member of Partners HealthCare, DF/PCC coordinates the clinical cancer research programs of both DFCI and Partners HealthCare.

The following table sets forth total research revenue by funding source received by

Partners HealthCare for the year ended September 30, 2015:

Source (in thousands)

NIH and other federal agencies $783,402 Foundations/other sponsors 548,196 Corporations 163,483

Total $1,495,081

The following table sets forth research direct expense, research overhead recovery and

total research expenditures by Partners HealthCare for the three years ended September 30, 2015.

(in thousands)

Fiscal Year

Research Direct

Expense

Research Overhead Recovery

Research Total

2013 $ 1,131,932 $ 336,915 $ 1,468,847

2014 1,079,505 337,029 1,416,533

2015 1,157,349 337,732 1,495,081

Other federal agencies that provide research funding to Partners HealthCare include the

U.S. Department of Defense which has provided funding over the last 14 years to support The Center for Integration of Medicine & Innovative Technology, a consortium of BWH, The General, The Massachusetts Institute of Technology, Draper Laboratory and Beth Israel Deaconess Medical Center (BIDMC), including approximately $5 million per year in funding over the last five years.

Health care and industry collaborations have emerged as a key force in the development and commercialization of biomedical and health care innovations. These relationships provide for the exchange of expertise between investigators, clinicians and administrators based at academic health systems, like Partners HealthCare, and for-profit corporations. They often include the exchange of academic-based intellectual property or cutting edge research in return for financial support or compensation or for access to proprietary technology and services from industry. Partners HealthCare’s vision for academic-industry strategic alliances is to utilize its integrated health care delivery system as a “living laboratory” to develop and test strategies and implement solutions for improving patient care. In 2015, Partners HealthCare research institutions conducted $164 million of industry-sponsored research, including $109 million in clinical trials ($75 million of which were large multi-centered clinical trials directed by PHS involving cardiovascular

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medicine, AIDS, cancer, neurology, genetics, and psychiatry), and $42 million in on-site industry/corporate sponsored laboratory research. In addition, $18.4 million in Non-Profit/Industry Originated Clinical Trials were conducted primarily through DFCI.

Partners Innovation provides commercialization services across Partners HealthCare, including promoting business development and commercialization through company creation, license transactions, securing research collaborations, technology development funding and managing intellectual property including filing for patents. Partners Innovation is organized into clinical “vertical” market sectors, spanning nine core specialties, enabling emphasis on disease insights and therapeutic options. In 2015, Partners HealthCare’s commercialization revenue from royalties and licensing agreements and equity monetization was approximately $110 million. The Partners Innovation Fund invests in companies based on technology developed by Partners HealthCare investigators. During 2014 and 2015, the monetization of three Innovation Fund portfolio companies generated $16.2 million in revenue, with the potential to contribute an additional $14 million based upon the achievement of milestones. As of September 30, 2015, it held positions in 24 companies. Including those companies, more than 175 companies have been established based in whole or in part on the work of Partners HealthCare investigators.

Partners HealthCare continues to collaborate with Harvard University, which established the Harvard Catalyst, an NIH funded enterprise dedicated to improving human health that includes other Harvard Medical School affiliated educational and healthcare centers in the Boston area. Harvard Catalyst was initially funded in 2008 and in 2013 was awarded a $121 million five year grant from NIH.

Partners HealthCare also supports various research programs to facilitate the translation of medical advances to its patients. Partners Personalized Medicine (PPM) was established by Harvard Medical School and Partners HealthCare in 2001 to realize the promise of genetics and genomics in research and in medical practice. One of the goals of PPM is to translate the knowledge gained from genetics and genomics, in particular to apply such knowledge so that genetic and genomic testing becomes an integral part of diagnosis, prognosis and treatment of disease and of the determination of the appropriate drugs for individual patients served by the Partners HealthCare institutions. PPM works with Partners HealthCare affiliates to demonstrate how genetic knowledge can be used by physicians in making clinical decisions. In 2013, the Laboratory for Molecular Medicine, a part of PPM, launched a Clinical Genome Sequencing service incorporating the power of genome sequencing with rigorous clinical interpretation of sequence information. The Laboratory for Molecular Medicine was selected by NIH as one of two designated centers to serve as a central sequencing and genotyping facility.

The implementation of Partners eCare is enabling targeted research opportunities to be integrated at the point-of-care using tools built by Partners HealthCare. The Partners Research Patient Portal is a comprehensive, leading-edge patient research engagement solution that aims to connect patients with research based on phenotypic characteristics, increase transparency in how patients review and search for research studies, provide opportunities for patients and researchers to engage at different levels of participation, and facilitate research-based electronic data collection.

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The Partners HealthCare Biobank is a repository of thousands of consented Partners HealthCare patient samples linked to the electronic medical record which are used in research to better understand, prevent, and treat many different diseases. Partners HealthCare Research Computing oversees the development and implementation of informatics based tools for its research community. In 2013, it launched the Partners Big Data Commons, which includes phenotyping to leverage Partners HealthCare’s electronic medical record in conjunction with already developed research registry tools to combine knowledge from many different data sources to better understand patient outcomes and treatment responses.

In 2014, BWH, together with The General and Harvard Medical School, was awarded a seven year $15 million NIH grant as one of three NIH Centers for Accelerated Innovation with matching institutional, commercial and other federal funds to establish the Boston Biomedical Innovation Center (B-BIC). B-BIC was designed to partner with industry to accelerate the development of diagnostic products in the areas of cardiac, pulmonary, sleep and hematologic diseases.

Partners HealthCare was also awarded two grants totaling $12 million in collaboration with the NIH Electronic Medical Records and Genomics Network (eMERGE). The primary goal of the eMERGE Network is to develop, disseminate, and apply approaches to research that combine DNA biorepositories with the electronic medical record system for large-scale, high-throughput genetic research. PHS will leverage its investment in Partners eCare and the BioBank to identify rare and common gene variants and examine how those variants relate to disease risks and treatment effects.

Partners HealthCare has also been involved in formulating the President’s Precision Medicine Initiative, PMI a national research effort established in 2015 to revolutionize health care and the treatment of disease. The initiative aims to give medical professionals the resources they need to target specific treatments for illnesses and further develop scientific and medical research, taking into account individual differences in people’s genes, environments and lifestyles.

VII. COMPETITIVE ENVIRONMENT

Partners HealthCare’s primary service area is similar for its Acute Care, Rehabilitation and Psychiatric Care and Network Sectors and is comprised of the City of Boston and surrounding communities in Eastern Massachusetts (generally described as those within Interstate 495 and the Cape and Islands). Individual Partners HealthCare acute care hospitals primarily draw from discrete but overlapping portions of this primary service area while the Rehabilitation and Psychiatric Care and the Network Sectors attract patients that are more widely dispersed throughout this area.

The following table sets forth total 2013 discharges (the most recent year for which data are available) from Partners HealthCare acute care hospitals (i) from within Eastern Massachusetts; (ii) from elsewhere in Massachusetts; and (iii) from elsewhere in the United States and foreign countries.

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2013 Partners HealthCare

Discharges (1)(2)% of Partners HealthCare

Discharges Eastern Massachusetts 121,337 82.3% Other Massachusetts 11,989 8.1% Outside of Massachusetts 14,099 9.6%

(1) Source: 2013 Inpatient Case Mix Database (Massachusetts Center for Health Information and Analysis) (2) Discharge data exclude all normal newborns and include discharges from BWH, DFCI discharges at BWH, The

General, BWFH, NWH, NSMC, MVH, NCH and Cooley.

The 2013 estimated population of the primary service area was approximately five

million.

Within Eastern Massachusetts there are approximately 55 acute care hospital sites, and 11 psychiatric and 15 rehabilitation hospitals, including Partners HealthCare affiliates. In addition, other acute care and specialty hospitals located outside Eastern Massachusetts compete with Partners HealthCare to attract patients both from within this area and outside of it. Partners HealthCare hospitals in the aggregate account for more discharges and generate more revenue than any other hospital or affiliated groups of hospitals in Eastern Massachusetts.

Partners HealthCare’s principal competitors are five other academic medical centers located in the Boston area and their affiliated parent systems: BIDMC, Boston Medical Center (BMC), Tufts Medical Center (TMC), Lahey Hospital & Medical Center (Lahey) and St. Elizabeth’s Medical Center (St. Elizabeth’s). BIDMC is the founding member of CareGroup, which has five other affiliated hospitals (BIDMC-Needham, BIDMC-Milton, BIDMC – Plymouth, Mt. Auburn, and New England Baptist). Lahey includes Lahey Hospital & Medical Center, Lahey Medical Center – Peabody, Beverly Hospital, Addison Gilbert Hospital and Winchester Hospital. St. Elizabeth’s is a member of Steward Health Care System LLC (Steward), a holding company for the private equity firm Cerberus Capital Management. BMC is an independent academic medical center.

The Massachusetts health care industry is highly competitive. Many Massachusetts hospitals have merged, closed or affiliated with other hospitals or have been acquired by for-profit hospitals or investors in an effort to remain financially viable as health care delivery systems compete against each other and against non-hospital providers of health care services, including physician groups, specialty providers and other industry participants. In 2013, Tenet Healthcare Corporation acquired Vanguard Health Systems, including Vanguard’s two Massachusetts facilities, MetroWest Medical Center, with campuses in Framingham and Natick, and Saint Vincent Medical Center in Worcester. In 2014, Lahey acquired Winchester Hospital in Winchester, Massachusetts, and BIDMC acquired Jordan Hospital in Plymouth, Massachusetts. In 2014, TMC and Lowell General Hospital, which acquired Saints Medical Center in 2012, announced the formation of a new parent company, Wellforce. Within the acute care sector, many of the surviving hospitals have embarked upon significant facility expansion and refurbishment projects, both on their main campuses and in existing and new satellite locations, and on programs to expand or reconfigure their service lines in order to capture incremental market share, to enter potentially profitable service lines or to reduce or limit services in service lines that generate losses.

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Partners HealthCare withdrew plans to acquire South Shore Hospital (SSH) in Weymouth, Massachusetts in February 2015, and withdrew plans to acquire Hallmark Health System (Hallmark Health), which includes Melrose-Wakefield Hospital in Melrose, Massachusetts and Lawrence Memorial Hospital in Medford, Massachusetts, in December 2015. For more information, see “Litigation and Regulatory Matters” in this Appendix A. In 2015, Partners HealthCare acquired Harbor, a physician practice with approximately 70 physicians based in Weymouth, Massachusetts.

The following table sets forth the shares of inpatient discharges of Partners HealthCare and its principal competitors within the primary service area described above for the five years ended September 30, 2013:

Percent of Eastern Massachusetts Inpatient Discharges

Years Ended September 30, 2013

2009 2010 2011 2012 2013

Partners HealthCare(1) 21.7% 21.6% 21.5% 22.0% 22.3%

Steward(2) 10.6% 10.7% 10.7% 13.1% 12.6%

CareGroup (3) 9.5% 9.6% 9.4% 9.9% 9.8%

Boston Medical Center 4.9% 4.8% 4.6% 4.3% 4.3%

Lahey Clinic(4) 3.1% 3.1% 3.1% 6.5% 6.6%

Tufts Medical Center 2.9% 3.2% 3.2% 3.3% 3.2%

Other 47.4% 47.0% 47.6% 40.8% 41.0%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Mass Center for Health Information and Analysis; Excludes normal newborns. (1) Partners HealthCare includes DFCI discharges at BWH; excludes Cooley. (2) Steward includes Carney, Good Samaritan, Holy Family, Holy Family at Merrimack Valley, Nashoba, Norwood, St. Anne’s and St.

Elizabeth’s. Includes Quincy Medical Center and Morton Hospital beginning in 2012. (3) CareGroup includes BIDMC, BID – Needham, Baptist and Mt. Auburn and Milton Hospital beginning in 2012. Excludes Jordan Hospital. (4) Lahey includes Northeast Health System beginning in 2012; excludes Winchester Hospital.

Partners HealthCare’s market reach extends more broadly across all of Eastern Massachusetts than any of its competitors and as the above table indicates, Partners HealthCare market share is significantly higher than that of its nearest competitor.

The following table sets forth discharges and patient days for all adult Boston teaching hospitals for the two years ended September 30, 2013 and 2014 and the nine months ended June 30, 2015:

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Source: Boston Organization of Teaching Hospitals Financial Officers. Discharges and patient days exclude newborns. Partners HealthCare inpatient data include DFCI licensed beds located at BWH.

VIII. EDUCATIONAL AFFILIATIONS AND PROGRAMS

The Partners HealthCare hospitals have a long tradition of educating physicians, other healthcare professionals and biomedical scientists. Approximately 1,463 residents and 694 clinical fellows in over 278 programs in nearly all specialties and subspecialties of medicine are appointed to the hospitals each year. Most of these are based at BWH and/or The General, but NWH, NSMC and Spaulding Boston also sponsor graduate medical education programs. A number of training programs are integrated across two or more Partners HealthCare hospitals, and several involve affiliations with other Harvard Medical School or TUSM teaching hospitals. Graduate medical education at Partners HealthCare utilizes both inpatient and ambulatory settings; the Partners HealthCare affiliated community health centers play an important role in training healthcare professionals at Partners HealthCare.

BWH and The General are major teaching affiliates of Harvard Medical School and the Harvard School of Dental Medicine. Most of the active clinical and research staff of BWH and The General hold Harvard Medical School appointments and actively participate in both the clinical and pre-clinical training of medical students. McLean and Spaulding Boston are principal clinical teaching sites for Harvard Medical School students in psychiatry and physiatry, respectively.

BWFH, NWH and NSMC are teaching affiliates of TUSM and also serve as training sites for residency programs from BWH and The General. NWH is also a training site for a Tufts Medical Center residency program and many members of NWH’s medical staff and the chiefs of its clinical departments hold TUSM faculty appointments.

Year Discharges Patient Days

Partners HealthCare (BWH, The General, DFCI 2013 91,973 553,233 combined) 2014 89,271 548,074

2015 68,812 412,436

BMC 2013 23,815 115,961 2014 23,880 123,890 2015 17,099 89,415

Care Group 2013 31,340 174,526 (BIDMC) 2014 33,004 189,691

2015 25,769 149,886

Steward 2013 11,378 52,636 (St. Elizabeth’s) 2014 11,066 47,732

2015 7,967 36,291

Lahey 2013 20,925 102,279 2014 21,380 102,758 2015 16,550 80,523

Tufts Medical Center 2013 19,046 99,906 2014 16,940 92,790 2015 12,412 69,183

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The Institute awards baccalaureate degrees in nursing; master’s degrees in nursing, physical therapy, health professions education, and communication sciences and disorders; and doctorate degrees in physical therapy, occupational therapy, rehabilitation sciences, and nursing practice. The Institute is accredited by the New England Association of Schools and Colleges and by discipline-specific accrediting organizations. The Institute partners with more than 600 clinical affiliates, including community hospitals, community health centers, health and research-related industries, home health care agencies, major academic medical centers, private practices, rehabilitation hospitals, and school-based clinics. It currently has over 100 full- and part-time faculty members and enrolls more than 1,200 full- and part-time students onsite and online.

In addition, The General sponsors programs in podiatry and psychology; McLean sponsors programs in psychology; BWH and The General provide training in general dentistry; and BWH and The General each offer internships in dietetics and hospital administration fellowships.

Complementing the diversity of clinical training, there are approximately 2,000 research fellows at BWH and The General, with some additional fellows at the other institutions. These Ph.D. or M.D./Ph.D. scientists participate in mentored research experiences. Many also take part in one of the didactic programs aimed at basic, translational, or clinical and outcomes research that are offered within the Partners HealthCare system.

IX. NEIGHBORHOOD HEALTH PLAN

On October 1, 2012, Partners HealthCare acquired NHP, a non-profit, licensed managed care organization founded in 1986. NHP serves members who have access to a provider network of more than 4,800 primary care practitioners, 13,000 specialists, and 73 teaching, community, and specialty hospitals throughout Massachusetts. NHP serves MassHealth and other subsidized and commercial populations and employs approximately 600 FTEs.

NHP offers products and services through the MassHealth managed Medicaid program, public and private exchanges and direct-to-employers via a broker network. It participates in the Massachusetts small group and individual market (1-50 lives) as well as the mid and large-group markets (up to 500 lives). NHP also has more than 10,000 members in several large group accounts. NHP’s HMO product portfolio offers individuals, brokers and employers a complete range of fully-insured products and services with a value proposition predicated on affordability and ease of use. NHP also offers a PPO option to complement its HMO plans, which is attractive to employers with out of state employees.

In September 2014, NHP was named one of the top 10 Medicaid managed care organizations (MMCOs) in the country based on quality by the National Committee for Quality Assurance (NCQA), a position that NHP has retained for seven consecutive years. In addition, NHP ranked in the top 15% of 507 commercial health plans evaluated by NCQA in the 2014-2015 rankings.

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For the three years ended September 30, 2013, 2014 and 2015, NHP’s membership was as follows:

(1) Effective January 31, 2015, the Commonwealth discontinued the Commonwealth Care program.

As of September 30, 2015, NHP’s membership comprised approximately 23% of the managed Medicaid population and 6% of the fully insured commercial population. NHP’s managed Medicaid membership increased by 71,699 (44%) in 2014 and 46,883 (20%) in 2015. The changes in NHP’s managed Medicaid membership in 2014 and 2015 were principally driven by the implementation of the ACA and Massachusetts’ election to expand its Medicaid program, resulting in the shift of certain populations previously included in Medicaid fee-for-service programs, the state-subsidized Commonwealth Care program and the HSN into MMCOs. In addition, NHP experienced volatility in its Medicaid membership in 2015 due to the Commonwealth’s member eligibility re-determination process, which was initiated in early 2015 and is expected to be completed in early 2016. The new Medicaid members in 2014 and 2015 generated substantially higher medical claims than Commonwealth actuaries had projected, causing NHP to record unfavorable financial performance in 2014 and 2015. For information concerning certain operating losses of NHP in 2014 and 2015, see “Management’s Discussion and Analysis of Recent Financial Performance” under the heading “Consolidated Partners HealthCare Financial Review – Results of Operations - 2013-2014 and 2014-2015, Insurance Segment” in this Appendix A.

Commercial membership at NHP increased 13,033 (18%) in 2014 and 43,062 (40%) in 2015, representing 30% of its total membership at September 30, 2015. The individual and small group (1-50 lives) market segments represented 82% of NHP’s total commercial membership as of September 30, 2015. Growth in these segments is expected to continue, but will become a smaller percentage of the commercial membership as NHP implements a commercial growth strategy focused on mid to large employer groups (51-500 members) in greater Boston. This commercial strategy will build on NHP’s core strengths, including price advantages and unique provider partnerships such as the Partners HealthCare/NHP affiliation and strategic ties with Community Health centers, and will also introduce an expanded brand campaign, enhanced broker relations and strategic network expansion. Although NHP currently offers employer groups only a fully-insured option, NHP is in the process of implementing expanded product offerings to enhance its potential for further commercial membership growth. In July 2015, NHP announced a partnership with CVS/caremark for pharmacy benefit management services. CVS/caremark will provide access to a comprehensive retail pharmacy network and manage a variety of services for NHP’s members, including online claims processing, mail order and specialty and formulary management. In addition, CVS/caremark will work with NHP in implementing a variety of patient-centric and clinical programs for NHP’s


2013 2014 2015

Medicaid 161,517 233,216 280,099 Commonwealth Care(1) 31,782 12,900 0 Commercial 71,163 84,196 127,258

Total 264,462 330,322 407,357

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membership, including initiatives that educate and empower members to make informed decisions about their health care. The CVS/caremark partnership also represents a significant pharmacy benefit cost saving opportunity for NHP. The affiliation with Partners HealthCare enables NHP to further its mission and provides enhanced programs and resources to its members. The affiliation also creates synergies which drive both quality care and cost reductions through the development of innovative care models. For example, NHP has partnered with Partners HealthCare’s iCMP clinical team to provide care to its high-risk members, particularly low-income Medicaid recipients. The program has been credited for reducing hospital visits among high-risk patients and lowering the overall cost of care despite the intense resources focused on some patients. This successful clinical model will soon be expanded to federally qualified community health centers in NHP’s network. A special emphasis will be placed on those members with mental health and substance use disorders — the conditions most commonly found in members with high utilization patterns. By providing intensive outpatient care management, NHP will be able to provide better, cost-effective care to those members whose complex physical, behavioral, and social needs are not well met through the current fragmented health care system.

X. COMMUNITY BENEFITS

Partners HealthCare is committed to improving the health of communities. Partners HealthCare providers and NHP have a long tradition of recognizing and supporting the essential role that community health centers (CHCs) play in preventing disease and providing accessible, high quality care for residents of Boston and surrounding-area neighborhoods.

Partners HealthCare’s community benefit programs include working with communities to address a number of public health issues including racial disparities, alcohol and substance abuse among young people, infant mortality, domestic violence and cancer. Partners HealthCare provides economic opportunity for low income Boston residents by helping people advance into nursing and other healthcare careers through its public school partnerships and workforce development programs. In addition, twenty community health centers are licensed by or affiliated with Partners HealthCare entities and provide high quality, and culturally competent primary care and access to Partners HealthCare’s hospitals. Partners HealthCare invests in health center infrastructure, programming and operations and also helps with relocation, renovation and other capital requirements.

The Massachusetts Attorney General’s Community Benefits Guidelines direct health maintenance organizations and nonprofit acute care hospitals to prepare annual reports documenting the status and level of their community benefit programs and initiatives. Partners HealthCare’s 2014 annual report indicated that its community benefit commitments were over $206 million, including the provision of medical care to approximately 9,400 uninsured and 149,000 Medicaid patients; support for innovative community health partnerships to improve the health of children and adults; and efforts to strengthen CHCs throughout the Boston area.

In 2014, CHCs operated by Partners HealthCare hospitals in Charlestown, Chelsea, Jamaica Plain (2), and Revere served more than 84,000 patients. By collaborating with health centers in the Boston neighborhoods of Dorchester, East Boston, Jamaica Plain, Roxbury,

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Mattapan, the North End, the South End and South Boston and in Lynn, Peabody and Salem, Partners HealthCare hospitals have expanded medical services and hospital choices for an additional approximately 378,000 health center patients and have provided financial support for health center renovations and expansions to strengthen health centers’ capacity to meet the needs of their patients and communities.

XI. GOVERNANCE AND MANAGEMENT

PHS is a charitable organization established as a membership corporation under Chapter 180 of the Massachusetts General Laws. It is exempt from federal income tax under Section 501(c)(3) of the Code.

PHS currently has 393 Members who serve staggered four year terms. At their annual

meeting the Members fix the number of Members for the next year, elect individuals to fill any vacancies, and fix the number of and elect the Directors of PHS. There are currently 17 Directors of PHS, including the Chief Executive Officer of PHS, the Chair of BWHC and the Chair of MGH who are ex officio members of the Board of Directors. The elected Directors serve staggered three year terms and, except for the Chairman of the Board and individuals who are both officers and employees of PHS, are limited to three consecutive three year terms with no term of service extending to or beyond a Director’s seventy-fifth birthday.

The Board of Directors has responsibility for the overall direction and management of the

affairs, funds and other properties of PHS and for the establishment of policies and procedures intended to ensure the development of the integrated health care network. The Board of Directors meets nine times per year and also discharges its responsibilities through the following standing committees: Audit and Compliance; Compensation; Development; Executive; Finance; Governance; Information Systems; Investment; Nominating; and Professional and Institutional Conduct.

The bylaws of certain of the affiliates of PHS, including The General and BWH, confer

on their respective members certain reserve powers that are exercised by the Board of Directors of PHS and its committees. Such reserve powers include the power to appoint independent auditors of the financial affairs of such affiliates and to review and approve (i) all capital and operating budgets and all non-budgeted expenditures and construction projects in excess of specified dollar amounts; (ii) the incurrence of all new indebtedness; (iii) all significant new business ventures and (iv) each capital fundraising campaign. The Board of Directors of PHS is also responsible for overseeing the investments of PHS and all of its affiliates, including the assets of their ERISA trusts.

PHS Directors

The current Directors of PHS, their principal business affiliations and their year of initial election as a Director are as follows:

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Name Principal Business Affiliation Year Initially

Elected

Edward P. Lawrence, Esq.

Chair Senior Counsel Ropes & Gray LLP

2011

Earl M. Collier, Jr. President The Braxton Company

2014

Anne M. Finucane Global Chief Strategy & Marketing Officer Bank of America

2015

Charles K. Gifford Chairman Emeritus Bank of America

2008

Richard E. Holbrook Chairman and Chief Executive Officer Eastern Bank

2011

Albert A. Holman III Managing Partner Chestnut Securities, Inc.

2008

Maury E. McGough, M.D. President North Shore Health System

2008

Cathy E. Minehan Dean, School of Management Simmons College

2007

Jerrold F. Rosenbaum, M.D. Chief of Psychiatry Massachusetts General Hospital

2015

Scott A. Schoen Chief Executive Officer Baylon Capital Partners, L.P.

2013

Scott M. Sperling Co-President Thomas H. Lee Partners, L.P.

2014

Henri A. Termeer Former Chairman, President & Chief Executive Officer Genzyme Corporation

2008

Dorothy A. Terrell Founder & Managing Partner FirstCap Advisors

2007

Lori W. Tishler, M.D. Medical Director, Phyllis Jen Center for Primary Care Brigham and Women’s Hospital

2015

David Torchiana, M.D. President and Chief Executive Officer Partners HealthCare System, Inc.

2015

Gwill York Managing Director Lighthouse Capital Partners

2013

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Partners HealthCare Senior Management

Partners HealthCare is managed by its President and Chief Executive Officer, assisted by its Executive Vice President of Administration and Finance and a number of Officers and Vice Presidents, including those listed below and a General Counsel. Biographical information on certain of these individuals, as well as on the Presidents and the Chief Financial Officers of BWH and The General, is set forth below.

Dr. David Torchiana, M.D., age 60, became President and Chief Executive Officer of Partners HealthCare System, Inc. in March 2015. Previously, he served as Chairman and Chief Executive Officer of Massachusetts General Physicians Organization at The General Hospital Corporation (2003 – 2015) and Chief of Cardiac Surgery at Massachusetts General Hospital (1998 – 2003). He is an Associate Professor of Surgery at Harvard Medical School and Senior Surgeon (Surgical Service) at Massachusetts General Hospital. He completed residencies in general surgery and cardiothoracic surgery at Massachusetts General Hospital before joining the Department of Surgery in 1989. Dr. Torchiana graduated from Yale College in 1976, was a Churchill scholar at Cambridge University in 1977, and graduated from Harvard Medical School in 1981.

Peter K. Markell, age 60, was appointed Executive Vice-President for Administration

and Finance in November 2011 in addition to Chief Financial Officer and Treasurer and has been with Partners HealthCare since 1999. Previously, he served as interim Chief Financial Officer of MGH and The General (1995-1997) and was with Ernst & Young, LLP (1977-1999), where he had been a partner of the firm since 1988. He received a B.S.B.A. degree from Boston College and is also a Certified Public Accountant. He is on the Board of Boston College, Big Brother Big Sister of Massachusetts Bay, Eastern Bank, CRICO and The McLean Hospital.

John Barker, age 47, was appointed Chief Investment Officer in 2012. Previously, he held positions at Harvard Management Company (2009–2012), Wellesley College (2002-2008), Paratus Capital (1998-2002), and Cambridge Associates (1991-1994). He is a Trustee of the Winsor School and Brooks School, where he currently co-chairs Brooks’ investment committee. He sits on the Boston University, Winsor School, and CRICO investment committees and is an independent member of the Cargill/MacMillan Family’s Waycrosse Investment Council. He received his M.B.A. from the Wharton School at the University of Pennsylvania and his A.B. from Dartmouth College.

Lynne Eickholt, age 63, was appointed Chief Strategy Officer in 2013. Previously, she was Vice President for Finance Analytics and Planning (2006-2011) and Vice President for Managed Care (1995-2006). Prior to joining PHS, she was Vice President of Managed Care, Planning and Marketing at MGH (1993-1995); Director of Managed Care at New England Medical Center in Boston (1987-1992), and Deputy Director of the Arkansas Department of Human Services (1976-1985). She completed undergraduate studies at Wake Forest University and received a master’s degree in Regional Planning from the University of North Carolina at Chapel Hill and a M.B.A. from Harvard Business School.

Brent L. Henry, Esq., age 68, has been Vice President and General Counsel since 2002. Previously, he served as Vice President and General Counsel for MedStar Health,

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Washington, D.C. (1985-2002). Mr. Henry began his career with the law firm of Jones, Day, and later directed the New York City Medicaid Program. He received a B.A. degree from Princeton University and M.U.S. and J.D. degrees from Yale University. Mr. Henry is the Vice Chairman of the Board of Trustees of Princeton University and a Trustee of the Boston Symphony Orchestra. He is also a member of the Board of Directors of Fiduciary Trust Company and is a Past President of the American Health Lawyers Association.

Anne Klibanski, M.D., age 65, was appointed Chief Academic Officer in April 2012. She is also the Laurie Carrol Guthart Professor of Medicine and an Academic Dean at Harvard Medical School. In her role as Partners HealthCare Chief Academic Officer, she oversees Partners HealthCare-wide academic programs in research and education. The author of over 400 papers and chapters, she has served on a number of editorial boards and received numerous awards including the Endocrine Society Clinical Investigator Award and the Clinical Endocrinology Trust Medal from the British Endocrine Society. She has served as a member of the NIH DDK Board of Counselors and is a member of the Association of American Physicians. Dr. Klibanski received a B.A. degree from Barnard College and an M.D. degree from New York University School of Medicine.

Gregg Meyer, M.D., age 54, was appointed Chief Clinical Officer in January

2014. Previously, he was Chief Clinical Officer and Executive Vice-President for Population Health at Dartmouth-Hitchcock (2012-2013), Senior Associate Dean for Clinical Affairs and Paul B. Batalden Professor and Chair at the Geisel School of Medicine (2012-2013), Senior Vice President for the Edward P. Lawrence Center for Quality and Safety at The General (2007-2012) and Medical Director of MGPO (2002-2007). Dr. Meyer received a B.S. degree from Union College, an M.D. degree from Albany Medical College and a M.Sc. (Rhodes Scholar) from Oxford University in England.

James Noga, age 59, was appointed Vice-President and Chief Information Officer in

April 2011. Previously, he held various positions at The General and MGPO, most recently serving as the CIO of The General and the MGPO. Prior to 1990, he held various healthcare IT roles at Riverside Methodist Hospital in Columbus, Ohio. He received an M.S. degree in Biomedical Computing and Information Processing and a B.S. degree in Medical Technology from The Ohio State University. He is an active member of the College of Healthcare Information Management Executives and the Health Information and Management Systems Society.

Brigham and Women’s Hospital

Elizabeth G. Nabel, M.D., age 63, has been President of BWH and BWHC and Professor at the Harvard Medical School since January 1, 2010. Prior to her position at BWH, Dr. Nabel served as the director of the National Heart, Lung, and Blood Institute at NIH. She received a B.A. degree from St. Olaf College and an M.D. degree from Cornell University. She is a member of the American Academy of the Arts and Sciences, the Institute of Medicine (Council) of the National Academy of Sciences, the Association of American Physicians (Council), and a fellow of the American Association for the Advancement of Science. Dr. Nabel has served on the Editorial Boards of the New England Journal of Medicine, Science, and

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Science Translational Medicine, she is a partner on 17 patents and the author of more than 250 scientific publications.

Susan Wheeler, age 47, was appointed interim Chief Financial Officer of BWH in 2015. She continues to serve as BWH Vice President, Finance and Revenue Cycle, a position she has held since 2013. Previously, she served as the BWH Budget Director (2006-2013). She received a bachelor’s degree and a master of business administration in Health Care Management from Bryant College. A national search is underway for a permanent Chief Financial Officer.

The General Hospital

Peter L. Slavin, M.D., age 58, has been President of The General and MGH since 2003. Previously, he was Chairman and Chief Executive Officer of the MGPO (1999-2002) and President, Barnes-Jewish Hospital, St. Louis, Missouri (1997-1999). He received A.B., M.D., and M.B.A. degrees from Harvard University.

Sally Mason Boemer, age 46, has been Senior Vice President for Finance of The General since 1999 and of NSMC since 2009. Previously, she served as a Budget Director and a Financial Analyst (1995-1999) and as an Administrative Fellow (1993 – 1995) for The General. She received a B.S. degree from Cornell University and an M.H.S.A. degree from the University of Michigan.

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PHS Finance Committee The members of the PHS Finance Committee are PHS Directors Earl M. Collier, Jr.,

Richard E. Holbrook, Albert A. Holman, III, who serves as Chairman, Edward P. Lawrence, Esq., Cathy E. Minehan, Scott A. Schoen, Scott M. Sperling and David Torchiana, M.D. Also members of the Finance Committee are Jane Mendillo (ex officio as Chair of PHS Investment Committee) and the following individuals, each of whom is a trustee of one or more of the affiliates of PHS: Name Principal Business Affiliation

David S. Barlow Former Chairman & Chief Executive Officer

Molecular Insight Pharmaceuticals, Inc.

Kevin T. Bottomley Director People’s United Financial, Inc.

John Deutch Institute Professor and Professor of Chemistry Massachusetts Institute of Technology

Steven Kaye Portfolio Manager Fidelity Investments

Carl Martignetti President Martignetti Companies

Carol C. McMullen Principal and Managing Partner The Crossland Group

G. Marshall Moriarty, Esq. Senior Counsel Ropes & Gray, LLP

Ronald L. Skates Retired; Former President and Chief Executive Officer Data General Corporation

Stephen G. Woodsum Founding Managing Partner Summit Partners

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PHS Investment Committee

The members of the PHS Investment Committee are PHS Directors Scott A. Schoen and Albert Holman, III and the following individuals:

Name Principal Business Affiliation

Jane L. Mendillo Chair

Former President and Chief Executive Officer Harvard Management Company

Howard E. Cox, Jr. Special Partner Greylock Management Company

Ben Gomez

Managing Director Pilot House Associates

Jay O. Light Former Professor of Administration and Dean Harvard Business School

Margaret McGetrick Founding Partner and Portfolio Manager Liberty Square Asset Management

Carol McMullen

Principal and Managing Partner The Crossland Group

André Perold Founder, Managing Partner and Chief Information Officer HighVista Strategies

Herbert Wagner Founder, Finepoint Capital

XII. EMPLOYEES

Partners HealthCare is one of the largest non-governmental employers in Massachusetts. As of September 30, 2015, Partners HealthCare employed approximately 46,348 FTEs. Of the total FTEs, approximately 30,400 were employed by BWH and The General. Approximately 7,200 Partners HealthCare employees are members of organized labor unions.

The Massachusetts Nurses Association represents approximately 5,700 registered nurses across Partners HealthCare. Included in these contracts are approximately 3,250 nurses at BWH, 1,000 nurses at NWH, and 600 nurses at NSMC’s Salem Campus, all of whose contracts expired September 30, 2015; approximately 350 nurses at BWFH whose contract extends through March 31, 2016; approximately 330 nurses at Cooley-Dickinson under a contract that extends through January 21, 2017; 40 nurses at VNA & Hospice of Cooley-Dickinson under a contact that extends through December 31, 2017; approximately 90 nurses at MVH under a contract that extends through September 22, 2017; and approximately 50 nurses at Nantucket Cottage Hospital under a contract that extends through September 30, 2016. Hospital management is actively negotiating with nurses covered under the expired contracts at BWH, NWH and NSMC/Salem.

In addition, Partners HealthCare has contracts with three other unions representing approximately 1,500 employees. The American Federation of State, County, and Municipal

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Employees union represents approximately 170 employees at Spaulding out-patient facilities on the North Shore under a contract that expires December 31, 2016. The Area Trade Council represents 61 employees at BWH under a contract that expires June 30, 2017; 12 employees at NSMC under a contract that extends through December 31, 2016; and 16 employees at BWFH under a contract that extends through March 31, 2017. The Service Employees International Union 1199 (1199SEIU) represents approximately 800 employees at NSMC under three contracts. One, covering 25 maintenance and trades employees, expires September 30, 2016. A second contract covering approximately 340 registered nurses, therapists, and medical technicians, expires June 6, 2016. The third contract, covering approximately 430 non-professional employees, expires September 30, 2016. 1199SEIU also represents approximately 230 employees at MVH under a contract that expires March 30, 2017, 4 LPNs at Cooley Dickinson Hospital under a contract that extends through November 8, 2017, approximately 80 employees at Windemere Nursing Home under a contract that expired December 31, 2015, and approximately 130 employees at NCH under a contract that expired December 5, 2015. Hospital management at NCH and Windemere are actively negotiating to settle the expired contracts.

XIII. FACILITIES

A. Partners HealthCare System, Inc.

Partners HealthCare’s main corporate office is located in approximately 25,000 square feet of leased space in the Prudential Building in Back Bay, Boston. PHS also leases 1,012,000 square feet in several locations in and around Boston and owns 250,000 square feet, including a 65,000 square foot data center in Marlborough. PHS also owns a 49 acre parcel in Danvers on which is located the Mass General/North Shore Center for Outpatient Care, 157,000 rentable square feet that is leased to others and a 78,000 square foot medical office building subject to a long term ground lease. Partners HealthCare is constructing an approximately 750,000 square foot administrative building and an approximately 2,000 space parking garage on a 10.7 acre parcel at Assembly Row in Somerville, Massachusetts (see “Management’s Discussion and Analysis of Recent Financial Performance” under the heading “Historical and Projected Capital Expenditures” and “The Project” in this Appendix A).

B. Brigham and Women’s Hospital

The BWH campus is located on approximately 12 acres in the Longwood Medical Area within the City of Boston and consists of 2.3 million owned square feet of record excluding garages. In addition, BWH leases approximately 1.5 million square feet in a number of locations in the Greater Boston area, of which 750,000 square feet is primarily used for research. BWH also has a long term ground lease on the three acre former Massachusetts Mental Health Center site for the BBF, a 380,000 square foot research and clinical facility exclusive of parking, which is currently under construction on a portion of the site.

C. The General Hospital

The General is located on approximately 18 acres of land in the former West End area of the City of Boston and owns an additional two acres at 125 Nashua Street (former site of Spaulding Rehabilitation Hospital). The total owned building area is approximately 4.9 million square feet of record excluding garages. In addition, The General occupies approximately 1.4

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million square feet in leased properties, of which approximately 615,000 square feet is primarily used for research.

D. Other Partners HealthCare Affiliates

Other Partners HealthCare affiliates including Cooley, BWFH, MVH, NCH, NWH, NSMC, McLean, Spaulding, PCC and PCPO, in aggregate comprise over 270 acres of land, 4.8 million owned square feet of record and approximately 1.0 million leased square feet including 11,178 square feet of research space.

XIV. THE PROJECT

The Project will finance portions of the construction and equipping of Partners HealthCare’s administrative building, Partners eCare system, and the BWH’s BBF and NICU projects, all of which are described under “Management’s Discussion and Analysis of Recent Financial Performance - Historical and Projected Capital Expenditures.”

XV. INSURANCE

General liability (GL) insurance, medical professional liability (MPL) insurance (that includes coverage for liability that may arise from medical-staff peer-review activities) and association liability (AL) insurance (that includes coverage for directors’ and officers’ liability, management consulting and advising errors-and-omissions liability and employment-practices liability) for Partners HealthCare are provided by the Controlled Risk Insurance Company of Vermont, Inc. or the Controlled Risk Insurance Company, LTD (referred to herein collectively CRICO). CRICO is a multi-parent captive insurance company serving Partners HealthCare and a number of other healthcare organizations in the Greater Boston area. Partners HealthCare is a 10% shareholder of CRICO. The insurance is provided on a claims-made basis and is provided to certain Boston-area hospital institutions and sponsored organizations having affiliations with Harvard Medical School. CRICO provides GL limits of $5 million per claim and no annual aggregate; MPL limits of $5 million per claim and $10 million annual aggregate; and AL limits of $2.5 million for each loss and $2.5 million annual aggregate. Reinsurance and excess insurance are purchased by CRICO from multiple reinsurers and excess insurers, providing Partners HealthCare with additional total shared GL limits of $105 million, additional total shared MPL limits of $105 million, and additional dedicated AL limits of $57.5 million. Based on the December 31, 2014 reserve report prepared by CRICO’s independent actuary, CRICO’s reserves are adequate to cover its actuarially determined liabilities.

In addition, Partners HealthCare has established actuarially determined reserves in its financial statements to cover MPL claims incurred but not reported to CRICO as of the end of the year. A portion of these MPL reserves has been funded through trust and board-designated funds.

Partners HealthCare is insured by “special form” (formerly referred to as “all-risk”) property insurance policies that provide a base per-loss limit of $1.5 billion for real property, business personal property and business income losses. Partners HealthCare is also covered by various commercial insurers and/or self-insurance mechanisms for other risks and losses including, but not limited to, those in connection with construction risks, commercial crime,

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fiduciary liability, workers’ compensation, helipad and non-owned aviation liability, privacy liability, pollution liability, products liability, construction risks, foreign risks and business auto risks.

Claims against health care providers, including Partners HealthCare, alleging wrongful acts or omissions such as negligence may seek punitive damages in addition to compensatory damages, but insurance usually does not cover judgments for punitive damages. As is the case with most forms of directors’ and officers’ liability insurance, certain risks and losses of Partners HealthCare in connection with allegations of mismanagement may not be covered by the AL insurance provided by CRICO. While management considers the current types and amounts of liability insurance coverage maintained by Partners HealthCare to be adequate, no assurance can be given that Partners HealthCare will continue to maintain in the future the types and coverage amounts currently in place, that the coverage will be sufficient to cover all insurable liability judgments rendered against or settlements entered into by Partners HealthCare or that adequate coverage will continue to be available at reasonable cost. Any such uninsured losses would be incurred directly by Partners HealthCare, and such losses, if material, could adversely affect the results of operations and financial condition of Partners HealthCare.

XVI. LITIGATION AND REGULATORY MATTERS

PHS, BWHC, BWH, MGH, The General and other Partners HealthCare institutions are involved from time to time as both plaintiffs and defendants in a variety of litigation matters and as the subjects of investigations and enforcement actions by government agencies. In addition, due to the broad scope and complexity of the health care and insurance operations of Partners HealthCare and the extensive array of regulatory and compliance oversight of such operations, events and circumstances occur on a not infrequent basis that, while the significance thereof is not immediately apparent, could in due course result in investigations and enforcement actions by government agencies. Some of these enforcement actions could in turn result in substantial refunds to the government, fines and potentially burdensome corrective action plans. Such government investigations and enforcement actions could arise, for example, in the context of concerns about the integrity of research data, breaches of information systems security, improper billing practices, prescription drug diversion and consumer complaints about insurance coverage decisions. An example of such circumstances can be found in a review currently being conducted jointly by BWH and Harvard Medical School and by certain federal agencies regarding concerns of possible data integrity issues in a number of papers published by members of the BWH medical staff and in data submitted to NIH in connection with federal funding for the research underlying these papers. If these concerns are ultimately confirmed and determined to be material to the federal funding, the federal government could institute enforcement action that, if successful, could result in recoupment of the NIH funding from BWH and related fines and penalties, which amounts could be substantial since the NIH has been funding this research for over seven years, as well as possible corrective action requirements. Another example involves an investigation currently being conducted by the DOJ and the AGO of Medicare and Medicaid billing for certain concurrent surgeries at The General. Management considers such actual or potential litigation and regulatory matters to be a routine part of health care operations. Management believes that Partners HealthCare has adequate insurance coverage for claims that are insurable and that no uninsured claims, whether

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pending or threatened, would have a materially adverse effect on the ability of PHS, BWHC, BWH, MGH or The General to meet their respective obligations with respect to the Series Q Bonds in the event of an adverse outcome. Investigations of Network Conduct and Pending Acquisitions

In 2009 the AGO began an investigation (joined by the DOJ in 2010) of Partners

HealthCare’s Network and payer contracting practices with regard to health care markets in Eastern Massachusetts (the Conduct Investigation). When PHS filed Hart Scott Rodino notices in 2012 and 2013, respectively, for the proposed acquisitions of SSH and Hallmark Health, the Conduct Investigation was consolidated with the DOJ and AGO reviews of those proposed acquisitions.

After extensive settlement negotiations, PHS and the AGO reached an agreement that

would have permitted both of the proposed acquisitions to proceed and would have ended the Conduct Investigation, subject to certain limitations on PHS’ payer contracting practices and other remedies. This settlement agreement was incorporated into a proposed Consent Judgment that would go into effect upon approval by the Massachusetts Superior Court, and in June 2014 the parties filed the proposed Consent Judgment with the Suffolk Superior Court. The Court received substantial public comments and held several hearings on the proposed Consent Judgment over the balance of 2014. In January 2015 the Court rejected the proposed Consent Judgment, finding first that the Consent Judgment failed to provide adequate protection for the anticompetitive effects that the Court determined would result from the proposed acquisitions and second that the Consent Judgment was so complicated that it was unreasonable to expect the Court to enforce it.

As a result of the rejection of the proposed Consent Judgment, in February 2015 the AGO

exercised its right to terminate the underlying settlement agreement. Shortly thereafter, PHS and SSH decided to abandon their proposed acquisition transaction, and Partners HealthCare and Hallmark Health have recently announced that they have agreed not to pursue their acquisition transaction. While PHS has not received any formal notice from either the AGO or DOJ regarding the status of the Conduct Investigation, to the knowledge of PHS, neither agency has taken any actions in 2015 in furtherance of the Conduct Investigation.

XVII. SOURCES OF PATIENT SERVICE REVENUE

A. Overview

Partners HealthCare’s patient service revenue depends upon a number of factors, including the volume and types of inpatient, outpatient and ancillary services provided by Partners HealthCare hospitals and physicians, the complexity and severity of those inpatient and outpatient services (case mix) and the mix of payment sources (payer mix) and payment rates (whether set by regulation or negotiation or based on established charges).

Partners HealthCare receives a significant portion of its patient service revenue from third

party payers that include government health programs, principally Medicare and Medicaid, and commercial health plans. Payment rates and terms for government health programs are highly

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regulated and subject to frequent statutory and regulatory changes, some of which can be substantial. Future legislation or other changes in or interpretations of government health programs could have adverse effects on reimbursement. Payment rates and terms with commercial health plans are based on periodic renegotiation of contracts, and the results of such renegotiations could also have an adverse effect on reimbursement. See “Bondowners’ Risks and Matters Affecting the Health Care Industry” in the forepart of this Official Statement.

Partners HealthCare hospitals and physicians are generally compensated by third party

payers on a per-service basis. Although the reimbursement practices vary among third party payers, Partners HealthCare hospitals, in common with the broader hospital industry, are reimbursed by payers using various methodologies, including diagnosis related group (DRG) payments, fee schedules, case rates, per diem rates and discounts from established charges. Physician services are generally reimbursed on the basis of the lesser of actual charges or the amounts payable under payer-specific fee schedules. Increasingly, payers are introducing a variety of alternative payment methodologies under which hospitals and physicians assume some level of financial risk for the cost of healthcare services that they provide and are eligible to receive additional payments beyond fee-for-service rates for improving quality and enhancing coordination of care. For a discussion of national and Commonwealth healthcare reform initiatives that may materially affect the manner in which Partners HealthCare hospitals and physicians are paid for patient care services, see “Bondowners’ Risks and Matters Affecting the Health Care Industry” in the forepart of this Official Statement.

B. Medicare

Medicare is a federal health care program that pays providers of institutional and non-institutional services, including inpatient and outpatient hospital services, physician services, medical supplies, durable medical equipment and inpatient and outpatient prescription drugs, on behalf of individuals who are elderly, disabled or subject to certain chronic conditions. As described below, Medicare pays participating providers either directly through fee-for-service and incentive arrangements or through managed care (Medicare Advantage) plans that contract with the providers. Rules governing Medicare payment methodologies and rates are issued annually by the Centers for Medicare & Medicaid Services (CMS) within the United States Department of Health and Human Services.

1. Acute Care Hospital Payments — Inpatient

Medicare pays acute care hospitals for general medical/surgical services provided to eligible inpatients under the inpatient prospective payment system (IPPS). Under IPPS, hospitals receive a predetermined payment amount for each Medicare discharge based on the Medicare Severity Diagnosis Related Group (MS-DRG) to which the discharge is assigned and an inflation and area wage-adjusted base payment rate (IPPS base rate). The MS-DRG system classifies treatments for illnesses according to the clinical characteristics and estimated costs of hospital resources necessary to furnish care for each patient and assigns a relative weight to each MS-DRG based on the national average cost of treating that MS-DRG compared to the national average cost of treating all MS-DRGs. The MS-DRG classification system and the relative MS-DRG weights are updated annually. In order to determine the IPPS base rate for the hospitals in a given geographic area, CMS establishes a uniform national base payment amount per inpatient

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discharge that is updated annually (1) by the hospital “market basket” percentage increase to adjust for inflation (using national indices) in the costs experienced by hospitals in purchasing goods and services to provide inpatient services; and (2) by the area wage index for the OMB core based statistical area (CBSA) in which the hospital is located to adjust for the difference in wage levels between that CBSA and the national average wage level. The payment amount for the discharge is then determined by multiplying the hospital’s annually updated IPPS base rate by the applicable MS-DRG weight. Hospitals are thus at financial risk for providing inpatient services to a patient if the actual cost of care is greater than the amount payable by Medicare for the applicable MS-DRG. However, Medicare also makes payments to acute care hospitals in addition to the per discharge MS-DRG payment for “outlier” cases, that is, cases that exceed a predetermined cost threshold.

Medicare makes additional payments, known as the disproportionate share hospital

(DSH) adjustment, to hospitals that serve large numbers of low-income patients, some of whom are uninsured. In the ACA Congress reduced the DSH payments in anticipation of the expected decrease in the number of uninsured patients as a result of the ACA. Beginning in FFY 2014, hospitals received only 25% of the amount that they would have received under the former statutory DSH payment formula. The balance, equal to an annual estimate of 75% of what otherwise would have been paid as DSH payments, is aggregated nationally, reduced by specified percentages and by other factors and then distributed to all acute care hospitals based on their relative share of a CMS measure of total uncompensated care.

Hospitals with graduate medical education programs (residencies) receive payments from

Medicare to offset both the additional direct costs and indirect costs (IME) of patient care associated with these training programs. These payments are based on the number of eligible residents (subject to certain caps), the number of inpatient beds (in the case of IMD only) and rates set by Congress. Because IME payments represent a substantial amount of additional revenue for acute care teaching hospitals, there have been a number of unsuccessful efforts in Congress in the past to curtail IME payments as a means of reducing overall Medicare spending.

2. Acute Care Hospital Payments — Outpatient

Most hospital outpatient services are reimbursed under the outpatient prospective payment system (OPPS). Other services, including laboratory services, are paid under separate fee schedules. Under OPPS, hospitals receive a predetermined payment amount based on the ambulatory payment classification (APC) group to which the items and services provided by the hospital have been assigned and an inflation and area wage-adjusted, dollar-denominated conversion factor. Items and services are assigned to APCs based on their having similar clinical characteristics and resource costs. Each APC is assigned a relative weight based on the resources needed to provide the applicable items and services. The APC weights are updated annually to account for changes in the relative costs of such items and services. In order to determine the conversion factor for hospitals in a given CBSA, CMS establishes a uniform national payment rate for outpatient services that is updated annually (1) by the hospital “market basket” percentage increase; and (2) by the area wage index for the CBSA in which the hospital is located. The payment amount for the specific outpatient services provided by the hospital is then determined by multiplying the hospital’s annually updated conversion rate by the applicable APC weight. As with IPPS, hospitals are thus at financial risk for the actual cost of outpatient

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services that are reimbursed pursuant to OPPS, but Medicare also makes outlier payments to hospitals for individual outpatient services whose costs are not adequately accounted for under OPPS. CMS has been expanding the number of items and services that are bundled into individual APCs in order to incentivize hospitals to deliver more efficient and higher quality care.

CMS and others have been concerned that services provided in off-campus hospital

outpatient facilities were being reimbursed under OPPS at rates that were higher than rates paid for similar services provided in physician offices and freestanding ambulatory care centers. In the Bilateral Budget Act of 2015 Congress responded to these concerns and mandated that, effective January 1, 2017, Medicare services that are furnished in off-campus hospital outpatient departments that commenced operations on or after November 2, 2015, be paid at “site neutral” rates, i.e. under the Medicare Physician Fee Schedule (MPFS), the ambulatory surgery center fee schedule or the clinical laboratory fee schedule, as applicable, and not pursuant to OPPS.

3. Acute Care Hospital Payments — Adjustments

The ACA and CMS regulations contain a number of provisions that result in reductions to hospital IPPS base rates and OPPS conversion rates by means of a number of adjustments and limitations. Examples include the following:

ACA Mandated Reductions. The ACA mandated graduated annual reductions in inpatient and outpatient Medicare rates for all hospitals (including acute care hospitals) through FFY 2019 by means of specified annual percentage reductions in the market basket adjustment and by a national productivity adjustment that reduces the annual hospital market basket adjustments in response to national productivity gains. The ACA established several adjustments relating to a hospital’s performance on certain quality measures. Payments are reduced for hospitals whose rates of readmissions and hospital-acquired conditions exceed certain benchmarks. Hospital payments are also adjusted (both upward and downward) based on a hospital’s performance in the Hospital Value Based Purchasing Program, a set of composite quality measures.

Limits on Availability of Full Market Basket Adjustments. Under the Hospital Inpatient and Hospital Outpatient Quality Reporting Programs hospitals that fail to report annually to CMS on a full set of quality of care data for inpatient and outpatient services experience a 25% reduction to their otherwise allowed full market basket adjustment to their IPPS base rates and OPPS conversion rates, respectively. All Partners HealthCare acute care hospitals have consistently reported on this quality data and are expected to continue to report all required quality data. In addition, beginning in FFY 2015, acute care hospitals that did not demonstrate meaningful use of certified electronic health record (EHR) systems forfeit a percentage of the otherwise allowed full market basket adjustment on their inpatient rates. This penalty started with a 25% reduction in the market basket adjustment in FFY 2015, a 50% reduction in FFY 2016, and it increases to a reduction of 75% in FFY 2017 and thereafter. None of the Partners HealthCare acute care hospitals incurred a penalty for failure to meet meaningful use requirements in FFY 2015, and they do not expect to incur such penalties in subsequent years.

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Behavioral Offset. CMS concluded that implementation of the MS-DRG system had the unintended effect of increasing aggregate Medicare inpatient hospital payments without a corresponding increase in actual severity of illness. CMS was statutorily required to maintain budget neutrality when implementing the MS-DRG program. Accordingly, acting under Congressional authority, CMS instituted a series of prospective inpatient rate reductions to recoup these overpayments. The most recent recoupment program involves the reduction of the IPPS base rates for each of FFYs 2014 through 2017. In connection with that recoupment program, in FY 13 Partners HealthCare recorded the estimated amounts of overpayments to its hospitals for the applicable period as $79.0 million of deferred revenue, to be amortized into net patient service revenue in its FY 2014 through FY 2017 financial statements (see “Management’s Discussion and Analysis of Recent Financial Performance” in this Appendix A). CMS originally intended to restore the full amount of the reductions in IPPS base rates in FFY 2018 but in order to fund (in part) the elimination of the sustainable growth rate adjustments to Medicare physician rates (see “Payment for Physician Services” below), Congress decided to phase in the restoration of the IPPS base rates over the 5 year period beginning with FFY 2018.

Area Wage Index/Rural Floor. In connection with the annual area wage index adjustments noted above, the area wage index for any acute care hospital in a state cannot be lower than the rural hospital area wage index in that state (the rural floor). Beginning in FFY2012, the rural floor for Massachusetts has been based on the wage levels of Nantucket Cottage Hospital. For FFYs 2012 through 2015, the area wage index for all urban acute care hospitals in Massachusetts was lower than the rural floor, and therefore the IPPS base rates for those hospitals were adjusted using the higher rural floor area wage index. For FFY 2016 the area wage adjustment will use the higher rural floor area wage index for all urban acute care hospitals in Massachusetts other than those in the Boston – Quincy CBSA (including BWH and The General) whose area wage index exceeds the rural floor. Rural floor adjustments must be budget-neutral nationally, and accordingly the benefit of the rural floor adjustment to hospitals in Massachusetts (and other states where the rural floor adjustment is made) must be offset by payment reductions to all hospitals across the country (including those that have received the rural floor benefit). The resulting adverse impact on hospital reimbursement in states that get little or no benefit from the rural floor has generated a proposal in Congress to neutralize the value of the rural floor within each state by offsetting each state’s rural floor benefit entirely by implementing Medicare hospital payment reductions within that state. If this proposal were enacted, Partners HealthCare would experience an adverse impact on its Medicare revenue so long as the area wage index adjustment to IPPS base rates for hospitals in Massachusetts are affected by the rural floor adjustment.

Sequestration. Since April 1, 2013 and, pursuant to the Bilateral Budget Act of 2015, extending through FFY 2015, most payments under Medicare have been reduced by 2% under congressionally-mandated automatic spending reductions known as sequestration.

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4. Payment for Physician Services

Physician services are generally reimbursed on the basis of the lesser of actual charges or the amount determined under the MPFS that is based on a system known as the resource based relative value scale (RB-RVS). RB-RVS sets a relative value for each physician service based on three components; a work component that reflects the time and intensity of effort required to provide the service; a practice expense component that includes costs such as office rents, allied health support salaries, equipment and supplies; and a malpractice insurance cost component. The per service relative value is then multiplied by a geographic adjustment factor and a nationally uniform conversion factor to determine the fee that Medicare will pay for each physician service.

Prior to the enactment in April 2015 of the Medicare Access and CHIP Reauthorization

Act of 2015 (MACRA), Medicare payments for physician services were supposed to be adjusted annually pursuant to the sustainable growth rate (SGR) formula which was based on changes in the United States gross domestic product. Over the past several years application of the SGR formula would have resulted in annual decreases to physician payments were it not for recurring legislative “patches” that implemented temporary delays in the application of the SGR formula and also authorized modest increases in physician fees. MACRA permanently repealed the SGR formula and replaced it with modest increases in Medicare physician fees and a move toward the use of alternative payment models (APMs) for physician reimbursement. The additional cost to Medicare resulting from repeal of the SGR are to be offset in part by the increased reliance on APMs and on implementation of other cost saving measures.

Under MACRA, the MPFS conversion factor was increased by 0.5% in 2015 and will be

increased by an additional 0.5% each year from 2016 through 2019. For 2020 through 2025 there are no scheduled increases in the conversion factor, and then in 2026 and thereafter the conversion factor will be adjusted annually by 0.75% for physicians being reimbursed through an APM (see below) or by 0.25% for those physicians who are not participating in an APM.

Currently and through 2018, the availability of the full amount of Medicare physician

reimbursement also depends on physician participation in and performance under three specific programs: (1) the Physician Quality Reporting System, under which eligible physicians who do not satisfactorily report required quality measure data are subject to a 2% reduction in the otherwise allowable Medicare fees; (2) the “meaningful use” incentive program, under which physicians who fail to achieve meaningful use of EHR systems will incur a 1% reduction in their Medicare fees, with the amount of such reductions increasing annually up to a 3% to 4% reduction in 2018; and (3) the Value-based Modifier Program, which provides incentive payments to physicians based on the quality of care they furnish compared to their cost of care during a performance period. Under MACRA, in 2019 CMS will replace these three programs with a two track system under which physicians will be reimbursed either (1) on a fee-for-service basis with enhanced incentives under the Merit-Based Incentive Payment Systems (MIPS); or (2) through participation in APMs.

Under MIPS, eligible physicians will be rewarded or penalized based on the quality of

the care that they provide during a performance year. The amount of the reward or penalty will be based on a composite score developed using the physician’s performance in the categories of

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(i) clinical quality, (ii) resource utilization, (iii) EHR meaningful use and (iv) clinical practice improvement. Physicians scoring below a certain threshold will incur a negative adjustment in their payments starting with a maximum penalty of 4% in 2019 and increasing to a maximum penalty of 9% in 2022 and beyond. Physicians scoring above the threshold in a given year will incur a positive adjustment on a sliding scale, with the maximum bonus payment equal to three times the penalty cap for that year. Those physicians who meet the threshold will receive no payment adjustment. Additionally, from 2019 through 2024, the best performing physicians will be eligible for an additional bonus payment of up to 10% allocated from a $500 million pool.

As an alternative, physicians who have a significant Medicare population can opt-out of

MIPS and participate in eligible APMs, such as ACOs, PCMHs and other models approved by the CMMI. Eligible physicians participating in a qualifying APM will receive an APM bonus each year from 2019 through 2024 equal to 5 percent of the estimated aggregate payment amounts for covered Part B professional services for the preceding year, provided that certain conditions are satisfied. Payment will be made on an annual basis in one lump sum.

5. Payments for Psychiatric, Rehabilitation and Long Term Acute Care

Hospital Services

Certain Partners HealthCare hospitals provide inpatient psychiatric, rehabilitation and LTAC services. For inpatient services Medicare reimburses these facilities using prospective payment (PPS) methodologies that have been developed specifically for these types of providers. For inpatient psychiatric services, Medicare pays on a per diem basis with adjustments for certain patient characteristics, such as age and co-morbidities, and for area wage index and IME. For inpatient rehabilitation services, patients are assigned to case mix groups (CMGs) based on factors such as their diagnosis and severity of illness, age, co-morbidities and functional capability. Medicare pays for these services using a predetermined amount per CMG, with such amount being adjusted for geographic area wage levels, proportion of low-income patients, location in rural areas, high cost outliers and indirect medical education (if applicable). LTAC hospitals are paid a per discharge amount that is adjusted for geographic wage levels and severity of illness as measured by a Long Term Care DRG classification. To qualify as an LTAC the facility’s average length of stay must be at least 25 days. Beginning in FFY 2016 Medicare began implementing new patient criteria that LTAC hospitals have to meet to receive full payment rates, site-neutral payments (at acute hospital IPPS rates) for discharges of patients who do not meet the new criteria, exclusions to the average length of stay calculation and other changes affecting reimbursement for LTAC services.

Inpatient psychiatric, rehabilitation and LTAC PPS rates are subject to annual market

basket adjustments. For these services, the ACA imposed reductions in the market basket adjustment factors, including a productivity factor adjustment, similar to those that apply to acute care hospitals. In addition, inpatient rehabilitation facilities and LTAC hospitals are required to report specified quality data or be subject to a 2% reduction to the applicable annual market basket adjustment.

Outpatient psychiatric and LTAC services are reimbursed by Medicare under OPPS.

Outpatient physical therapy, occupational therapy and speech therapy are paid under the MPFS.

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6. Other Medicare Payment-Related Matters

RAC Program. The Recovery Audit Contractor (RAC) Program seeks to identify and recover improper payments made by Medicare to medical providers. Under the RAC Program, which supplements the routine processing and review of Medicare claims, private organizations contract with CMS to audit Medicare claims and receive contingent fees based on claim denials identified by the contractor.

Medicare Advantage. Medicare beneficiaries may voluntarily enroll in a managed care

Medicare Advantage plan. Medicare Advantage plans cover all Medicare Part A (hospital/facility) and most Part B (physician) services, and usually include the Medicare prescription drug benefit. A Medicare Advantage plan receives a monthly risk adjusted capitated payment from Medicare for each Medicare beneficiary who has elected coverage under the plan. The Medicare Advantage plan is at full financial risk for health care costs that exceed the per-beneficiary amounts paid to it by Medicare, creating incentives to provide more coordinated and efficient care and otherwise to control the costs of providing care. Medicare Advantage plans contract with health care providers to treat their enrollees at agreed upon rates, which may, but do not need to be, the Medicare rates such providers would receive if payment were being made directly by CMS. The ACA requires that Medicare Advantage plans have medical loss ratios (MLRs) of at least 85%. A plan with an MLR of less than 85% must pay to CMS the difference between its actual MLR and an MLR of 85%.

Accountable Care Organizations (ACO). Partners HealthCare formed a Pioneer ACO

that entered into a three year contract with CMMI that commenced on January 1, 2012. During 2012 and 2013, the Partners HealthCare Pioneer ACO managed care for approximately 48,000 and 60,000 Medicare beneficiaries, respectively, and realized savings of approximately $14.4 million and $3.3 million in 2012 and 2013, respectively. In 2014 the number of Medicare beneficiaries managed by the Partners HealthCare Pioneer ACO increased to approximately 68,000, and the ACO realized savings of approximately $21.7 million. The Pioneer ACO contract was renewed for 2015 and 2016, although Partners HealthCare has the option to exit the program as of January 1, 2016 by providing notice to CMMI by May, 2016.

C. Medicaid

Medicaid is a means-based health insurance program jointly funded by state and federal governments. States administer the program and set rules for eligibility, benefits and provider payments within federal guidelines. The program provides health care coverage to low-income children and families, pregnant women, long term unemployed adults, seniors and persons with disabilities. Eligibility is determined by a variety of factors, which include income relative to the federal poverty line, age, immigrant status and assets.

In Massachusetts, the Medicaid program and the federal Children’s Health Insurance

Program are combined into a program called MassHealth that is administered by the Medicaid Office within the Executive Office of Health and Human Services (EOHHS). Eligible Medicaid beneficiaries (MassHealth Members), with limited exceptions such as those aged 65 and over, must enroll either in the Primary Care Clinician Program (PCCP), a plan administered by the

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Medicaid Office, or with a private MMCO with which the Medicaid Office contracts. NHP is one of the three largest MMCOs in Massachusetts.

Since 1997 Massachusetts has participated in the federal Section 1115 Demonstration

Project (the 1115 Waiver) under which certain aspects of federal Medicaid law are waived for a designated period of time to allow a state to experiment with innovative strategies for delivering and financing healthcare for many of its Medicaid-eligible residents so long as the state can demonstrate to CMS that federal matching payments under the 1115 Demonstration Project will not exceed what the state would have otherwise received under the Medicaid program. Over its lifetime the 1115 Waiver has been a vehicle for a statewide, multifaceted health reform effort that has expanded Medicaid eligibility for certain populations, provided supplemental payments to “safety net” hospitals, provided premium subsidies to low-and moderate-income uninsured adults and supported various health system reform projects to improve access and quality of care. These Demonstration Projects must be reauthorized and extended periodically. The most recent extension of the 1115 Waiver, which was granted in October, 2014 for a 5 year period until June 30, 2019, continues support for a number of existing 1115 Waiver programs, including expanded MassHealth eligibility and various service innovations such as a pediatric asthma pilot and home-and community-based behavioral health services.

The most recent extension of the 1115 Waiver also continues the Safety Net Care Pool

(SNCP), first created in 2005 but for which the most recent extension only runs until June 30, 2017. SNCP provides funding for insurance subsidies through the state exchange (ConnectorCare), payment for uncompensated care through the Health Safety Net (see “Health Safety Net Trust Fund” below), supplemental payments to safety net providers that serve a disproportionate share of disadvantaged populations and funding for certain state health programs serving vulnerable individuals that are administered by agencies other than MassHealth.

The ACA gave states an option to expand their Medicaid programs to cover all

individuals under 133% of the federal poverty level. Massachusetts elected to expand its Medicaid program, but as a result of the Medicaid coverage expansions that had already been implemented in Massachusetts pursuant to the 1115 Waiver and other health care reform initiatives, the federal assistance for which Massachusetts was eligible under the ACA will be phased in over a period running until 2020, at which point Massachusetts will receive the same federal match percentage as other states for this population.

1. Payments to Hospitals

For services to MassHealth Members enrolled in MMCOs, hospitals are paid in accordance with their contracts with each MMCO. For services to MassHealth Members not enrolled in a MMCO, hospitals are paid based on inpatient and outpatient payment methodologies contained in non-negotiated annual contracts with EOHHS. Payment for inpatient hospital services is based on an adjudicated payment amount per discharge for each inpatient stay that is related to the acuity of the particular inpatient stay. Additional payments may be made for outlier cases, defined as cases that exceed a cost threshold similar to that used for Medicare’s outlier payment.

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Payment for outpatient hospital services is based on a payment amount per episode (PAPE), which provides a hospital-specific episodic rate for most services. The hospital-specific PAPE is based on an outpatient standard payment adjusted for the hospital’s average outpatient case mix over the one year period that is two years prior to the year of the adjustment. Certain services, including laboratory services, are carved out of the PAPE payment and are paid on a fee schedule or other basis. In addition, hospitals that have a high percentage of government payers, such as NSMC, receive enhanced inpatient and outpatient MassHealth rates.

Several years ago MassHealth established a Pay-for-Performance Initiative to reward

hospitals that achieve certain benchmarks or show year-to-year improvement on a number of measures, including maternity care, care coordination and utilization of emergency department services. Over the past several years, including FY 2016, MassHealth has allocated a maximum of $50 million per year to this Initiative; however, total annual payments to qualifying hospitals have been considerably less.

2. Payments to Physicians

For services to MassHealth Members enrolled in MMCOs, physicians are paid in accordance with their contracts with each MMCO, and for MassHealth Members enrolled in PCCP physicians are paid at a rate equal to approximately 70% of the MPFS.

3. Behavioral Health Services MassHealth Members who are enrolled in the PCCP receive behavioral health and

substance abuse services through a contract between EOHHS and the Massachusetts Behavioral Health Partnership, which in turn contracts with providers, including psychiatric hospitals, inpatient psychiatric units of acute hospitals and group practices for inpatient, outpatient and partial hospitalization services. Inpatient services are paid at an all-inclusive per diem rate that is adjusted for hospital performance using a number of quality metrics. For MassHealth Members who are enrolled with MMCOs, the MMCOs assume responsibility, either directly or through subcontracts, for providing mental health and substance abuse services. Rates for such services are negotiated by the MMCOs.

4. Alternative Payment Methodologies

Chapter 224 of the Massachusetts Acts of 2012 (Chapter 224) directed the Medicaid Office to pay for health care based on alternative payment methodologies for at least 80% of MassHealth Members by January 1, 2015. Alternative payment methodologies may include bundled payments, global payments, shared savings and other innovative methods of paying for health care services. In addition, EOHHS was instructed to seek a federal waiver to permit Medicaid to participate in alternative payment methodologies. To date, MassHealth has not achieved the targeted level of implementation of alternative payment methodologies. EOHHS is currently developing an ACO model for MassHealth that will require the Commonwealth to seek a federal waiver.

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D. Health Safety Net Trust Fund

Acute care hospitals and freestanding community health centers are reimbursed for eligible services provided to qualified charity care patients from the HSN administered by the Medicaid office. Rates of payment are based on Medicare rates. A portion of the funding for the HSN is paid through an annual statewide assessment on acute care hospitals set by the Massachusetts Legislature. For each of 2015 and 2016 the total hospital assessment is $160 million plus 50% of the administrative costs of the HSN. This hospital assessment is apportioned among all acute care hospitals based upon their respective pro rata shares of total annual acute care hospital private sector gross patient care revenue. Partners HealthCare hospitals report this assessment as a deduction from net patient service revenue. The HSN was underfunded by $41.7 million in FY 2015 and is likely to be underfunded in FY 2016. This funding “shortfall” is allocated to acute care hospitals based on their respective pro rata shares of total statewide acute care hospital patient care costs. Accordingly, whenever there is an HSN funding shortfall, an acute care hospital will receive less than what would be otherwise reimbursable from the HSN for charity care; provided, however, that each hospital’s share of the overall shortfall cannot exceed the total charity care reimbursement due from the HSN, and hospitals with a high proportion of charity care and government funding are guaranteed to receive at least 85% of their otherwise reimbursable charity care costs regardless of the amount of the shortfall that is allocated to them. Shortfall allocations exceeding these two limits are re-allocated to other hospitals.

E. Commercial Insurance (Including Managed Care Plans)

Commercial insurers negotiate contracts directly with hospitals and physician groups. Under these contracts, the commercial insurers make payments to the providers for covered inpatient and outpatient services either on behalf of their insured members or on behalf of self-funded employer accounts, health benefit plans or other entities (self-funded accounts) primarily on the basis of DRG payments, case rates, per diem rates, fee schedules and discounts from established charges. Patients with commercial health insurance are generally responsible for paying directly to the hospitals and physician groups certain co-payments, coinsurance amounts and deductibles.

Included among the commercial insurers are managed care organizations (MCOs),

principally HMOs and PPOs. These organizations provide insurance coverage and a network of providers of medical services to members for a fixed monthly premium or provide a network of providers and administrative services to self-funded accounts. MCOs establish utilization review and prior authorization procedures to limit unnecessary services and also include financial incentives in their provider contracts to encourage providers to coordinate care and improve quality. The Partners HealthCare acute-care hospitals and physicians participate in contracts with many commercial insurers, including MCOs.

For several years Blue Cross, TAHP and HPHC, the principal MCOs in Massachusetts,

have been contracting with providers on the basis of a global budget, medical expense trend target or other type of arrangement that puts the provider organization at risk for a specified portion of the total medical expenses of the MCO’s members who have chosen, or who have been assigned to, a provider organization primary care physician (risk contracts). The Blue

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Cross Alternative Quality Contract (AQC) is an example of this type of financial arrangement that is in effect with many provider organizations in Massachusetts. Under AQC providers are paid on a fee for service basis, but Blue Cross and the provider organization settle at the end of the year against a pre-determined total medical expense budget. Favorable or unfavorable performance against the budget yields a surplus (upside opportunity) or deficit (downside risk), a contractually specified percentage of which (usually subject to an annual cap) will be paid to the provider organization or paid back to Blue Cross by the provider organization, respectively. The ACQ arrangement also typically includes financial incentives for provider organizations that improve their scores on various quality measures. At the health care cost trend hearings held in October 2014 by the Health Policy Commission, Blue Cross testified that in 2013 85% of its HMO members had a primary care physician who participated in the Blue Cross AQC program. At the same hearings, TAHP testified that over 80% of its HMO members are covered by a value-based global budget contract.

The hospitals and physicians in the Network have been participating in the Blue Cross

AQC program since January, 2012 during which time the Network providers have been eligible to earn up to a specified percentage of any surplus and have been at risk for a specified percentage of any deficit, up to an annual cap on both surplus and deficit, that results from the cost of services provided to the Blue Cross HMO and point of service covered lives who have chosen, or who have been assigned to, Partners HealthCare primary care physicians (Partners HealthCare members). This Network-wide contract with Blue Cross has recently been renewed through September 30, 2018, and starting in 2016 the calculation of the upside opportunity for Network providers will be expanded to include the cost of services provided to certain Blue Cross PPO covered lives. The Network-wide AQC contract also includes incentive payments for achieving designated quality improvement targets.

Since 2012 the Network hospitals and physicians have also been participating in risk

contracts that have similar medical expense trend target and quality improvement arrangements with TAHP and HPHC, which contracts expire on December 31, 2016 and December 31, 2018, respectively. As of September 30, 2015, the Network providers were at risk under Network-wide risk contracts with Blue Cross, TAHP and HPHC for the cost of care for approximately 201,500 Partners HealthCare members. For calendar years 2012, 2013 and 2014, the Network's performance against medical expense trend and quality targets resulted in an aggregate surplus of $8.9 million and aggregate deficits of $5.8 million and $16.1 million in 2012, 2013 and 2014, respectively.

In an effort to control the growth of total medical expenditures, Massachusetts MCOs

(including Blue Cross, TAHP and HPHC) have also been offering tiered network and limited network products that are designed to encourage their members to use lower cost providers. In the tiered network products the MCO assigns providers to different tiers based upon their relative costs and in certain cases based on their relative quality performance. The MCO then offers financial incentives to its members, typically through lower copayments and coinsurance, when they use providers in the lower cost, “preferred” tiers. MCOs may move hospitals up or down tiers as relative costs and quality change, and they have expressly disclosed to consumers and hospitals that the movement of a hospital is due to improved (or reduced) cost or quality performance. In limited network products the MCO limits “in network” benefits to a select group of lower cost providers, with the result that members will have either no coverage or

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higher copayments or coinsurance for the use of non-network providers. The Massachusetts Group Insurance Commission, which is the insurer for Commonwealth and some municipal employees, retirees and survivors, also offers significant financial incentives for its members to enroll in tiered network and limited network products.

While the tiered provider networks offered by each of Blue Cross, TAHP and HPHC

place a majority of their acute care hospitals in the lowest cost sharing tier, most of the Partners HealthCare hospitals have been assigned by these MCOs to the most expensive tier. Partners HealthCare hospitals, like other hospitals, have limited ability to influence their assignment to specific tiers other than by offering to accept lower rates from the MCO. Although in some plans quality improvements might appear to create the opportunity to alter a hospital’s tier assignment, in practice the quality metrics used by the MCOs have not been capable of demonstrating meaningful quality differences among hospitals.

F. Accruals for Estimated Amounts Due to Third Party Payers

Cost reports of hospitals are prepared annually for, and are subject to audit by, the Medicare program and by the Center for Health Information and Analysis for the Medicaid program. In addition, certain agreements with third party payers contain provisions for retroactive settlements and dispute resolution related to issues such as allowable cost, utilization, performance under risk contracts and charge structure. Changes occur periodically in the rules and regulations applicable to Medicare and Medicaid, as well as in the agreements of various private third party payers. Similarly, the data used to estimate amounts due to third parties often change. When appropriate, accruals for estimated amounts due to Medicare, Medicaid and other third party payers are established for unresolved items and incomplete data. Upon resolution, any such accruals that are no longer necessary are reversed (or amounts required in excess of accruals are recorded) and are reflected in the Statement of Operations. See Appendix B to this Official Statement “Consolidated Financial Statements of Partners HealthCare System, Inc. and Affiliates for the Years Ended September 30, 2015 and 2014.”

This letter and the information contained herein are submitted to the Agency for inclusion

in the Official Statement relating to the Series Q Bonds.

Respectfully submitted,

PARTNERS HEALTHCARE SYSTEM, INC.

By: /s/ Debra M. Sloan Its: Vice President, Treasury

Partners HealthCare System, Inc. and Affiliates Consolidated Financial Statements September 30, 2015 and 2014

APPENDIX B

Partners HealthCare System, Inc. and Affiliates Index September 30, 2015 and 2014

Page(s)

Independent Auditor’s Report .................................................................................................................. 1

Financial Statements

Consolidated Balance Sheets ...................................................................................................................... 2

Consolidated Statements of Operations ...................................................................................................... 3

Consolidated Statements of Changes in Net Assets ................................................................................... 4

Consolidated Statements of Cash Flows ..................................................................................................... 5

Notes to Consolidated Financial Statements ......................................................................................... 6–47

Independent Auditor’s Report

To the Board of Directors of Partners HealthCare System, Inc. and Affiliates

We have audited the accompanying consolidated financial statements of Partners HealthCare System, Inc. and Affiliates (Partners HealthCare), 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 of cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; 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.

Auditor’s Responsibility

Our responsibility is to express an opinion on the 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 our 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, we consider internal control relevant to Partners HealthCare’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 Partners HealthCare’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 Partners HealthCare System, Inc. and Affiliates at September 30, 2015 and 2014, and the results of their operations, their changes in net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. December 11, 2015

PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA 02210 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us

Partners HealthCare System, Inc. and Affiliates Consolidated Balance Sheets September 30, 2015 and 2014

The accompanying notes are an integral part of these consolidated financial statements.

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(in thousands of dollars) 2015 2014

AssetsCurrent assets

Cash and equivalents 621,568$ 457,244$ Investments 1,354,636 1,474,058Current portion of investments limited as to use 1,590,203 2,120,057Patient accounts receivable, net of allowance for bad debts (2015 - $112,630; 2014 - $117,212) 878,033 876,214Research grants receivable 121,775 115,786Other current assets 447,188 381,517Receivable for settlements with third-party payers 60,374 39,082

Total current assets 5,073,777 5,463,958

Investments limited as to use, less current portion 2,832,744 2,927,360Long-term investments 1,061,176 1,026,538Pledges receivable, net and contributions receivable from trusts, less current portion 209,064 197,975Property and equipment, net 5,328,782 4,615,908Other assets 564,898 499,353

Total assets 15,070,441$ 14,731,092$

Liabilities and Net AssetsCurrent liabilities

Current portion of long-term obligations 398,990$ 238,204$ Accounts payable and accrued expenses 646,355 645,999Accrued medical claims and related expenses 232,268 254,480Accrued compensation and benefits 710,929 677,957Current portion of accrual for settlements with third-party payers 53,066 55,918Unexpended funds on research grants 202,137 183,222

Total current liabilities 2,243,745 2,055,780

Accrual for settlements with third-party payers, less current portion 34,725 58,899Accrued professional liability 482,640 455,463Accrued employee benefits 1,705,287 1,066,840Interest rate swaps liability 404,062 295,656Accrued other 153,146 157,029Long-term obligations, less current portion 3,994,034 3,697,938

Total liabilities 9,017,639 7,787,605

Commitments and contingencies

Net assetsUnrestricted 4,707,662 5,623,759Temporarily restricted 765,562 855,954Permanently restricted 579,578 463,774

Total net assets 6,052,802 6,943,487Total liabilities and net assets 15,070,441$ 14,731,092$

Partners HealthCare System, Inc. and Affiliates Consolidated Statements of Operations Years Ended September 30, 2015 and 2014


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Operating revenueNet patient service revenue, net of provision for bad debts (2015 - $129,051; 2014 - $129,492) 7,317,918$ 7,042,558$ Premium revenue 2,034,420 1,622,392Direct academic and research revenue 1,316,283 1,225,782Indirect academic and research revenue 354,942 352,911Other revenue 642,082 662,410

Total operating revenue 11,665,645 10,906,053

Operating expensesEmployee compensation and benefit expenses 5,655,073 5,428,352Supplies and other expenses 2,325,085 2,226,663Medical claims and related expenses 1,652,538 1,463,972Direct academic and research expenses 1,316,283 1,225,782Depreciation and amortization expenses 493,505 463,039Interest expense 116,703 119,849

Total operating expenses 11,559,187 10,927,657Income (loss) from operations 106,458 (21,604)

Nonoperating gains (expenses)(Loss) income from investments (37,258) 227,357Change in fair value of interest rate swaps (110,315) (109,275)Gifts and other, net of fundraising and other expenses (39,468) (67,242)Academic and research gifts, net of expenses (11,406) 90,609

Total nonoperating gains (expenses), net (198,447) 141,449(Deficit) excess of revenues over expenses (91,989) 119,845

Other changes in net assetsChange in net unrealized appreciation on marketable investments (224,616) (3,309)Change in fair value of hedging interest rate swaps - 45,624Funds utilized for property and equipment 38,288 39,058Change in funded status of defined benefit plans (639,167) (387,698)Other 1,387 5,173

Decrease in unrestricted net assets (916,097)$ (181,307)$

Partners HealthCare System, Inc. and Affiliates Consolidated Statements of Changes in Net Assets Years Ended September 30, 2015 and 2014


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Temporarily Permanently(in thousands of dollars) Unrestricted Restricted Restricted Total

Net assets at October 1, 2013 5,805,066$ 792,769$ 412,209$ 7,010,044$

Increases (decreases)Loss from operations (21,604) - - (21,604)Income from investments 227,357 36,897 30 264,284Gifts and other (67,242) 51,250 49,877 33,885Academic and research gifts, net of expenses 90,609 - - 90,609Change in net unrealized appreciation on marketable investments (3,309) (11,209) 1,706 (12,812)Change in fair value of interest rate swaps

Nonhedging (109,275) - - (109,275)Hedging 45,624 - - 45,624

Funds utilized for property and equipment 39,058 (12,814) - 26,244Change in funded status of defined benefit plans (387,698) - - (387,698)Other 5,173 (939) (48) 4,186

Change in net assets (181,307) 63,185 51,565 (66,557)

Net assets at September 30, 2014 5,623,759 855,954 463,774 6,943,487

Increases (decreases)Income from operations 106,458 - - 106,458(Loss) income from investments (37,258) (46,460) 55 (83,663)Gifts and other (39,468) 8,029 116,449 85,010Academic and research gifts, net of expenses (11,406) - - (11,406)Change in net unrealized appreciation on marketable investments (224,616) (36,351) (2,313) (263,280)Change in fair value of interest rate swaps (110,315) - - (110,315)Funds utilized for property and equipment 38,288 (17,151) - 21,137Change in funded status of defined benefit plans (639,167) - - (639,167)Other 1,387 1,541 1,613 4,541

Change in net assets (916,097) (90,392) 115,804 (890,685)Net assets at September 30, 2015 4,707,662$ 765,562$ 579,578$ 6,052,802$

Partners HealthCare System, Inc. and Affiliates Consolidated Statements of Cash Flows Years Ended September 30, 2015 and 2014


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Cash flows from operating activitiesChange in net assets (890,685)$ (66,557)$ Adjustments to reconcile change in net assets to net cash provided by operating activities

Change in funded status of defined benefit plans 639,167 387,698Loss on refunding of debt 9,649 1,002Change in fair value of interest rate swaps 110,315 63,651Depreciation and amortization 493,505 463,039Provision for bad debts 129,051 129,492Loss (gain) on disposal of property 196 (13,275)Net realized and change in unrealized appreciation on investments 307,782 (342,608)Restricted contributions and investment income (172,749) (102,660)Cash premium upon issuance of bonds 39,969 14,337Increases (decreases) in cash resulting from a change in

Patient accounts receivable (127,108) (192,322)Research grants receivable (5,989) (6,078)Other current assets (71,428) (51,716)Pledges receivable and contributions receivable from trusts (3,987) (35,930)Other assets (34,545) (6,433)Accounts payable and accrued expenses (10,101) (44,947)Accrued medical claims and related expenses (22,212) 132,647Accrued compensation and benefits 25,006 53,005Settlements with third-party payers (48,318) 20,750Unexpended funds on research grants 18,915 22,554Accrued employee benefits and other 23,922 42,902

Net cash provided by operating activities 410,355 468,551

Cash flows from investing activitiesPurchases of property and equipment (1,198,031) (835,019)Proceeds from sale of property 182 13,713Purchase of investments (2,772,478) (3,145,588)Proceeds from sales of investments 3,173,950 2,921,288Purchases of businesses, net of cash acquired (23,343) -

Net cash used for investing activities (819,720) (1,045,606)

Cash flows from financing activitiesBorrowings under line of credit - 45,000Repayments under line of credit - (45,000)Payments on long-term obligations (71,353) (60,031)Proceeds from long-term obligations, net of financing costs 612,359 783,348Decrease in auction rate securities holdings - 23,830Deposits into refunding trusts (140,066) (286,830)Restricted contributions and investment income 172,749 102,660

Net cash provided by financing activities 573,689 562,977Net increase (decrease) in cash and equivalents 164,324 (14,078)

Cash and equivalentsBeginning of year 457,244 471,322End of year 621,568$ 457,244$

Partners HealthCare System, Inc. and Affiliates Notes to Consolidated Financial Statements September 30, 2015 and 2014

(in thousands of dollars)

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1. Organization and Community Benefit Commitments

Partners HealthCare System, Inc. (PHS) is the sole member of The Massachusetts General Hospital (MGH), Brigham and Women’s Health Care, Inc. (BWHC), NSMC HealthCare, Inc. (NSMC), Newton-Wellesley Health Care System, Inc. (NWHCS), Partners Continuing Care, Inc. (PCC), Partners HealthCare International, LLC (PHI) and Neighborhood Health Plan, Incorporated (NHP). The two physicians who serve as the President and Chief Executive Officer of PHS (PHS CEO) and the Chief Clinical Officer of PHS are the members of Partners Community Physicians Organization, Inc. (PCPO) formerly known as Partners Community HealthCare, Inc. The individual serving as the PHS CEO is the sole member of Partners Medical International, Inc. (PMI). PHS, together with all of its affiliates, is referred to as “Partners HealthCare.”

Partners HealthCare currently operates two tertiary and seven community acute care hospitals in Massachusetts, one facility providing inpatient and outpatient mental health services and three facilities providing inpatient and outpatient services in rehabilitation medicine and long-term care. Partners HealthCare also operates physician organizations and practices, a home health agency, nursing homes and a graduate level program for health professions. Partners HealthCare provides services to patients primarily from the Greater Boston area as well as New England and beyond. In addition, Partners HealthCare is a nonuniversity-based nonprofit private medical research enterprise and is a principal teaching affiliate of the medical and dental schools of Harvard University. Partners HealthCare also operates a licensed, not-for-profit managed care organization that provides health insurance products to the Medical Assistance Program (Medicaid), Commonwealth Care (a series of health insurance plans for adults who meet income and other eligibility requirements) and commercial populations.

PHS and substantially all of its affiliates are tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code (IRC). NHP is a tax-exempt organization under Section 501(c)(4) of the IRC. Accordingly, no provision for income taxes related to these tax-exempt entities has been made. PCPO applied to become a tax-exempt organization under Section 501(c)(3) of the IRC on October 1, 2015. As a result of this anticipated conversion, PCPO recognized income tax expense of $1,200 within supplies and other expenses.

Community Benefit Partners HealthCare’s community benefit programs include working with communities to address a number of public health issues including racial disparities, alcohol and substance abuse among young people, infant mortality, domestic violence and cancer. Partners HealthCare provides economic opportunity for low income Boston residents by helping people advance into nursing and other healthcare careers through its public school partnerships and workforce development programs. In addition, twenty community health centers are licensed by or affiliated with Partners HealthCare entities and provide high quality, culturally competent primary care and access to Partners HealthCare’s hospitals. Partners HealthCare invests in these health centers’ infrastructure, programming and operation and also helps with relocation, renovation and other capital requirements.



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The Massachusetts Attorney General’s Community Benefits Guidelines direct nonprofit acute care hospitals and health maintenance organizations to prepare annual reports documenting the status and level of their community benefit programs and initiatives. These annual reports serve the important purpose of providing the public with access to useful information about these programs and initiatives. Partners HealthCare files its report annually with the Massachusetts Attorney General. The report summarizes community benefit activities on a system-wide basis. In addition, each of the acute care hospitals within Partners HealthCare has a community benefit planning and service delivery structure and files separate community benefit reports. NHP also files a community benefit report annually.

Uncompensated Care Partners HealthCare provides care to all patients regardless of their ability to pay. The cost of providing that care is reflected in the statements of operations. The cost related to those patients for which Partners HealthCare receives either partial or no reimbursement for healthcare services provided is summarized as follows:

State Programs Charity care services are partially reimbursed to acute care hospitals through the statewide Health Safety Net Trust Fund (HSN) established by the Massachusetts Health Care Reform Law (Chapter 58 of the Acts of 2006 or Chapter 58). A portion of the funding for the HSN is paid by hospitals through a statewide acute care hospital assessment that has been set by the Massachusetts Legislature, beginning in 2014, at $160,000 plus 50% of the estimated cost of administering the HSN and related assessments, as determined by the Secretary of Administration and Finance. All acute care hospitals in the state are assessed their share of this total statewide hospital assessment amount ($165,000 in 2015 and $164,708 in 2014) based on each hospital’s charges for private sector payers. Partners HealthCare’s acute care hospitals report this assessment as a deduction from net patient service revenue.

Acute care hospitals are reimbursed for charity care based on claims for eligible patients and eligible services that are submitted to and adjudicated by the HSN. Rates of payment are based on Medicare rates and payment policies. The HSN was under-funded by approximately $41,327 and $86,836 in 2015 and 2014, respectively. This shortfall is allocated to hospitals based on their share of total statewide patient care costs with approximately $10,881 and $25,571 in 2015 and 2014, respectively, allocated to Partners HealthCare’s acute care hospitals. Each hospital’s share of the overall state shortfall cannot exceed its total charity care reimbursement. Hospitals with a high proportion of charity care and government funding receive more favorable reimbursement, including limiting their shortfall allocation to no more than 15% of their payments for charity care. In aggregate, Partners HealthCare’s acute care hospitals received uncompensated care funding covering 68% of the estimated cost of charity care provided in 2015 and 47% of the estimated cost of charity care provided in 2014, excluding the assessment.

Medicaid Medicaid is a means-tested health insurance program jointly funded by state and federal governments. States administer the program and set rules for eligibility, benefits and provider payments within broad federal guidelines. The program provides health care coverage to low-income children and families, pregnant women, long-term unemployed adults, seniors and persons with disabilities. Eligibility is determined by a variety of factors, which include income relative to the federal poverty line, age, immigrant status and assets.



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Medicaid payments to Partners HealthCare providers do not cover the full cost of services provided. In aggregate, reimbursement from Medicaid covered 62% and 61% of the estimated cost of services provided in 2015 and 2014, respectively. In addition, Medicaid premium revenue paid to NHP for the care of Medicaid patients enrolled in NHP did not cover the medical expense and administrative costs of care for these enrollees. In aggregate, the premium revenue paid to NHP by Medicaid, excluding the impact of premium deficiency reserves, was $72,549, or 4.6%, less than the cost of care in 2015, and $108,655, or 8.6%, less than the cost of care in 2014.

Federal Program Medicare Medicare is a federally sponsored health insurance program for people age 65 or older, under age 65 with certain disabilities and any age with End-Stage Renal Disease. For many years, Medicare payments have not kept pace with increases in the cost of care provided at many hospitals. Additionally, payments to physicians have seen little or no increases over the past several years. Compounding this shortfall in payments is the shift of care from higher paying inpatient services to lower paying outpatient services.

Consequently, Medicare payments to Partners HealthCare providers do not cover the full cost of services provided. In aggregate, reimbursement from Medicare covered approximately 73% and 74% of the estimated cost of services provided in 2015 and 2014, respectively.



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For charity care, Medicaid and Medicare, the total estimated cost of services provided by Partners HealthCare exceeded the net reimbursement received under these programs by $1,229,790 and $1,148,200 for the years ended September 30, 2015 and 2014, respectively. The estimated cost of services provided is either obtained directly from a costing system or based on an entity specific ratio of cost to gross charges. In the latter case, cost is derived by applying this ratio to gross charges associated with providing care to charity care, Medicaid and Medicare patients. The following summarizes, by program, the cost of services provided, net reimbursement and cost of services in excess of reimbursement for each year:

2015 2014

Cost of services providedCharity care, including assessment payments to HSN of $56,716 and $60,372 in 2015 and 2014, respectively 136,276$ 140,641$ Medicaid 1,008,882 886,706Medicare 2,824,890 2,634,533

3,970,048$ 3,661,880$

Net reimbursementCharity care 40,906$ 29,808$ Medicaid 625,761 542,078Medicare 2,073,591 1,941,794

2,740,258$ 2,513,680$

Cost of services in excess of reimbursementCharity care 95,370$ 110,833$ Medicaid 383,121 344,628Medicare 751,299 692,739

1,229,790$ 1,148,200$


Bad Debts In addition to charity care and inadequate funding from the Medicaid and Medicare programs, there are significant losses related to self-pay patients who fail to make payment for services rendered or insured patients who fail to remit co-payments and deductibles as required under the applicable health insurance arrangement. The provision for bad debts represents charges for services provided that are deemed to be uncollectible and was $129,051 and $129,492 in 2015 and 2014, respectively. The estimated cost of providing these services was approximately $48,347 and $48,699 for 2015 and 2014, respectively.

2. Summary of Significant Accounting Policies

Basis of Accounting The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and include the accounts of PHS and its affiliates. Significant interaffiliate accounts and transactions have been eliminated.



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Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made in the areas of patient accounts receivable, research grants receivable, investments, receivables and accruals for settlements with third-party payers, accrued medical claims and related expenses, accrued professional liability, accrued compensation and employee benefits, interest rate swaps and accrued other.

Fair Value of Financial Instruments The fair value of financial instruments approximates the carrying amount reported in the consolidated balance sheets for cash and equivalents, certain investments and investments limited as to use, patient accounts receivable, research grants receivable, accounts payable and accrued expenses and interest rate swaps. More information can be found in Note 6, Fair Value Measurements.

Cash and Equivalents Cash and equivalents represent cash, registered money market funds and highly liquid debt instruments with a maturity at the date of purchase of three months or less. Partners HealthCare’s banking cash and equivalents are maintained with several national banks and from time to time cash deposits exceed federal insurance limits. It is Partners HealthCare’s policy to monitor these banks’ financial strength on an ongoing basis and no losses have been experienced to date.

Investments Investments in equity securities with readily determinable fair values and all investments in debt securities (marketable investments) are measured at fair value based on quoted market prices. The change in net unrealized appreciation on these marketable investments is excluded from excess of revenues over expenses.

Alternative investments, including hedge funds and private equities, do not have readily ascertainable market values. Investments in securities sold short or traded on a national securities exchange are valued based on quoted market prices. Investments in securities that are not traded and restricted securities of public companies are valued based on amounts reported by the fund manager and evaluated by management. The reported value of these investments represents the amount Partners HealthCare would expect to receive if it liquidated its investments at the balance sheet date on a nondistressed basis. Investments in hedge funds, private equity, private debt and other private partnerships (collectively, private partnerships) for which Partners HealthCare owns more than 5% of the overall investment are generally recorded as equity method investments. The change in value of equity method investments is included in excess of revenues over expenses as a component of income from investments. All other investments, including alternative investments, are recorded at cost.

Income from investments (including realized gains and losses, change in value of equity method investments, interest, dividends and endowment income distributions) is included in excess of revenues over expenses unless the income or loss is restricted by donor or law. Income from investments is reported net of investment-related expenses.



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Investments whose cost exceeds fair value are reviewed each quarter to determine whether these investments are other-than-temporarily impaired. Externally managed marketable investments with fair value below cost are considered to be other-than-temporarily impaired and, accordingly, the unrealized depreciation is recognized as realized losses through a write-down in the cost basis of these investments. All other investments are subject to a further review, which considers factors including the anticipated holding period for the investment and the extent and duration of below cost valuation. A similar write-down is recorded when the impairment on these investments has been judged to be other-than-temporary.

Depending on any donor-imposed restrictions on the underlying investments, the amount of the write-down is reported as a realized loss in either temporarily restricted net assets or in excess of revenues over expenses as a component of income from investments, with no adjustment in the cost basis for subsequent recoveries.

Partners HealthCare has an endowment spending policy for pooled endowment funds. A fixed distribution rate for spending is determined each year which will come from either income and/or net accumulated appreciation.

Investments Limited as to Use Investments limited as to use primarily includes assets whose use is contractually limited by external parties as well as assets set aside by the boards (or management) for identified purposes and over which the boards (or management) retain control such that the boards (or management) may, at their discretion, subsequently use such assets for other purposes. Certain investments corresponding to deferred compensation are accounted for such that all income and appreciation (depreciation) is recorded as a direct addition (reduction) to the asset and corresponding liability.

Derivative Instruments Derivatives are recognized on the balance sheet at fair value. As of September 30, 2014, Partners HealthCare elected to stop applying hedge accounting treatment for interest rate swap contracts (swap contracts). As a result of the election to stop applying hedge accounting treatment, changes in the fair value are recorded in excess of revenue over expenses. Previously, Partners HealthCare designated at inception whether the swap contracts were considered hedging or nonhedging for accounting purposes. For hedges, Partners HealthCare formally documented at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various accounting hedges. Partners HealthCare uses its swap contracts as cash flow hedges. Changes in the fair value of swap contracts designated for hedging activities that were highly effective as hedges were excluded from excess of revenues over expenses. Hedge ineffectiveness, if any, was recorded in excess of revenues over expenses.

Patient Accounts Receivable Partners HealthCare receives payments for services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care payers, commercial insurance companies and patients. Patient accounts receivable are reported net of contractual allowances and reserves for denials, uncompensated care and doubtful accounts. The level of reserves is based upon management’s assessment of historical and expected net collections, business and economic conditions, trends in federal and state governmental and private employer health care coverage and other collection indicators.



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Research Grants Receivable Partners HealthCare receives research funding from departments and agencies of the U.S. Government, industry and other foundation sponsors. Research grants receivable include amounts due from these sponsors of externally funded research. These amounts have been billed or are billable to the sponsor, or in limited circumstances, represent accelerated spending in anticipation of future funding. Research grants receivable are reported net of reserves for uncollectible accounts.

Other Current Assets Other current assets include prepaids, nonpatient receivables, current portion of pledges receivable, premiums receivable and reinsurance recoveries.

Property and Equipment Property and equipment is reported on the basis of cost less accumulated depreciation. Donated items are recorded at fair value at the date of contribution. All research grants received for capital are recorded in the year of expenditure as a change in unrestricted net assets. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Depreciation of property and equipment is calculated by use of the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives, which generally range from three to fifty years. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized, net of any interest earned, as a component of the cost of acquiring those assets.

Asset Retirement Obligations Asset retirement obligations, reported in accrued other, are legal obligations associated with the retirement of long-lived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Partners HealthCare records changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original liability estimate. Partners HealthCare reduces these liabilities when the related obligations are settled.

Other Assets Other assets consist of long-term receivables, deferred financing costs, intangible assets, prepaid ground rent, malpractice insurance receivables (Note 14), investments in healthcare related limited partnerships and benefit assets for over-funded defined benefit plans. Deferred financing costs are amortized over the terms of the related obligations. The carrying value of other assets is evaluated for impairment if the facts and circumstances suggest that the carrying value may not be recoverable.

Compensated Absences In accordance with formal policies concerning vacation and other compensated absences, accruals of $259,470 and $254,803 were recorded as of September 30, 2015 and 2014, respectively.

Unexpended Funds on Research Grants Research grants received in advance of corresponding grant expenditures are accounted for as a direct addition to investments limited as to use and unexpended funds on research grants.



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Self-Insurance Reserves Partners HealthCare is generally self-insured for employee healthcare, disability, workers’ compensation and certain other employee benefits. These costs are accounted for on an accrual basis to include estimates of future payments for claims incurred prior to year end.

Net Assets Permanently restricted net assets include the historical dollar amounts of gifts and the income and gains on such gifts which are required by donors to be permanently retained. Temporarily restricted net assets include gifts and the income and gains on permanently restricted net assets which can be expended but for which restrictions have not yet been met. Such restrictions include purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time restrictions imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, life income funds) or by interpretations of law (gains available for appropriation but not appropriated in the current period). Unrestricted net assets include all of the remaining net assets of Partners HealthCare. More information can be found in Note 16, Net Assets.

Realized gains and losses are classified as unrestricted net assets unless they are restricted by the donor or law. Unless permanently restricted by the donor, realized gains and net unrealized appreciation on permanently restricted gifts are classified as temporarily restricted until appropriated for spending by Partners HealthCare in accordance with policies established by Partners HealthCare and the Massachusetts Uniform Prudent Management of Institutional Funds Act (UPMIFA). Net losses on permanently restricted endowment funds are classified as a reduction to unrestricted net assets until such time as the fair value of these funds exceeds historical cost.

Gifts Unconditional promises to give cash and other assets to Partners HealthCare are reported at fair value at the date the promise is received. Conditional promises to give are recognized when the conditions are substantially met. Gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted gifts in the accompanying financial statements.

Gifts of long-lived assets with explicit restrictions that specify use of assets and gifts of cash or other assets that must be used to acquire long-lived assets are reported as additions to temporarily restricted net assets if the assets are not placed in service during the year.

Grants Grants and contracts normally provide for the recovery of direct and indirect costs, subject to audit. Partners HealthCare recognizes revenue associated with direct and indirect costs as direct costs are incurred. The recovery of indirect costs is based on predetermined rates for U.S. Government grants and contracts and negotiated rates for other grants and contracts.



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Contributed Securities Partners HealthCare’s policy is to sell securities contributed by donors upon receipt, unless prevented from doing so by donor request. For the years ended September 30, 2015 and 2014, contributed securities of $36,742 and $45,058, respectively, were received and liquidated. Donors restricted the proceeds received from the sale of these contributed securities of $14,163 and $8,737 for long-term purpose for the years ended September 30, 2015 and 2014, respectively.

Statement of Operations All activities of Partners HealthCare deemed by management to be ongoing, major and central to the provision of healthcare services, teaching, research activities and health insurance are reported as operating revenue and expenses. Other activities are deemed to be nonoperating and include unrestricted gifts (net of fundraising expenses), external community benefit program support, net change in unexpended academic and research gifts, change in fair value of interest rate swaps, substantially all income (loss) from investments and interest on advanced borrowings. Academic and research gifts largely consist of donor contributions (and the related investment income including realized gains and losses) designated to support the clinical, teaching or research efforts of a physician or department as directed by the donor. These gifts are reported as unrestricted, net of related support expenses, when donor restrictions are of a general nature that are inherent in the normal activities of the organization.

Partners HealthCare recognizes changes in third-party payer settlements and other estimates in the year of the change in estimate. For the years ended September 30, 2015 and 2014, adjustments to prior year estimates resulted in an increase to income from operations of $22,381 and $14,642, respectively.

Effective October 1, 2007, the Centers for Medicare and Medicaid Services (CMS) adopted the MS-DRG patient classification system (MS-DRGs) for inpatient services to better recognize severity of illness in Medicare payment rates for acute care hospitals. The adoption of MS-DRGs resulted in the expansion of the number of diagnosis related groups (DRGs), a system of classifying patients for purposes of inpatient reimbursement. By increasing the number of DRGs and more fully taking into account patients’ severity of illness in Medicare payment rates for acute care hospitals, the use of MS-DRGs encourages hospitals to improve their documentation and coding of patient diagnoses. CMS has determined that the adoption of the MS-DRGs has increased aggregate payments to hospitals due to additional documentation and coding without a corresponding increase in actual patient severity of illness.

CMS is required by its enabling statute to maintain budget neutrality by prospectively adjusting the Medicare payment rate to eliminate the effect of changes in DRG classification that do not reflect real changes in case-mix. CMS requires Congressional authority, however, to recoup any overpayments made in prior years. In 2007, Congress granted CMS the authority to recoup overpayments made to hospitals in 2008 and 2009 resulting from increased coding and documentation, which CMS did through rate reductions in 2011 and 2012. Subsequently, under the American Taxpayer Relief Act of 2012, Congress granted CMS the authority to recoup overpayments made to hospitals in 2010 through 2012 through rate reductions in 2014 through 2017.



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In 2013, Partners HealthCare recorded the estimated overpayment amounts received in 2010 through 2012 of $79,020 as deferred revenue to be amortized into net patient service revenue in 2014 through 2017 to offset the rate reductions. Management believes this accounting treatment better reflects the financial impact of this rate methodology and more accurately presents the recognition of revenue. For the years ended September 30, 2015 and 2014, amortization of these overpayments amounted to $15,192 and $6,893, respectively. Partners HealthCare anticipates amortizing the remaining overpayments in 2016 of $23,900 and in 2017 of $33,035.

The statement of operations includes excess of revenues over expenses. Changes in unrestricted net assets, which are excluded from excess of revenues over expenses, include change in net unrealized appreciation on marketable investments, change in fair value of effective hedging interest rate swaps (prior to the change in accounting policy), contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for acquisition of such assets) and change in funded status of defined benefit plans.

Net Patient Service Revenue Partners HealthCare maintains agreements with CMS of the United States Department of Health and Human Services under the Medicare program, the Commonwealth of Massachusetts (the Commonwealth) under the Medicaid program and various managed care payers that govern payment for services rendered to patients covered by these agreements. The agreements generally provide for per case or per diem rates or payments based on discounted charges for inpatient care and discounted charges or fee schedules for outpatient care. Certain contracts also provide for payments that are contingent upon meeting agreed upon quality and efficiency measures.

Partners HealthCare recognizes patient service revenue associated with services provided to patients who have third-party payer coverage on the basis of contractual rates for the services rendered. For uninsured patients that do not qualify for charity care, Partners HealthCare recognizes revenue on the basis of its standard rates (subject to discounts) for services provided. On the basis of historical experience, a significant portion of Partners HealthCare’s uninsured patients are unable or fail to pay for the services provided. Consequently, Partners HealthCare records a provision for bad debts related to uninsured patients in the period the services are provided. For the years ended September 30, 2015 and 2014, patient service revenue net of contractual allowances and discounts (before the provision for bad debts) is as follows:

2015 2014

Patient service revenue (net of contractual allowances and discounts)Third-party payers 7,156,435$ 6,906,051$ Uninsured patients 290,534 265,999

Total all payers 7,446,969$ 7,172,050$



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Net patient service revenue includes estimated retroactive revenue adjustments due to future audits, reviews and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews and investigations. Contracts, laws and regulations governing the Medicare, Medicaid and uncompensated care programs (Note 1) and managed care payer arrangements are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. A portion of the accrual for settlements with third-party payers has been classified as long-term because such amounts, by their nature or by virtue of regulation or legislation, will not be paid within one year.

Partners HealthCare provides either full or partial uncompensated care to patients who cannot afford to pay for their medical services based on income and family size. Uncompensated care is generally available to qualifying patients for medically necessary services. Partners HealthCare reports certain bad debts related to emergency services as uncompensated care. Uncompensated care is reported at gross charges with an offsetting allowance, as there is no expectation of collection. Accordingly, there is no net patient service revenue related to uncompensated care.

Medical Claims and Related Expenses NHP contracts with various community health centers, hospital-based primary care physician practices and other health care providers for the delivery of services to its members and compensates these providers on a capitated, fee-for-service or per diem basis.

The cost of contracted health care services is accrued in the period in which services are provided and include certain estimated amounts. The estimated liability for medical claims and related expenses is actuarially determined based on analysis of historical claims-paid experience, modified for changes in enrollment, inflation and benefit coverage. The liability for medical claims and related expenses represents the anticipated cost of claims incurred but unpaid at the balance sheet date. The estimates for claims expense may be more or less than the amounts ultimately paid when claims are settled. Such changes in estimates are reflected in the current period in the consolidated statements of operations.

In the normal course of business, NHP identifies and recoups overpayments through reductions in future payments made to providers and hospitals. Such overpayments are the result of, among other things, coordination of benefits and provider claim audits. For the years ended September 30, 2015 and 2014, NHP identified approximately $53,396 and $44,100, respectively, of recoveries related to claim overpayments made for both current-year and prior-year paid claims, which are reflected as a reduction to medical claims and related expenses in the consolidated statements of operations. As of September 30, 2015 and 2014, NHP’s accounts receivable include $1,723 and $2,049, respectively, related to such overpayments.

Premium Revenue Premiums are due monthly and recorded as earned during the period in which members are eligible to receive services. Premiums received prior to the first day of the coverage period are recorded as unearned premiums in accounts payable and accrued expenses.

Reinsurance Reinsurance premiums are reported in medical claims and related expenses and reinsurance recoveries are reported as reductions in medical claims and related expenses.



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Settlements NHP contracts with the Executive Office of Health and Human Services (EOHHS) and certain providers based on historical and anticipated experience. These methods of reimbursement result in settlements based on actual versus anticipated experience which could result in either payments due from (to) these providers. Settlements receivable of $78,969 and $21,197 were recorded as of September 30, 2015 and 2014, respectively. Settlements payable of $3,697 and $14,654 were recorded as of September 30, 2015 and 2014, respectively. The settlements are intended to include both reported and unreported incurred claims as of September 30, 2015 and 2014.

In 2014, the Affordable Care Act introduced new settlements related to a risk adjustment program, risk corridor program and reinsurance program designed to mitigate the transitional impact on insurers for new members. NHP’s estimated net receivable due from the federal government for these programs was $23,687 and $5,761 at September 30, 2015 and 2014, respectively. Similar to the federal program, EOHHS has a risk corridor program and NHP’s estimated net receivable due from EOHHS is $75,910 and $17,842 at September 30, 2015 and 2014, respectively.

Premium Deficiency Reserve Premium deficiency reserves are assessed and recognized on a product line basis based upon expected premium revenue, medical expense and administrative expense levels, and remaining contractual obligations using historical experience. As of September 30, 2015 and 2014, premium deficiency reserves total approximately $32,636 and $91,555, respectively, and are included in accrued medical claims and related expenses in the accompanying consolidated financial statements.

Claims Adjustment Expenses Claims adjustment expenses (CAE) are those costs expected to be incurred in connection with the adjustment and recording of health claims. NHP has recorded an estimate of unpaid CAE associated with incurred but unpaid claims, which is included in medical claims and related expenses in the accompanying consolidated statements of operations. Management believes the amount of the liability for unpaid CAE as of September 30, 2015, is adequate to cover NHP’s cost for the adjustment and recording of unpaid claims; however, actual expenses may differ from those established estimates. Adjustments to the estimates for unpaid CAE are reflected in operating results in the period in which the change in estimate is identified (Note 9).

Other Revenue Other revenue includes institutional revenue (for example, billing for services provided to other healthcare providers), parking, nonpatient pharmacy and tuition revenue.

Recent Accounting Pronouncements Partners HealthCare adopted ASU 2015-07, Disclosures for Certain Entities That Calculate Net Asset Value per Share (or its Equivalent), which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using net asset value per share as the practical expedient. The adoption of ASU 2015-07 did not have a material effect on Partners HealthCare’s financial statements.



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3. Acquisitions

Multiple physician practices were acquired during the year ended September 30, 2015 for a combined purchase price of $46,917. In accordance with accounting standards, the purchase price was allocated first to tangible assets, then identifiable intangible assets and the remaining allocated to goodwill.

Assets, liabilities, and net assets assumed as of the acquisition dates are as follows:

AssetsCash and cash equivalents 5,257$ Patient accounts receivable, net 3,762Property plant and equipment 3,201Other assets 34,697

Total assets acquired 46,917$

LiabilitiesNote payable 2,693$ Accounts payable and accrued expenses 10,457Accrued compensation and benefits 5,087Accrued professional liability 80

Total liabilities assumed 18,317

Net assetsUnrestricted 28,600

Total net assets 28,600Total liabilities and net assets 46,917$

A summary of the financial results of the acquired physician practices from the respective dates of acquisition is included in the consolidated statements of operations and changes in net assets is as follows:

Total operating revenue 88,325$ Total operating expenses 103,431

Loss from operations (15,106)

Nonoperating gains (expenses), net 2Deficit of revenues over expenses (15,104)

Other changes 1,000Decrease in unrestricted net assets (14,104)$



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A summary of the consolidated financial results of Partners HealthCare for the year ended September 30, 2015, as if the transactions had occurred on October 1, 2014 is as follows (unaudited):

Total operating revenue 11,696,236$ Total operating expenses 11,592,219

Income from operations 104,017

Nonoperating gains (expenses), net (198,447)Deficit of revenues over expenses (94,430)

Pension related changes (639,167)Other changes (186,096)

Decrease in unrestricted net assets (919,693)$

4. Levels of Capital and Surplus

Risk-based capital (RBC) is a methodology adopted by the National Association of Insurance Commissioners (NAIC) for determining the minimum level of capital and surplus deemed necessary for an insurer based upon the types of assets held and business written. Pursuant to a guaranty entered into by PHS when it acquired NHP in 2012 (the RBC Guaranty), PHS has committed to maintain NHP’ s capital and surplus at a specified minimum level, measured quarterly in accordance with an RBC methodology permitted by the Massachusetts Division of Insurance (DOl). The RBC Guaranty may be enforced by the DOI. PHS provided capital to NHP of $117,100 and $86,000 in 2015 and 2014, respectively.

In accordance with accounting guidance, NHP recognized premium deficiency reserves of $32,636 and $91,555 at September 30, 2015 and 2014, respectively. The premium deficiency reserves are estimates of anticipated losses in fiscal 2016 and 2015, respectively, related to NHP’s MassHealth and CommCare contracts. In order to comply with its obligations under the RBC Guaranty PHS transferred $40,300 to NHP in November 2015.

NHP’s current contract with EOHHS requires NHP to maintain a minimum net worth and/or financial insolvency insurance in an amount equal to the Minimum Net Worth calculation as defined in Massachusetts General Law 176G, Section 25. At December 31, 2014 and 2013 (NHP’s fiscal and statutory year end), the minimum net worth requirement, as determined in accordance with EOHHS guidelines, was $114,300 and $78,800, respectively. NHP’s statutory net worth was $128,700 and $97,200 at December 31, 2014 and 2013, respectively, and thus exceeded the EOHHS requirements by $14,400 and $18,400, respectively.



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5. Investments and Investments Limited as to Use

Investments are either separately invested or included in pooled investment funds within the Partners HealthCare System Pooled Investment Accounts (Partnership). The Partnership is structured as a single general partnership composed of three investment pools, with PHS and substantially all of its affiliates participating in the pools as partners. Each partner’s interest in the Partnership is based on its underlying investments in one or more of the three separate pools. Amounts included in the investment pools are accounted for using the fair value method whereby each partner is assigned a number of units based on the fair value of the assets of a pool at the time of entry of the funds into the pool. Current fair value is used to determine the number of units allocated to additional amounts placed in a pool and to value withdrawals from a pool. Income from investments of the pools, including realized gains and losses, is allocated on a unitized basis to a partner based on the partner’s share of units in a pool.

Among other investments, the Partnership invests in private partnerships whose assets include equity, fixed income and other investments. As of September 30, 2015, the Partnership has unfunded commitments of approximately $470,498 which will be drawn down by the various general partners over the next several years. The maximum annual drawdown is expected to be less than 2% of investments and investments limited as to use.

Investments and investments limited as to use are recorded in the balance sheet as follows:

2015 2014

Current assetsInvestments 1,354,636$ 1,474,058$ Current portion of investments limited as to use 1,590,203 2,120,057

2,944,839 3,594,115

Long-term assetsInvestments limited as to use, less current portion 2,832,744 2,927,360Long-term investments 1,061,176 1,026,538

6,838,759$ 7,548,013$

September 30,



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Investments limited as to use consist of the following:

Current Long-Term Current Long-TermPortion Portion Portion Portion

Internally designated fundsReserved for capital expenditures 863,703$ -$ 1,010,371$ -$ Unexpended academic and research gifts - 2,311,685 - 2,449,470Deferred compensation - 226,627 - 216,553Other 394,756 263,764 863,371 224,310

1,258,459 2,802,076 1,873,742 2,890,333

Externally limited fundsUnexpended funds on research 202,137 - 183,222 -Contributions held for others 1,269 - 3,991 -Professional liability trust fund - 30,668 - 37,027Held by trustees under debt and other agreements 128,338 - 59,102 -

331,744 30,668 246,315 37,0271,590,203$ 2,832,744$ 2,120,057$ 2,927,360$

September 30, 2015 September 30, 2014

Investments and investments limited as to use are reported at either fair value or on the equity or cost methods of accounting. The composition of these investments, segregated between pooled investments and those that are separately invested, is as follows:

At Fair On Equity On CostValue Method Method Total

Pooled investmentsInvested cash equivalents 34,049$ -$ -$ 34,049$ Separately managed investments 1,834,357 - - 1,834,357Mutual funds 365,035 - - 365,035Commingled funds 1,157,965 - - 1,157,965Private partnerships - 744,139 1,991,206 2,735,345

3,391,406 744,139 1,991,206 6,126,751

Separately investedInvested cash equivalents 135,640 - 16 135,656Equities 6,247 - 46,237 52,484U.S. Government and domestic fixed income securities 32,330 - - 32,330Mutual funds 397,539 - - 397,539Other 17,416 - 76,583 93,999

589,172 - 122,836 712,0083,980,578$ 744,139$ 2,114,042$ 6,838,759$

September 30, 2015



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Separately managed investments include cash and equivalents of $212,882, equities of $612,948 and fixed income securities of $1,008,527 as of September 30, 2015.

At Fair On Equity On CostValue Method Method Total

Pooled investmentsInvested cash equivalents 43,396$ -$ -$ 43,396$ Separately managed investments 2,301,880 - - 2,301,880Mutual funds 549,948 - - 549,948Commingled funds 1,151,708 - - 1,151,708Private partnerships - 804,445 2,013,552 2,817,997

4,046,932 804,445 2,013,552 6,864,929

Separately investedInvested cash equivalents 127,785 - 741 128,526Equities 14,062 - 23,937 37,999U.S. Government and domestic fixed income securities 32,427 - - 32,427Mutual funds 360,417 - - 360,417Other 47,018 - 76,697 123,715

581,709 - 101,375 683,0844,628,641$ 804,445$ 2,114,927$ 7,548,013$

September 30, 2014

Separately managed investments include cash and equivalents of $193,406, equities of $930,884 and fixed income securities of $1,177,590 as of September 30, 2014.

For the private partnerships reflected in the balance sheet at cost, the difference (unrecorded net unrealized appreciation) between the value reported by the investment managers and the cost for these investments was $863,084 and $883,174 as of September 30, 2015 and 2014, respectively.



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The fair value and gross unrealized depreciation of investments and investments limited as to use, with a fair value less than cost, that are not deemed to be other-than-temporarily impaired as of September 30, 2015 are as follows:

Gross GrossFair Unrealized Fair Unrealized

Value Depreciation Value Depreciation

Pooled investmentsSeparately managed investments 1,051$ (137)$ 189$ (9)$ Mutual fundsCommingled funds 734,450 (84,501) 169,374 (45,212)

735,501 (84,638) 169,563 (45,221)

Separately investedEquities - - 10 (4)Fixed income securities -Mutual funds 104,407 (7,866) 27,628 (5,113)External trusts - - 93 (12)

104,407 (7,866) 27,731 (5,129)839,908$ (92,504)$ 197,294$ (50,350)$

Less than 12 Months 12 Months or Greater

In addition, for certain private partnerships recorded at cost, gross unrealized depreciation amounted to $23,118 as of September 30, 2015, with $20,478 of that amount unrealized for 12 months or greater.

Based on management’s quantitative and qualitative assessment, investments whose cost exceeds fair value are not considered to be other-than-temporarily impaired as of September 30, 2015. Management believes these investments will recover their values and there is no intention to liquidate these positions.



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Investment income and gains (losses) from cash and equivalents, investments, investments limited as to use and beneficial interests in perpetual trusts are comprised of the following:

2015 2014

UnrestrictedDividends, interest and other income 59,941$ 62,576$ Endowment income distributions, net of reinvested gains 39,059 35,564Net realized gains (losses) on investments

Realized gains 158,402 313,244Other-than-temporary impairment (139,474) (55,636)

Change in value of equity method investments (46,860) 33,832Recovery on endowment funds (11,045) 91

Total investment activity included in excess of revenues over expenses 60,023 389,671

Change in net unrealized appreciation on marketable investments (224,616) (3,309)

Total unrestricted investment activity (164,593) 386,362

Temporarily restrictedDividends and interest income 5,286 14,857Endowment income distributions (47,133) (41,823)Net realized gains (losses) on investments

Realized gains 31,890 63,595Other-than-temporary impairment (24,558) (10,468)

(34,515) 26,161

Change in value of equity method investments (11,945) 10,736Change in net unrealized appreciation on marketable investments (47,396) (11,118)Recovery on endowment funds 11,045 (91)

(48,296) (473)Total temporarily restricted investment activity (82,811) 25,688

Permanently restrictedDividends and interest income (3) 4Net realized gains on investments 58 26Change in net unrealized appreciation on marketable investments (2,313) 392Change in value of beneficial interests in perpetual trusts (970) 1,314

Total permanently restricted investment activity (3,228) 1,736(250,632)$ 413,786$




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Investment income included in operating results and excess of revenues over expenses is comprised of the following:

2015 2014

Investment income included in operations and reported in other revenue 11,841$ 13,692$ Investment income included in nonoperating gains and reported in

(Loss) income from investments (37,258) 227,357Academic and research gifts, net of expenses 85,440 148,622

Total investment activity included in excess of revenues over expenses 60,023$ 389,671$


6. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (also referred to as exit price). Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. In determining fair value, the use of various valuation approaches, including market, income and cost approaches, is permitted.

Fair Value Hierarchy A fair value hierarchy has been established based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the reporting entity’s assumptions about the inputs market participants would use. The fair value hierarchy requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In addition, for hierarchy classification purposes, the reporting entity should not look through the form of an investment to the nature of the underlying securities held by an investee.

The hierarchy is described below.

Level 1 Valuations using quoted prices in active markets for identical assets or liabilities. Valuations of these products do not require a significant degree of judgment. Level 1 assets and liabilities primarily include debt and equity securities that are traded in an active exchange market.

Level 2 Valuations using observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; broker or dealer quotations; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities primarily include debt securities with quoted prices that are traded less frequently than exchange-traded instruments as well as debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.



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Level 3 Valuations using unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the reporting entity’s assumptions about the assumptions market participants would use as well as those requiring significant management judgment.

Valuation Techniques Pooled investments (except for private partnerships, which are reported on either the equity method or cost method of accounting), separately invested cash equivalents and debt and equity securities are classified within Level 1 or Level 2 of the fair value hierarchy as they are valued using quoted market prices, broker or dealer quotations, or other observable pricing sources. Certain types of investments are classified within Level 3 of the fair value hierarchy because they have little or no market activity and therefore have little or no observable inputs with which to measure fair value.

The valuation of interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

The following tables summarize fair value measurements as of September 30, 2015 and 2014 for financial assets and liabilities measured at fair value on a recurring basis:

Quoted Prices Significantin Active Other Significant

Markets for Observable Unobservable Fair Value atIdentical Items Inputs Inputs September 30,

(Level 1) (Level 2) (Level 3) 2015

AssetsPooled investments

Invested cash equivalents 33,027$ 1,021$ -$ 34,048$ Separately managed investments 1,331,564 502,793 - 1,834,357Mutual funds 365,034 - - 365,034Commingled funds - 1,157,967 - 1,157,967

1,729,625 1,661,781 - 3,391,406

Separately investedInvested cash equivalents 135,640 - - 135,640Equities 6,247 - - 6,247U.S. Government and domestic fixed income securities 32,330 - - 32,330Mutual funds 397,539 - - 397,539Other - - 17,416 17,416

571,756 - 17,416 589,1722,301,381$ 1,661,781$ 17,416$ 3,980,578$

LiabilitiesInterest rate swaps 404,062$ 404,062$

Fair Value Measurements Using



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Quoted Prices Significantin Active Other Significant

Markets for Observable Unobservable Fair Value atIdentical Items Inputs Inputs September 30,

(Level 1) (Level 2) (Level 3) 2014

AssetsPooled investments

Invested cash equivalents 9,702$ 33,694$ -$ 43,396$ Separately managed investments 1,700,305 601,575 - 2,301,880Mutual funds 549,948 - - 549,948Commingled funds - 1,151,708 - 1,151,708

2,259,955 1,786,977 - 4,046,932

Separately investedInvested cash equivalents 127,785 - - 127,785Equities 9,708 4,354 - 14,062U.S. Government and domestic fixed income securities 17,224 15,203 - 32,427Mutual funds 360,417 - - 360,417Other - 36,280 10,738 47,018

515,134 55,837 10,738 581,7092,775,089$ 1,842,814$ 10,738$ 4,628,641$

LiabilitiesInterest rate swaps 295,656$ 295,656$


As of and for the years ended September 30, 2015 and 2014, the fair value of the assets and change in the value of the assets measured using significant unobservable inputs (Level 3) were related to beneficial interests in perpetual assets.



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7. Pledges Receivable and Contributions Receivable From Trusts

Pledges receivable represent unconditional promises to give and are net of allowances for uncollectible amounts. Pledges are recorded at the present value of their estimated future cash flows. Pledges collectible within one year are classified as other current assets, net of allowances, and total $87,229 and $94,331 as of September 30, 2015 and 2014, respectively. Estimated cash flows due after one year are discounted using published treasury bond and note yields that are commensurate with estimated collection risks. The blended discount rate was 1.0% and 0.8% for 2015 and 2014, respectively. Pledges are expected to be collected as follows:

2015 2014

Amounts dueWithin one year 108,865$ 110,668$ In one to five years 138,411 161,764In more than five years 56,120 19,300

Total pledges receivable 303,396 291,732

Less: Unamortized discount 6,840 5,348296,556 286,384

Less: Allowance for uncollectibles 26,711 23,460Net pledges receivable 269,845 262,924

Contributions receivable from trusts 26,448 29,382296,293$ 292,306$

September 30,

8. Property and Equipment

Property and equipment consists of the following:

2015 2014

Land and land improvements 179,954$ 172,924$ Buildings and building improvements 5,955,908 5,558,974Equipment 1,826,766 1,427,800Construction in progress 1,098,134 900,180

9,060,762 8,059,878

Accumulated depreciation (3,731,980) (3,443,970)Property and equipment, net 5,328,782$ 4,615,908$

September 30,

Depreciation expense for the years ended September 30, 2015 and 2014 was $487,980 and $454,512, respectively. Interest costs, net of interest earned, aggregating $35,063 and $30,744 were capitalized in 2015 and 2014, respectively.



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For the years ended September 30, 2015 and 2014, fully depreciated assets with an original cost of $199,970 and $235,966, respectively, were written off.

9. Accrued Medical Claims and Related Expenses

Liabilities for accrued medical claims and related expenses include estimates of expected trends in claims severity, frequency, and other factors, which could vary as the claims are ultimately settled and are based principally upon historical experience. As a result of changes in estimates of insured events in prior years and recoveries, the liability on claims existing on October 1, 2014 and 2013, (decreased) increased ($27,221) and $13,332, respectively, in the years ended September 30, 2015 and 2014, respectively. Increases (decreases) of this nature occur as the result of claim settlements and recoveries during the current year and as additional information is received regarding individual claims, causing changes from the original estimates of the cost of these claims. Ongoing analysis of the recent loss development trends is also taken into account in evaluating the overall adequacy of the reserves.

2015 2014

Balance at beginning of year 254,480$ 121,833$

Less:Premium deficiency reserve (91,555) (6,494)Medical loss ratio rebate payable (611) (4,701)Accrual for claims adjustment expenses (4,381) (2,855)Claim recoveries (7,567) (1,991)

Plus: Settlements payable, net 22,020 23,555

Net balance at beginning of year 172,386 129,347

Incurred related toCurrent year 2,007,380 1,597,866Prior years (27,221) 13,332

Total incurred 1,980,159 1,611,198

Paid related toCurrent year 1,822,513 1,431,205Prior years 144,996 136,954

Total paid 1,967,509 1,568,159

Net balance at end of year 185,036 172,386

Plus: Premium deficiency reserve 32,636 91,555Medical loss ratio rebate payable - 611Accrual for claims adjustment expenses 4,877 4,381Accrued medical payables - other 14,477 -Claims recoveries 8,300 7,567

Less: Settlements payable, net (13,058) (22,020)Balance at end of year 232,268$ 254,480$



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Medical claims and related expenses in the accompanying consolidated statements of operations include these amounts along with other nonclaims related costs. These nonclaims related expenses were for directly delivered services and medical cost risk sharing and incentives, totaling approximately $17,422 and $14,792 for the years ended September 30, 2015 and 2014, respectively.

10. Long-Term Obligations

Long-term obligations issued by PHS and its affiliates consist of the following:

2015 2014

Massachusetts Health and Educational Facilities Authority (Authority) Revenue BondsPartners HealthCare System Series D, issued in multiple subseries, variable interest rate of 0.01% and 0.02% at September 30, 2015 and 2014, respectively, final maturity in 2017 1,940$ 11,490$ Partners HealthCare System Series F, issued in multiple subseries, average fixed interest rate of 5.00%, variable interest rate of 0.29% and 0.24% at September 30, 2015 and 2014, respectively, final maturity in 2040 246,209 273,458Partners HealthCare System Series G, issued in multiple subseries, average fixed interest rate of 4.93%, variable interest rate of 0.24% at September 30, 2015 and 2014, final maturity in 2047 319,614 438,054Partners HealthCare System Series H, issued in multiple subseries, variable interest rate of 0.08% and 0.08% at September 30, 2015 and 2014, respectively, final maturity in 2042 171,170 171,165Partners HealthCare System Series I, issued in multiple subseries, average fixed interest rate of 4.80%, variable interest rate of 0.01% and 0.03%, at September 30, 2015 and 2014, respectively, final maturity in 2044 168,686 171,996Partners HealthCare System Series J, issued in multiple subseries, average fixed interest rate of 5.00%, final maturity in 2039 442,110 456,746Partners HealthCare System Series P, issued in multiple subseries, variable interest rate of 0.01% and 0.04% at September 30, 2015 and 2014, respectively, final maturity in 2027 150,000 150,000

Massachusetts Development Finance Agency (Agency) Revenue BondsPartners HealthCare System Series K, issued in multiple subseries, average fixed interest rate of 4.86%, variable interest rate of 0.02% and 0.04% at September 30, 2015 and 2014, respectively, final maturity in 2046 342,219 352,836Partners HealthCare System Series L, average fixed interest rate of 4.94%, final maturity in 2041 340,347 351,264Partners HealthCare System Series M, issued in multiple subseries, average fixed interest rate of 4.95%, variable interest rate of 0.34% and 0.36% at September 30, 2015 and 2014, respectively, final maturity in 2048 507,533 509,100Partners HealthCare System Series N, issued in multiple subseries, variable interest rate of 0.65% and 0.62% at September 30, 2015 and 2014, respectively, final maturity in 2044 139,400 141,350Partners HealthCare System Series O, issued in multiple subseries, average fixed rate of 4.60%, variable interest rate of 0.50% at September 30, 2015, final maturity in 2050 356,517 -

Partners HealthCare System Series 2007 taxable bonds, fixed interest rate of 6.26%, final maturity in 2037 100,000 100,000Partners HealthCare System Series 2011 taxable bonds, fixed interest rate of 3.44%, final maturity in 2021 250,000 250,000Partners HealthCare System 2012 Taxable Senior Notes, fixed interest rate of 4.11%, final maturity in 2052 400,000 400,000Partners HealthCare System 2014 Taxable Senior Notes, fixed interest rate of 4.73%, final maturity in 2044 150,000 150,000Partners HealthCare System Series 2015 taxable bonds, fixed interest rate of 4.12%, final maturity in 2055 300,000 -Other obligations 6,092 6,454Capital lease obligations 1,187 2,229

Total long-term obligations including unamortized discounts and premiums 4,393,024 3,936,142

Less: Current portion 398,990 238,2043,994,034$ 3,697,938$

September 30,



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Aggregate maturities and payments of long-term obligations during the next five years and thereafter, and other amounts classified as current liabilities, are as follows:

BondsSupported by Bonds

Partners Supported byScheduled HealthCare BankMaturities Liquidity Facilities Total

2016 64,860$ 246,780$ 87,350$ 398,990$ 2017 61,979 - - 61,9792018 68,162 - - 68,1622019 69,392 - - 69,3922020 71,959 - - 71,959Thereafter 3,722,542 - - 3,722,542

4,058,894$ 246,780$ 87,350$ 4,393,024$

The scheduled maturities represent annual payments as required under debt repayment schedules. The current portion of long-term obligations includes the payments scheduled to be made in 2016 along with bonds supported by Partners HealthCare liquidity and bonds supported by bank facilities (standby bond purchase agreements or letters of credit) with financial institutions that expire prior to September 30, 2016. The bonds supported by Partners HealthCare liquidity provide the bondholder with an option to tender the bonds to Partners HealthCare. Accordingly, these bonds are classified as a current liability. The bonds supported by bank facilities provide the bondholder with an option to tender the bonds to the liquidity provider. Generally accepted accounting principles require bonds backed by bank facilities expiring within one year of the balance sheet date to be classified as a current liability.

The fair value of long-term obligations was $4,611,382 and $4,152,828 as of September 30, 2015 and 2014, respectively, and would be classified as Level 2. The carrying amount of the variable rate debt is a reasonable estimate of its fair value. The fair value of the fixed rate debt is estimated based on quoted market prices for the same or similar issues.

Interest expense paid during the years ended September 30, 2015 and 2014 was $165,844 and $149,942, respectively.

Taxable Bonds and Notes In March 2014, PHS issued $150,000 of Partners HealthCare System Taxable Senior Notes. Proceeds from the notes were used to finance certain capital projects.

In January 2015, PHS issued $300,000 of Partners HealthCare System Taxable Bonds. Proceeds from the bonds were used to finance certain capital projects.

Revenue Bonds In January 2014, PHS issued $496,040 of Partners HealthCare System Series M Revenue Bonds, plus bond premium of $14,337. The bond proceeds, net of issuance costs of $4,042, were used to refund portions of Series D Bonds ($71,665) and Series K Bonds ($73,815) and to finance certain capital projects ($360,855).



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In August 2014, PHS issued $141,350 of Partners HealthCare System Series N Revenue Bonds. The Series N Bonds were privately placed with two banks. The bond proceeds were used to refund portions of Series F Bonds ($91,350) and Series I Bonds ($50,000).

In January 2015, PHS issued $317,615 of Partners HealthCare System Series O Revenue Bonds, plus bond premium of $39,969. The bond proceeds, net of issuance costs of $2,814, were used to refund portions of Series F Bonds ($20,865) and Series G Bonds ($119,201) and to finance certain capital projects ($214,704).

Partners HealthCare bonds are general obligations of PHS supported by guarantees from BWHC, The Brigham and Women’s Hospital, Inc. (BWH), MGH and The General Hospital Corporation (the General) which may be suspended under certain conditions.

PHS bond agreements contain certain covenants, including a minimum debt service coverage ratio and limitations on additional indebtedness and asset transfers.

Credit Agreement Partners HealthCare maintains a $150,000 Credit Agreement (the Agreement) that provides access to same day funds. Advances under the Agreement bear a variable rate of interest based on the London Interbank Offered Rate (LIBOR). As of September 30, 2015, there were no amounts outstanding under the Agreement. The Agreement expires in June 2017.

11. Derivatives

Interest Rate Swaps Partners HealthCare utilizes swap contracts to manage fluctuations in cash flows resulting from interest rate risk on certain of its variable rate bonds. These bonds expose Partners HealthCare to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of its interest payments. To meet this objective and to take advantage of low interest rates, Partners HealthCare entered into various swap contracts involving the exchange of fixed rate payments by Partners HealthCare for variable rate payments from several counterparties based on a percentage of LIBOR.

By using swap contracts to manage the risk of changes in interest rates, Partners HealthCare exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the swap contracts. When the fair value of a swap contract is positive, the counterparty has a liability to Partners HealthCare, which creates credit risk. Partners HealthCare minimizes its credit risk by entering into swap contracts with several counterparties and requiring the counterparty to post collateral for the benefit of Partners HealthCare based on the credit rating of the counterparty and the fair value of the swap contract. When the fair value of a swap contract is negative, Partners HealthCare has a liability to the counterparty and, therefore, it does not possess credit risk, but under certain circumstances, Partners HealthCare may be required to post collateral for the benefit of the counterparty and the counterparty. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate changes is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.



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The following is a summary of the outstanding positions under these swap contracts as of September 30, 2015:

NotionalAmount Maturity Rate Paid Rate Received

5/1/03 150,000$ 7/1/35 4.40 % 67% 1-month LIBOR7/1/05 150,000 7/1/40 3.63 % 67% 1-month LIBOR7/1/05 38,600 7/1/25 5.11 % 67% 6-month LIBOR7/1/07 150,000 7/1/42 3.46 % 67% 1-month LIBOR7/1/09 100,000 7/1/44 3.71 % 67% 1-month LIBOR7/1/11 100,000 7/1/46 3.74 % 67% 1-month LIBOR7/1/13 100,000 7/1/48 3.80 % 67% 1-month LIBOR7/1/15 50,000 7/1/50 3.80 % 67% 1-month LIBOR4/1/16 50,000 7/1/50 3.93 % 67% 1-month LIBOR4/1/16 50,000 7/1/52 3.59 % 67% 1-month LIBOR7/1/17 50,000 7/1/52 3.74 % 67% 1-month LIBOR

DateEffective

As of September 30, 2014, Partners HealthCare elected to stop applying hedge accounting treatment for its swap contracts; accordingly, changes in the fair value of interest rate swaps are recognized as nonoperating gains (expenses). As a result of this election and in accordance with accounting guidance for derivative instruments, losses of $81,600 which were previously recognized as a change in unrestricted net assets were reclassed to nonoperating gains (expenses) in the consolidated statement of operations.

Previously, for swap contracts designated as cash flow hedges, the change in fair value of the effective portion of the hedge was reflected as a change in unrestricted net assets and the ineffective portion of the hedge was reflected as a component of nonoperating gains (expenses) in the consolidated statements of operations. For nonhedging swap contracts, the change in fair value was recorded as a component of nonoperating gains (expenses) in the consolidated statements of operations.

The fair value of swap contracts is recorded in the interest rate swap liability.



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The effects of swap contracts on the consolidated statements of operations are as follows:

2015 2014 2015 2014

Statement of operations locationSwap contracts designated as hedging instruments

Change in fair value of hedging interest rate swaps -$ 44,806$ -$ -$ Amortization of swaption premiums - - - 1,112Hedge ineffectiveness - - - 771

Swap contracts not designated as hedging instrumentsChange in fair value of nonhedging interest rate swaps - - (110,315) (110,340)Amortization of net asset balance upon hedge de-designation - 818 - (818)

-$ 45,624$ (110,315)$ (109,275)$

Years Ended September 30, Years Ended September 30,Net Assets Over Expenses

Amount of Gain (Loss) Amount of Gain (Loss)Recognized in Recognized in Excess

Changes in Unrestricted of Revenues

Partners HealthCare’s swap contracts contain provisions that require collateral to be posted if the fair value of the swap exceeds certain thresholds. The collateral thresholds reflect the current credit ratings issued by major credit rating agencies on Partners HealthCare’s and the counterparty’s debt. Declines in Partners HealthCare’s or the counterparty’s credit ratings would result in lower collateral thresholds and, consequently, the potential for additional collateral postings by Partners HealthCare or the counterparty. As of September 30, 2015 and 2014, Partners HealthCare had posted collateral of $128,208 and $58,944, respectively. Partners HealthCare has established procedures to ensure that liquidity and securities are available to meet collateral posting requirements.

Upon the occurrence of certain events of default or termination events identified in the swap contracts, either Partners HealthCare or the counterparty could terminate the contracts in accordance with their terms. Termination results in the payment of a termination amount by one party that attempts to compensate the other party for its economic losses. If interest rates at the time of termination are lower than those specified in the swap contract, Partners HealthCare would make a payment to the counterparty. Conversely, if interest rates at such time are higher, the counterparty would make a payment to Partners HealthCare.

Derivatives - Other Partners HealthCare also enters into options and futures primarily as hedges on securities and indices primarily related to foreign currency. Forward contracts are used as currency hedges. These agreements are limited in use and generally do not exceed one year and are included in separately invested investments.



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12. Commitments

Leases Partners HealthCare has capital and noncancelable operating leases for certain buildings and equipment. Minimum future lease commitments under noncancelable leases for the next five years and thereafter are as follows:

Capital OperatingLeases Leases

2016 437$ 239,337$ 2017 437 172,7362018 396 145,3922019 - 103,9592020 - 83,541Thereafter - 382,176

Total lease payments 1,270 1,127,141$

Less: Amount representing interest 83Capital lease obligations at September 30, 2015 1,187$

Rental expense under operating leases approximated $196,946 in 2015 and $190,827 in 2014.

Construction Projects BWH is constructing a building (the Brigham Building for the Future or BBF). The BBF will expand research and clinical space on the BWH campus, with a focus on the Neuroscience and Musculoskeletal programs, and increase flexibility for future campus redevelopment while allowing for lease consolidation. The associated land is leased to BWH by the Commonwealth through 2105. Phase 1 of the project, which involved the construction of two smaller facilities to be used by the Commonwealth, was completed in 2012. Phase 2 of the project, which involves the site preparation and construction of BBF, is ongoing. As of September 30, 2015, accumulated costs incurred related to the BBF approximated $284,830 with approximately $77,605 in outstanding construction contracts. Phase 2 costs are expected to be approximately $511,500, with occupancy scheduled for late 2016.

Partners HealthCare is constructing a building and parking garage as part of the mixed-use development project at Assembly Row in Somerville, MA. This building will primarily be administrative space and allow for consolidation of multiple locations into a single cost- effective location. As of September 30, 2015, accumulated costs incurred related to the new administrative project are approximately $127,392 with approximately $182,500 in outstanding commitments. The total cost of the project is expected to be approximately $467,000, with occupancy scheduled for summer 2016.



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13. Pension and Postretirement Healthcare Benefit Plans

Substantially all employees of Partners HealthCare are covered under various noncontributory defined benefit pension plans and various defined contribution pension plans. In addition, certain affiliates provide subsidized healthcare benefits for retired employees on a self-insured basis, with the benefit obligation being partially funded. These retiree healthcare benefits are administered through an insurance company and are accounted for on the accrual basis, which includes an estimate of future payments for claims incurred.

Total expense for these plans consists of the following:

2015 2014

Defined benefit plans 233,670$ 181,748$ Defined contribution plans 150,745 144,747Postretirement healthcare benefit plans 4,368 7,029

388,783$ 333,524$


Information regarding benefit obligations, plan assets, funded status, expected cash flows and net periodic benefit cost follows within this footnote.

Benefit Obligations

2015 2014 2015 2014

Change in benefit obligationsBenefit obligations at beginning of year 5,102,117$ 4,260,555$ 136,502$ 138,329$

Service cost 267,328 221,631 5,059 5,373Interest cost 231,953 221,702 4,966 5,777Plan amendments 5,045 1,825 - -Actuarial (gain) loss 204,937 507,350 7,622 (15,438)Benefits paid (126,127) (105,475) (5,301) (5,077)Expenses paid (6,565) (5,672) - -Employee contributions 187 201 8,027 7,538

Benefit obligations at end of year 5,678,875$ 5,102,117$ 156,875$ 136,502$

Defined Benefit PostretirementPension Plans Healthcare Benefit Plans



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The accumulated benefit obligation for all defined benefit pension plans at the end of 2015 and 2014 was $5,371,220 and $4,806,399, respectively.

2015 2014 2015 2014

Weighted-average assumptions used to determine end of year benefit obligationDiscount rate 4.50% 4.40% 3.00% - 4.55% 3.05% - 4.40%Rate of compensation increase

Professional staff 4.45% 4.45% N/A N/AOther than professional staff 3.00% - 3.50% 3.00% - 4.00% N/A N/A

Healthcare cost trend rate for next year N/A N/A 7.00% 7.00%Rate to which the cost trend rate is to decline N/A N/A 5.00% 5.00%Year that rate reaches the ultimate trend rate N/A N/A 2020 2020

Defined Benefit Postretirement HealthcarePension Plans Benefit Plans

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effect:

One-Percentage-Point One-Percentage-PointIncrease Decrease

Effect on postretirement benefit obligation 986$ (914)$

Plan Assets

2015 2014 2015 2014

Change in plan assetsFair value of plan assets at beginning of year 4,365,566$ 3,925,818$ 68,438$ 56,761$

Actual return on plan assets (147,938) 366,240 (3,003) 5,212Employer contributions 246,972 184,454 5,044 4,004Employee contributions 187 201 8,027 7,538Benefits paid (126,127) (105,475) (5,301) (5,077)Expenses paid (6,565) (5,672) - -

Fair value of plan assets at end of year 4,332,095$ 4,365,566$ 73,205$ 68,438$

PostretirementPension Plans Healthcare Benefit PlansDefined Benefit

The assets of the defined benefit pension plans are aggregated in a single master trust (Master Trust) and managed as one asset pool. The investment objective for the Master Trust is to achieve the highest reasonable total return after considering (i) plan liabilities, (ii) funding status and projected cash flows, (iii) projected market returns, valuations and correlations for various asset classes and (iv) Partners HealthCare’s ability and willingness to incur market risk.

Oversight of the management of Partners HealthCare’s investable assets, including the Master Trust, is provided by the Investment Committee of the PHS Board of Directors which seeks to add incremental returns by manager selection and asset allocation (increasing/decreasing allocations within allowable ranges based on current and projected valuations). The Committee is supported by a professional staff, an outside investment consultant and a pension actuarial consultant.



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Partners HealthCare utilizes a target allocation policy that balances projected returns, correlations and volatility of various asset classes within the overall risk tolerance. Asset allocations are managed based on relative valuations among and within asset classes and the perceived ability of managers to outperform passive benchmarks. Exposure by asset class is the sum of the net exposures reported by each manager. Asset allocation can and will deviate from target exposures and is regularly monitored for rebalancing opportunities.

The following table presents the capital allocations, reported exposures of the allocations and policy benchmarks by manager mandate within the Master Trust. Some managers, particularly real assets and less market sensitive managers, invest allocated capital among multiple policy benchmark asset classes.

Reported Policy Reported PolicyDollars Exposures Benchmark Dollars Exposures Benchmark

Global equity 205,596$ 4 % 7 % 204,952$ 4 % 4 % Traditional U.S. equity 537,524 12 10 610,856 14 13 Traditional foreign developed equity 585,803 14 12 601,744 14 13 Traditional emerging markets equity 552,140 13 11 571,868 13 13 Private equity 388,336 9 8 329,329 8 8 Real assets 284,808 7 7 334,631 8 8 Less: Market sensitive managers 1,502,556 35 36 1,404,996 32 31 Fixed income managers 275,332 6 9 307,190 7 10

4,332,095$ 100 % 100 % 4,365,566$ 100 % 100 %

September 30, 2015 September 30, 2014

Within the Master Trust, assets are allocated to managers with investment mandates that may range from a single sub-asset class to very broad mandates; with restrictions that range from long-only to unconstrained; and with management structures ranging from separately managed funds to mutual/commingled funds to private partnerships. Less market sensitive managers employ absolute return, long/short equity and diversified strategies, which in the aggregate are expected to generate positive returns on a consistent basis. Other exposures include currency and volatility based strategies. Inflation defensive strategies include investments in real estate assets, commodities, timber and inflation protection bonds. Investment risks (concentration, correlation, valuation, liquidity, leverage, mandate compliance, etc.) are measured at the manager level as well as the pool level.

The postretirement healthcare benefit plans assets are commingled funds, with the objective of achieving returns to satisfy plan obligations and with a level of volatility commensurate with Partners HealthCare’s overall financial profile.



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The following table presents plan assets, by form of ownership, as of September 30, 2015 and 2014 measured at fair value on a recurring basis using the fair value hierarchy defined in Note 6:

Quoted Prices Significant Investmentsin Active Other Valued

Markets for Observable Using NAV as a Fair Value atIdentical Items Inputs Practical September 30,

(Level 1) (Level 2) Expedient 2015

Defined benefit pension plansInvested cash equivalents 43,315$ -$ -$ 43,315$ Separately managed investments 366,713 201,603 - 568,316Mutual funds 257,734 - - 257,734Commingled funds - 1,072,581 - 1,072,581Private partnerships - - 2,390,149 2,390,149

667,762 1,274,184 2,390,149 4,332,095

Postretirement healthcare benefit plansCommingled funds 9,980 56,325 6,900 73,205

Total plan assets 677,742$ 1,330,509$ 2,397,049$ 4,405,300$


Quoted Prices Significant Investmentsin Active Other Valued

Markets for Observable Using NAV as a Fair Value atIdentical Items Inputs Practical September 30,

(Level 1) (Level 2) Expedient 2014

Defined benefit pension plansInvested cash equivalents 2,169$ -$ -$ 2,169$ Separately managed investments 536,940 221,807 - 758,747Mutual funds 419,479 - - 419,479Commingled funds - 977,778 - 977,778Private partnerships - - 2,207,393 2,207,393

958,588 1,199,585 2,207,393 4,365,566

Postretirement healthcare benefit plansCommingled funds 671 60,892 6,875 68,438

Total plan assets 959,259$ 1,260,477$ 2,214,268$ 4,434,004$


In evaluating the Level at which Partners HealthCare’s private partnerships have been classified within the fair value hierarchy, management has assessed factors including, but not limited to price transparency, the ability to redeem these investments at net asset value at the measurement date, and the existence or absence of certain restrictions at the measurement date. Investments in private partnerships generally have limited redemption options for investors and, subsequent to final closing, may or may not permit subscriptions by new or existing investors. These entities may also have the ability to impose gates, lockups and other restrictions on an investor’s ability to readily redeem out of their investment interest in the fund. As of September 30, 2015 and 2014, Partners HealthCare has excluded all assets from the fair value hierarchy for which fair value is measured at net asset value per share using the practical expedient.



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Funded Status The funded status of the plans recognized in the balance sheet and the amounts recognized in unrestricted net assets follows:

2015 2014 2015 2014

End of yearFair value of plan assets at measurement date 4,332,095$ 4,365,566$ 73,205$ 68,438$ Benefit obligations at measurement date (5,678,875) (5,102,117) (156,875) (136,502)

Funded status (1,346,780)$ (736,551)$ (83,670)$ (68,064)$

Amounts recognized in the balance sheet consist ofNoncurrent assets -$ -$ -$ 348$ Current liabilities (2,116) (4,272) (3,586) (3,299)Long-term liabilities (1,344,664) (732,279) (80,084) (65,113)

(1,346,780)$ (736,551)$ (83,670)$ (68,064)$

Amounts not yet recognized in net periodic benefit cost and included in unrestricted net assets consist ofActuarial net loss (gain) 1,850,126$ 1,227,732$ 11,730$ (4,551)$ Prior service cost (credit) 9,852 9,360 - -

1,859,978$ 1,237,092$ 11,730$ (4,551)$

Amounts recognized in unrestricted net assets consist ofCurrent year actuarial (gain) loss 698,377$ 449,880$ 15,746$ (16,404)$ Amortization of actuarial gain (loss) (75,983) (44,183) 535 33Current year prior service cost (credit) 4,402 1,354 - -Amortization of prior service (cost) credit (3,910) (3,002) - 20

622,886$ 404,049$ 16,281$ (16,351)$

Defined Benefit PostretirementPension Plans Healthcare Benefit Plans

At the end of 2015 and 2014, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets were as follows:

2015 2014

Accumulated benefit obligation in excess of plan assetsProjected benefit obligation 5,678,875$ 5,102,117$ Accumulated benefit obligation 5,371,220 4,806,399Fair value of plan assets 4,332,095 4,365,566



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Expected Cash Flows Information about the expected cash flows for the defined benefit and postretirement healthcare benefit plans is as follows:

DefinedBenefitPension

Plans

Expected employer contributions2016 287,515$ 6,739$

MedicareSubsidy

Expected benefit payments (receipts)2016 226,494$ 6,997$ (258)$ 2017 253,603 7,997 (239)2018 267,380 9,002 (222)2019 283,947 10,036 (204)2020 308,479 11,084 (185)2021-2025 1,779,566 70,975 (654)

Postretirement HealthcareBenefit Plans

Net Periodic Benefit Cost

2015 2014 2015 2014

Service cost 267,328$ 221,631$ 5,059$ 5,373$ Interest cost 231,953 221,702 4,966 5,777Expected return on plan assets (345,504) (308,770) (5,123) (4,247)Amortization of

Prior service cost (credit) 3,910 3,002 - (20)Actuarial net (gain) loss 75,983 44,183 (534) 146

Net periodic benefit cost 233,670$ 181,748$ 4,368$ 7,029$

Pension PlansPostretirement

Healthcare Benefit PlansDefined Benefit

Amounts expected to be amortized from unrestricted net assets into net periodic benefit cost during the year ending September 30, 2015 are as follows:

Defined PostretirementBenefit HealthcarePension Benefit

Plans Plans

Actuarial net loss (gain) 90,109$ 1,266$ Prior service cost (credit) 3,566 -



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2015 2014 2015 2014

Weighted-average assumptions used to determine net periodic pension and postretirement costDiscount rate 4.40 % 5.05 % 3.05 % - 4.40 % 3.15 % - 5.05 %Expected return on plan assets 8.00 % 8.00 % 7.50 % 7.50 %Rate of compensation increase

Professional staff 4.45 % 4.45 % N/A N/AOther than professional staff 3.00 % - 3.50 % 3.00 % - 4.00 % N/A N/A

Healthcare cost trend rate for this year N/A N/A 7.00 % 6.50 %Rate to which the cost trend rate is to decline N/A N/A 5.00 % 5.00 %Year that rate reaches the ultimate trend rate N/A N/A 2021 2017

Postretirement HealthcareBenefit PlansPension Plans

Defined Benefit

Partners HealthCare uses a long-term return assumption which is validated annually by obtaining long-term asset return, volatility and correlation projections for relevant asset class indexes; modifying volatility and correlations to reflect the actual historical experience of the active managers; calculating the expected return using benchmark weights and indexes; and comparing the return assumption to the sum of the expected return and the historical outperformance of the actual return versus the benchmark. Partners HealthCare regularly monitors the active risk of the Master Trust by a statistical regression of the return series of the actual portfolio to that of the policy benchmark.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effect:

Increase Decrease

Effect on service and interest cost 40$ (37)$

One-Percentage-Point

14. Professional Liability Insurance

Partners HealthCare insures substantially all of its professional and general liability risk on a claims-made basis in cooperation with other healthcare organizations in the Greater Boston area through a captive insurance company, Controlled Risk Insurance Company Ltd. (CRICO). PHS owns 10% of CRICO. The investment is accounted for on the cost basis of accounting. The policies cover claims made during their respective terms, but not those occurrences for which claims may be made after expiration of the policy, except for certain tail liabilities which CRICO has assumed on an occurrence basis through December 31, 2015. Management intends to renew its coverage on a claims-made basis and has no reason to believe that it will be prevented from such renewal. During 2015, CRICO announced and paid a dividend to member organizations. As a result, Partners HealthCare recognized a dividend of $54,779 as a nonoperating gain.



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Partners HealthCare follows the accounting policy of establishing reserves to cover the ultimate costs of medical malpractice claims, which include costs associated with litigating or settling claims. The liability also includes an estimated tail liability, established to cover all malpractice claims incurred but not reported to the insurance company as of the end of the year. The total malpractice liability of $482,640 and $455,463 as of September 30, 2015 and 2014, respectively, is presented as an accrued professional liability in the consolidated balance sheets. These reserves have been recorded on a discounted basis using an interest rate of 3.50% and 3.25% as of September 30, 2015 and 2014, respectively.

Partners HealthCare also recognizes an insurance receivable from CRICO, at the same time that it recognizes the liability, measured on the same basis as the liability, subject to the need for a valuation allowance for uncollectible amounts. The insurance receivable of $397,958 and $370,311 as of September 30, 2015 and 2014, respectively, is reported as a component of other assets in the consolidated balance sheets.

Management is not aware of any claims against Partners HealthCare or factors affecting CRICO that would cause the expense for professional liability risks to vary materially from the amount provided.

15. Concentration of Credit Risk

Financial instruments that potentially subject Partners HealthCare to concentration of credit risk consist of patient accounts receivable, research grants receivable, pledges receivable, premiums receivable, certain investments and interest rate swaps.

Partners HealthCare receives a significant portion of its payments for services rendered from a limited number of government and commercial third-party payers, including Medicare, Medicaid, Blue Cross and Blue Shield of Massachusetts, Harvard Pilgrim Health Care and Tufts Health Plan. Research funding is provided through many government and private sponsors. NHP receives a significant portion of its premium revenue from the Commonwealth. Pledges receivable are due from multiple donors. Partners HealthCare assesses the credit risk for pledges based on history and the financial wherewithal of donors, most of which are individuals or organizations well known to Partners HealthCare.

Investments, which include government and agency securities, stocks and corporate bonds, and private partnerships and other investments are not concentrated in any corporation or industry or with any single counterparty. Alternative investments are less liquid than Partners HealthCare’s other investments. The reported values of the alternative investments may differ significantly from the values that would have been used had a ready market for those securities existed. These instruments may contain elements of both credit and market risk. Such risks include, but are not limited to, limited liquidity, absence of oversight, dependence upon key individuals, emphasis on speculative investments and nondisclosure of portfolio composition.

Partners HealthCare minimizes the credit risk it is exposed to under interest rate swap agreements by utilizing several counterparties and requiring the counterparties to post collateral for the benefit of Partners HealthCare when the fair value of the swap is positive. Partners HealthCare minimizes its counterparty risk by contracting with six counterparties, none of which accounts for more than 30% of the aggregate notional amount of the swap contracts.



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16. Net Assets

Restricted net assets are available for the following purposes:

2015 2014

Temporarily restrictedCharity care 89,032$ 98,170$ Buildings and equipment 89,990 102,109Clinical care, research and academic 586,540 655,675

765,562$ 855,954$

Permanently restrictedCharity care 20,550$ 19,763$ Buildings and equipment 2,444 2,433Clinical care, research and academic 556,584 441,578

579,578$ 463,774$

September 30,

Endowment Partners HealthCare’s endowment consists of numerous individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the boards to function as endowment.

Partners HealthCare has interpreted UPMIFA as requiring the preservation of the value of the original gift of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, Partners HealthCare classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts donated to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by Partners HealthCare in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, Partners HealthCare considers several factors in making a determination to appropriate or accumulate donor-restricted endowment funds. These factors include: the duration and preservation of the fund; the purposes of the organization and the donor-restricted endowment fund; general economic conditions; the possible effect of inflation and deflation; the expected total return from income and the appreciation of investments; other resources of the organization; and the investment policies of the organization.

Endowment Funds with Deficits From time to time, the value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts. When such endowment deficits exist, they are classified as a reduction to unrestricted net assets. Deficits of this nature reported in unrestricted net assets were $11,292 and $247 as of September 30, 2015 and 2014, respectively. These deficits resulted from unfavorable market fluctuations that occurred after the investment of new permanently restricted contributions or subsequent endowment additions.



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The following presents the endowment net asset composition by type of fund as of September 30, 2015 and 2014 and the changes in endowment assets for the years ended September 30, 2015 and 2014:

Temporarily PermanentlyUnrestricted Restricted Restricted Total

Endowment net asset composition by type of fund as of September 30, 2015Donor-restricted endowment funds (11,292)$ 410,816$ 558,507$ 958,031$ Board-designated endowment funds 885,380 - - 885,380

Total funds 874,088$ 410,816$ 558,507$ 1,843,411$


Changes in endowment net assetsEndowment net assets at September 30, 2014 942,119$ 498,238$ 447,607$ 1,887,964$

Investment returnInvestment income 3,856 4,588 (1) 8,443Net realized and unrealized appreciation (depreciation) (51,213) (40,005) (30) (91,248)

Total investment return (47,357) (35,417) (31) (82,805)

Contributions 5,898 (172) 116,449 122,175Appropriation of endowment assets for expenditure (40,515) (49,813) - (90,328)Other changes 13,943 (2,020) (5,518) 6,405

Total changes (68,031) (87,422) 110,900 (44,553)

Endowment net assets at September 30, 2015 874,088$ 410,816$ 558,507$ 1,843,411$


Endowment net asset composition by type of fund as of September 30, 2014Donor-restricted endowment funds (247)$ 498,238$ 447,607$ 945,598$ Board-designated endowment funds 942,366 - - 942,366

Total funds 942,119$ 498,238$ 447,607$ 1,887,964$



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Changes in endowment net assetsEndowment net assets at October 1, 2013 903,255$ 468,273$ 397,472$ 1,769,000$

Investment returnInvestment income 4,894 14,570 13 19,477Net realized and unrealized appreciation (depreciation) 76,199 51,383 291 127,873

Total investment return 81,093 65,953 304 147,350

Contributions 8,509 5,566 49,877 63,952Appropriation of endowment assets for expenditure (39,258) (41,234) - (80,492)Other changes (11,480) (320) (46) (11,846)

Total changes 38,864 29,965 50,135 118,964

Endowment net assets at September 30, 2014 942,119$ 498,238$ 447,607$ 1,887,964$

Conditional Pledge During 2009, the General signed an agreement (Ragon Agreement) with The Massachusetts Institute of Technology (MIT), The President and Fellows of Harvard College (Harvard) and The Phillip T. and Susan M. Ragon Foundation (Ragon Foundation) to establish the Phillip T. and Susan M. Ragon Institute (Ragon Institute) as a joint research center of the General, MIT and Harvard with the purpose of harnessing the potential of the immune response to combat and conquer human diseases, integrating biomedical research with emerging engineering technologies (with the main initial focus being the development of an AIDS vaccine) and educating and training scientists. The Ragon Foundation committed to provide funding for the Ragon Institute of $100,000 over ten years through the General (as the administrative home for the Ragon Institute), beginning retroactively on January 1, 2008. The Ragon Foundation has the ability to slow, suspend or eliminate funding based on restrictions described in the Ragon Agreement. Additionally, any funding not paid by December 31, 2017 would no longer be due by the Ragon Foundation. In February 2014, an amendment was signed (Ragon Amendment) that noted that the current agreement would be completed by December 2018 and that an additional $50,000 of funding would be committed by the Ragon Foundation over five years beginning in 2019. Due to the conditions within the Ragon Agreement, funding is recognized when received, with no pledge receivable recorded for the balance of the amended commitment.

Through September 30, 2015, total funding of $84,891 was received, with $10,891 received for the year ended September 30, 2015 (including $891 of endowment earnings distributed), and total net expenses of $70,912 were incurred, including $10,417 for the year ended September 30, 2015. As of September 30, 2015, unspent funding of $13,979 has been recorded as temporarily restricted net assets, to be released to unrestricted net assets after qualifying expenses have been incurred.



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17. Functional Expenses

Total operating expenses by function are as follows:

2015 2014

Healthcare services 7,167,823$ 6,852,795$ Research and academic 1,671,225 1,578,693Medical claims and related expenses 1,652,538 1,463,972General and administrative 1,067,601 1,032,197

11,559,187$ 10,927,657$


18. Contingencies

Partners HealthCare is subject to complaints, claims and litigation which arise in the normal course of business. In addition, Partners HealthCare is subject to reviews and investigations by various federal and state government agencies to assure compliance with applicable laws, some of which are subject to different interpretations. Governmental review of compliance by healthcare institutions, including Partners HealthCare, has increased.

19. Subsequent Events

Partners HealthCare has assessed the impact of subsequent events through December 11, 2015, the date the audited financial statements were issued. During this period, there were no subsequent events that require adjustment to the audited financial statements.

APPENDIX C-1

DEFINITIONS OF CERTAIN TERMS

The following are definitions of certain terms used in the Loan and Trust Agreement and used in this Official Statement:

Definitions

“Act” means Chapters 23G and 40D of the Massachusetts General Laws.

“Affiliate” means any Person (whether for-profit or not-for-profit) which “controls” or is “controlled” by, or is under common “control” with, another Person. For purposes of this definition, a Person “controls” another Person when the first Person possesses or exercises directly, or indirectly through one or more other affiliates or related entities, the power to direct the management and policies of the other Person, whether through the ownership of voting rights, membership, the power to appoint members, trustees or directors, by contract, or otherwise.

“Authorized Officer” means: (i) in the case of the Issuer, its President and Chief Executive Officer; Treasurer, Chief Financial Officer and Executive Vice President for Finance & Administration; Executive Vice President, Legislative and Defense Sector Initiatives; Executive Vice President for Finance Programs; Executive Vice President for Real Estate; General Counsel; Secretary; and Senior Vice President, Investment Banking, and when used with reference to an act or document of the Issuer also means any other person authorized to perform the act or execute the document; (ii) in the case of the Borrower, the Chairman or other presiding officer of the Board of Trustees, the President, Director or other chief executive or administrative officer, any Vice President or Vice Chairman, the Secretary, the Treasurer or other chief financial officer or any Deputy Treasurer, and when used with reference to an act or document of the Borrower, also means any other person authorized to perform the act or execute the document; and (iii) in the case of the Trustee, the President, any Vice President, any Assistant Vice President, any Corporate Trust Officer, any Trust Officer or any Assistant Trust Officer, and when used with reference to an act or document of the Trustee also means any other person authorized to perform the act or sign the document.

“Bond Counsel” means any attorney at law or firm of attorneys selected by the Borrower and acceptable to the Issuer, of nationally recognized standing in matters pertaining to the federal tax exemption of interest on bonds issued by states and political subdivisions, and duly admitted to practice law before the highest court of any state of the United States.

“Bondowners” means the registered owners of the Bonds from time to time as shown in the books kept by the Trustee as bond registrar and transfer agent.

“Bonds” means the Massachusetts Development Finance Agency Revenue Bonds, Partners HealthCare System Issue, Series Q (2016), dated their date of delivery, and any Bond or Bonds duly issued in exchange or replacement therefor.

“Bond Year” means each one year period (or shorter period from the date of issue of the Bonds) ending on September 30.

“Book-Entry-Only System” means the system maintained by the Securities Depository described in the Agreement.

“Brigham” means The Brigham and Women’s Hospital, Inc., a Massachusetts non-profit corporation.

“Business Day” means a day other than (i) a Saturday or Sunday, (ii) a day on which banking institutions are authorized or required by law or executive order to be closed for commercial banking purposes in Boston, Massachusetts or New York, New York, and (iii) a day on which banks in the city in which the designated corporate trust office of the Trustee is located are authorized or required by law to remain closed.

“BWHC” means Brigham and Women’s Health Care, Inc., a Massachusetts non-profit corporation.

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“Continuing Disclosure Agreement” means that certain Continuing Disclosure Agreement among the Borrower, Digital Assurance Certification, L.L.C. and the Trustee dated the date of issuance and delivery of the Bonds as originally executed and as it may be amended from time to time in accordance with the terms thereof.

“Debt Service Coverage Ratio” means a fraction the numerator of which shall be the Partners’ (and for any Affiliate not included in the Partners’ consolidated financial statements, such Affiliate’s) excess of revenues over expenses, plus depreciation, amortization and interest expense (but exclusive of the cumulative effect of changes in accounting principles, unrealized gains and losses from investments, unrealized gains or losses resulting from the periodic valuation of Hedge Agreements, other interest rate swap agreements or similar agreements, any “other-than-temporary” impairment losses recorded pursuant to Financial Accounting Standard 115 and any items that are reported as extraordinary in the Partners’, or such Affiliate’s, audited financial statements, as the case may be) in any fiscal year, and the denominator of which shall be Debt Service Payments on outstanding Indebtedness of the Borrower and all Affiliates paid or payable in such fiscal year.

“Debt Service Payments” means interest, principal and mandatory sinking fund payments on Indebtedness.

“Fitch” means Fitch Ratings Inc., a corporation duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term “Fitch” shall be deemed to refer to any other nationally recognized securities rating agency selected by the Borrower.

“General” means The General Hospital Corporation, a Massachusetts non-profit corporation.

“Government or Equivalent Obligations” means (i) obligations issued or fully and unconditionally guaranteed by the United States; (ii) certificates evidencing ownership of the right to the payment of the principal of and interest on obligations described in clause (i), provided that such obligations are held in the custody of a bank or trust company satisfactory to the Trustee or the Issuer, as the case may be, in a special account separate from the general assets of such custodian; and (iii) 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 (A) which are not callable at the option of the obligor or otherwise prior to maturity or as to which irrevocable notice has been given by the obligor to call such bonds or obligations on the date specified in the notice, (B) which are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described in clause (i) or (ii) which fund may be applied only to the payment when due of interest, principal of 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 (C) as to which the principal of and interest on the bonds and obligations of the character described in clause (i) or (ii), as the case may be, which have been deposited in such fund on deposit in such fund is sufficient to pay interest when due, principal of and redemption premium, if any, on the bonds or other obligations described in this clause (iii) on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to in subclause (A) of this clause (iii), as appropriate.

“Guarantee” means each of the Guaranty Agreements, dated the date of issuance and delivery of the Bonds, as they may be amended from time to time, by and between (i) the Issuer and the General and MGH, pursuant to which the General and MGH have guaranteed the obligations of the Borrower under the Agreement, and (ii) the Issuer and Brigham and BWHC, pursuant to which Brigham and BWHC have guaranteed the obligations of the Borrower under the Agreement.

“Guarantee Suspension” means any period during which the guarantee obligations of the General and the MGH, and of Brigham and BWHC are suspended under their respective Guarantees by the terms thereof.

“Hedge Agreement” means an interest rate swap, cap, collar, floor, forward, or other hedging agreement, arrangement or security, however denominated, expressly identified pursuant to its terms as being entered into in connection with and in order to hedge interest rate fluctuations on all or a portion of any Indebtedness and with a counterparty which is rated at least “A” by Moody’s, S&P or Fitch.

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“HEFA” means the Massachusetts Health and Educational Facilities Authority, predecessor to the Issuer.

“Indebtedness” means (i) obligations of the Borrower or any Affiliate for borrowed money, without regard to the maturity thereof, including leases capitalized in accordance with generally accepted accounting principles, but excluding reverse repurchase agreements with a maturity of not more than thirty (30) days, and (ii) for purposes of calculating Senior Affiliate Indebtedness and Senior Indebtedness under the Agreement, (a) 25% of the aggregate amount outstanding on certain Massachusetts College of Pharmacy and Allied Health Sciences Commercial Paper Notes, interest and principal payments of which are paid from lease payments by Brigham to the Massachusetts College of Pharmacy and Allied Health Sciences, and (b) 25% of the aggregate amount of indebtedness of any Person other than the Borrower or an Affiliate which an Affiliate guarantees, except for guarantees of indebtedness aggregating less than 2% of the unrestricted net assets of that Affiliate, which shall not be included, and except for guarantees on which an Affiliate is actually making payment, which shall be included at 100% of the indebtedness so guaranteed.

“IRC” means the Internal Revenue Code of 1986, as it may be amended and applied to the Bonds from time to time.

“Irrevocable Deposit” means the irrevocable deposit in trust of cash in an amount (or Government or Equivalent Obligations 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 Indebtedness which immediately prior to the time of such deposit is Outstanding. The trustee of such deposit may be the Trustee or any other trustee authorized to act in such capacity.

“Issuer” means the Massachusetts Development Finance Agency.

“Lien” means any lien, pledge, charge, or other encumbrance upon the Property.

“Long-Term Indebtedness” means any Indebtedness which is not Short-Term Indebtedness.

“MGH” means The Massachusetts General Hospital, a Massachusetts non-profit corporation.

“Moody’s” means Moody’s Investors Service, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term “Moody’s” shall be deemed to refer to any other nationally recognized securities rating agency selected by the Borrower.

“Opinion of Bond Counsel” means an opinion of Bond Counsel to the effect that the matter or action in question will not have an adverse impact on the tax-exempt status of the Bonds for federal income tax purposes.

“Outstanding,” when used to modify Bonds, refers to Bonds issued under the Agreement, excluding: (i) Bonds which have been exchanged or replaced, or delivered to the Trustee for credit against a principal payment or a sinking fund installment; (ii) Bonds which have been paid; (iii) Bonds which have become due and for the payment of which moneys have been duly provided; and (iv) Bonds for which there have been irrevocably set aside sufficient funds, or Government or Equivalent Obligations bearing interest at such rates, and with such maturities as will provide sufficient funds, to pay or redeem them, provided, however, that if any such Bonds are to be redeemed prior to maturity, the Issuer or the Borrower shall have taken all action necessary to redeem such Bonds and notice of such redemption shall have been duly mailed in accordance with the Agreement or irrevocable instructions so to mail shall have been given to the Trustee.

“Partners” or “Partners System” means the Borrower and all of the Affiliates as to which financial information is presented on a consolidated basis in accordance with generally accepted accounting principles.

“Partners Series F-5 Bonds” means the Massachusetts Health and Educational Facilities Authority Revenue Bonds, Partners HealthCare System Issue, Series F-5, issued June 16, 2005.

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“Partners Series G-5 Bonds” means the Massachusetts Health and Educational Facilities Authority Revenue Bonds, Partners HealthCare System Issue, Series G-5, issued June 28, 2007.

“Partners Series K-4 Bonds” means the Massachusetts Development Finance Agency Revenue Bonds, Partners HealthCare System Issue, Series K-4, issued January 13, 2011.

“Person” means any individual, association, unincorporated organization, corporation, trust, partnership, joint venture, or government or an agency or political subdivision thereof.

“Project” means (a) Existing Part of the Project: the acquisition of land, site development, construction or alteration of buildings or the acquisition or installation of furniture, fixtures and equipment, or any combination of the foregoing, in connection with the project financed and refinanced by the Refunded Bonds, which consisted of:

(i) the projects originally financed and refinanced with the Partners Series K-4 Bonds, including: (A) renovations and improvements to the Brigham emergency department at 75 Francis Street, Boston, Massachusetts; (B) construction of an ambulatory care building at the General’s main campus bounded by Charles Street, Blossom Street, Cambridge Street and Fruit Street, Boston, Massachusetts housing a relocated and expanded radiation oncology department, expanded emergency services, three levels of operating and procedure suites, 150 neurosciences and medical oncology intensive care and acute care patient rooms, a sterile processing department and a central receiving dock; (C) planning costs including environmental remediation costs and the construction by the Spaulding Rehabilitation Hospital Corporation of an approximately 240,000 square foot replacement facility located on Parcel 6 in the Charlestown Navy Yard, Charlestown, Massachusetts and comprised of approximately 132 beds; (D) acquisition and installation of a system-wide revenue management system and an acute care documentation management system and installation of software; (E) the projects financed and refinanced with the HEFA Revenue Bonds, Partners HealthCare System Issue, Series D-1, Series D-2 and Series D-4, including (1) the projects financed and refinanced with the HEFA Revenue Bonds, Brigham and Women’s Hospital Issue, Series A, including the construction of (a) a four-level Ambulatory Services Building located on Brigham’s Francis Street campus and connected to Brigham’s existing Ambulatory Services Building; and (b) a combination parking structure/mid-campus entry point, directly connected to the new Ambulatory Building with parking for approximately 240 cars on four levels; and (2) a portion of the construction of new space in an ambulatory care building, to consist of a total of approximately 660,000 square feet and construction of a portion of an approximately 750-space parking garage attached to the ambulatory care building, both projects owned and operated by the General and located at the General’s main campus; and

(ii) a portion of the projects originally financed and refinanced with the Partners Series F-5 Bonds, including: (A) refinancing the HEFA Revenue Bonds, Newton-Wellesley Issue, Series E, which itself financed or refinanced the construction and improvements by Newton-Wellesley Hospital (“NWH”) of various portions of the NWH Hospital complex (as defined below), including the acquisition of and upgrades to various items of capital equipment at the NWH Hospital complex; (B) financing the following projects owned and/or operated by the General: (1) tenant improvements and fit out of approximately 355,000 square feet of space leased by the General at Charles River Plaza (185 Cambridge Street in Boston); (2) construction and renovation of four operating rooms of approximately 28,200 square feet at the ambulatory surgery center operated by the General known as MGH West and located at 40 Second Avenue in Waltham; and (3) renovations to various clinical areas at (i) the General’s Chelsea Health Center located at 151 Everett Avenue in Chelsea, and (ii) the General’s main campus bounded by Charles Street, Blossom Street, Cambridge Street and Fruit Street in Boston (“the General’s Main Campus”); (C) financing the following projects owned and/or operated by the Brigham: (1) a portion of the cost of acquisition by the Brigham of the ServiCenter located at 80 Francis Street in Boston, which includes a parking garage with approximately 650 parking spaces, physicians’ offices, hospital supply handling facilities and a small parcel of vacant land; (2) renovations to ambulatory clinical areas at 850 Boylston Street in Brookline; (3) renovations and upgrades to inpatient and outpatient clinical areas and physician faculty offices at various locations on the Brigham’s main campus at 15-75 Francis Street in Boston; (4) construction of a cardiovascular center of approximately 350,000 square feet at 70 Francis Street in Boston; (5) administrative and research space renovations to facilities at 801 Massachusetts Avenue in Boston; (6) renovations to clinical space at One Brookline Place in Brookline; (7) renovations to clinical space and physician faculty offices at One Brigham Circle in Boston; and (8) the acquisition and installation of capital equipment and construction of improvements and renovations to existing facilities at the above locations; (D) financing the construction and renovation by NWH of approximately 77,000

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square feet of space used for the emergency department, operating room build-out, and ambulatory build-out and a 570 space parking garage all located at 2014 Washington Street in Newton (the “NWH Hospital complex”); and (E) financing the acquisition and improvements of a portion of the building located at 128 First Avenue in Needham and installation of capital equipment therein used by Partners as a data center; and

(iii) the projects originally financed and refinanced with the Partners G-5 Bonds, including: (A) the construction of a cardiovascular center of approximately 420,000 square feet at 70 Francis Street in Boston consisting of inpatient beds, operating rooms, outpatient procedure and clinic areas, and ancillary support departments; (B) the construction of a building of approximately 500,000 square feet at the General’s Main Campus to house a relocated and expanded radiation oncology department, expanded emergency services, three levels of operating and procedure suites, 150 neurosciences and medical oncology intensive care and acute care patient rooms, a new sterile processing department and a new central receiving dock; (C) the acquisition of a condominium unit or units at Charles River Plaza in Boston and consisting of the properties identified as 165 Cambridge Street, 175 Cambridge Street and the Charles River Plaza parking facility, as well as the property known as 75 Blossom Court in Boston; (D) the renovation of clinical space at the General’s Main Campus; (E) renovations and improvements to inpatient clinical areas by NSMC at NSMC’s main campus, 81 Highland Avenue in Salem; (F) the construction of a multi-specialty, ambulatory care center at 100 Endicott Street in Danvers, to house the MGH/NSMC Cancer Center, eight day-surgery suites, diagnostic imaging, diagnostic cardiology, laboratory services/phlebotomy, and a family/patient resource center; and (G) the acquisition and installation of a system-wide revenue management system at 529 Main Street in Charlestown; and

(b) New Part of the Project: the acquisition of land, site development, construction or alteration of buildings or the acquisition of furnishings and equipment or any combination of the foregoing, in connection with the following: (i) construction of an approximately 384,000 square foot building by Brigham located on a portion of the existing parcel at 60, 74 Fenwood Road bounded by Fenwood Road, Vining Street and the Vining Street Extension, in Boston, Massachusetts, to house clinical and research space and approximately 406 underground parking spaces; (ii) the construction of an approximately 400 space underground parking facility by Brigham under 15 Francis Street, Boston; (iii) renovation of a 46-bed level III neonatal intensive care unit and construction of a new 20-bed level II special care nursery at Brigham comprising approximately 34,032 square feet and located at 75 Francis Street, Boston, Massachusetts; (iv) development and implementation of a system wide common revenue processing and clinical application system, called Partners eCare, to improve the performance of Partners and its affiliates in dimensions of quality, cost and service and to integrate care across diverse and growing systems and thereby to coordinate care; (v) a data center for backup and disaster recovery to be located at 559 Forest Street, Marlborough, Massachusetts; (vi) construction of a 768,000 square foot office building located on Revolution Drive (Assembly Row), Somerville, Massachusetts, to house administrative personnel; and (vii) renovation, equipping and furnishing of various facilities and the acquisition or construction of various other routine capital improvements for Partners and its Affiliates.

The word “Project” also refers to the facilities that result or have resulted from the foregoing activities. The scope of the Project may be increased or decreased upon certification by an Authorized Officer on behalf of the Borrower to the Trustee and the Issuer describing the change, estimating the resulting increase or decrease in the cost of the Project and stating: (A) that the amendment will not cause the Project to violate any applicable building, zoning, land use, environmental protection, historical, sanitary, safety or health care laws, rules and regulations or applicable grant, reimbursement or insurance requirements or the provisions of the Agreement; (B) that the changes are covered by a Determination of Need (which shall mean a determination pursuant to Chapter 111, Section 25C, of the Massachusetts General Laws) or are exempt from the requirement of a Determination of Need; (C) with respect to any portion of the Project to which the amendment relates and for which a Determination of Need has been obtained, that the amendment is consistent with the Determination of Need and is not expected to increase its cost beyond the amount approved in the Determination of Need; (D) with respect to any portion of the Project to which the amendment relates and which is exempt from the requirement of a Determination of Need, that the amendment is consistent with the exemption; and (E) as to any portion to which the amendment relates and which is exempt by reason of its cost being not more than the amount exempted by statute, that the amendment is not expected to increase its cost beyond that amount. The signers of the certificate may rely, as to conclusions of law, on an opinion of counsel furnished to the Trustee and the Issuer and referred to in the certificate. The scope of the Project may be increased only upon (i) approval of the Issuer and (ii) receipt by the Trustee of an Opinion of Bond Counsel regarding the increase in scope.

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“Project Costs” means the costs of issuing the Bonds and carrying out the Project, including repayment of external loans and internal advances for the same, if any, and interest prior to, during and for up to one year after construction is substantially complete, and other costs chargeable to the capital account of the Project, but excluding general administrative expenses, overhead of the Borrower and interest on internal advances.

“Property” means all real and personal property of the Borrower and Affiliates.

“Rating Agency” means any of Moody’s, S&P or Fitch, which is then providing a rating on the Bonds.

“Refunded Bonds means, collectively, the portions of each of the Partners Series K-4 Bonds, the Partners Series F-5 Bonds and the Partners Series G-5 Bonds that are refunded with the proceeds of the Bonds .

“Revenues” means all rates, payments, rents, fees, charges, and other income and receipts, including proceeds of insurance, eminent domain and sale, and including proceeds derived from any security provided under the Agreement, payable to the Issuer or the Trustee under the Agreement, excluding administrative fees of the Issuer, fees of the Trustee, reimbursements to the Issuer or the Trustee for expenses incurred by the Issuer or the Trustee, and indemnification of the Issuer and the Trustee.

“S&P” means Standard & Poor’s Ratings Service, a division of The McGraw-Hill Companies, Inc., duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term “S&P” shall be deemed to refer to any other nationally recognized securities rating agency selected by the Borrower.

“Securities Depository” or “DTC” means The Depository Trust Company and its successors and assigns or any other securities depository selected by the Borrower which agrees to follow the procedures required to be followed by such securities.

“Short-Term Indebtedness” means any issue of Indebtedness no portion of which has a date of maturity more than one year from the date of original issuance thereof.

“Tax Certificate” means the Tax Certificate and Agreement between the Issuer and the Borrower dated the date of original issuance of the Bonds, as it may be amended or supplemented from time to time.

“UCC” means the Massachusetts Uniform Commercial Code.

Words importing persons include firms, associations and corporations, and the singular and plural form of words shall be deemed interchangeable wherever appropriate.

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APPENDIX C-2

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SUMMARY OF THE LOAN AND TRUST AGREEMENT The following is a brief summary, prepared by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Bond Counsel to the Borrower, of certain provisions of the Loan and Trust Agreement dated as of January 1, 2016 (the “Agreement”) pertaining to the Bonds. This summary does not purport to be complete, and reference is made to the Agreement for full and complete statements of such and all provisions. The Agreement is entered into pursuant to a resolution adopted by the Issuer on December 10, 2015 that authorizes the issuance of the Bonds.

The Assignment and Pledge of Revenues

The Issuer assigns and pledges to the Trustee in trust upon the terms of the Agreement (a) all Revenues to

be received from the Borrower or derived from any security provided under the Agreement, (b) all rights to receive such Revenues and the proceeds of such rights, (c) all funds and investments held from time to time in the funds established under the Agreement and (d) all of its right, title and interest in the Agreement, including enforcement rights and remedies but excluding certain rights of indemnification and to reimbursement of certain expenses as set forth in the Agreement. The assignment and pledge does not include: (i) the rights of the Issuer pursuant to provisions for consent, concurrence, approval or other action by the Issuer, notice to the Issuer or the filing of reports, certificates or other documents with the Issuer; and (ii) the rights of the Issuer to any payment or reimbursement pursuant to the Agreement. As additional security for its obligations to make payments to the Debt Service Fund, and for its other payment obligations under the Agreement, the Borrower grants to the Trustee a security interest in its interest in the moneys and other investments held from time to time in such funds established under the Agreement. (Section 201) Establishment of Funds The following funds shall be established and maintained with the Trustee for the account of the Borrower, to be held in trust by the Trustee and applied subject to the provisions of the Agreement: Debt Service Fund; Rebate Fund; Expense Fund; and Project Fund. (Sections 303, 304, 305 and 401) Debt Service Fund

A Debt Service Fund is established with the Trustee and moneys shall be deposited therein as provided in

the Agreement. The moneys in the Debt Service Fund and any investments held as part of such Fund shall be held in trust and, except as otherwise provided, shall be applied solely to the payment of the principal (including sinking fund installments), redemption price and interest on the Bonds. Promptly after July 1 of each Bond Year, if the amount deposited by the Borrower in the Debt Service Fund during the preceding Bond Year pursuant to the Agreement was in excess of the amount required to be so deposited, the Trustee shall transfer such excess to the Borrower unless there is then an Event of Default known to the Trustee with respect to payments to the Debt Service Fund, or to the Trustee or the Issuer, in which case the excess shall be applied to such payments. The Trustee shall transfer moneys from the Debt Service Fund for payment of Bonds on the date on which such payment is to be made. (Section 303)

Rebate Fund

A Rebate Fund is established with the Trustee under the Agreement. Moneys in the Rebate Fund shall be applied by the Trustee to the payment when due of any rebate due to the United States under IRC §148(f) and the regulations thereunder (the “Rebate Provision”). Amounts in the Rebate Fund shall not be available to principal or

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interest on the Bonds. Within forty-five days after the close of each fifth Bond Year (or any earlier date that may be necessary to make a required payment to the United States), the Borrower shall compute and certify to the Issuer and the Trustee the amount of Excess as defined in the Agreement, if any, for the Bonds as of the close of such Bond Years and the Borrower shall pay to the Trustee for deposit into the Rebate Fund any amount necessary to make the amount in the Rebate Fund equal to the sum of the Excesses for the Bonds. To the extent amounts in the Rebate Fund are insufficient to make any payment of rebatable arbitrage due to the United States under the Rebate Provision, the Borrower shall be liable for that deficiency. (Section 304) Expense Fund An Expense Fund is established to be held by the Trustee and proceeds of the Bonds shall be deposited therein as provided in the Agreement. The moneys in the Expense Fund and any investments held as part of such Fund shall be held in trust and, except as otherwise provided in the Agreement, shall be applied by the Trustee solely to the payment or reimbursement of the costs of issuing the Bonds. Earnings on the Expense Fund shall not be applied to pay costs of issuance of the Bonds, but shall be transferred to the Debt Service Fund as provided in the Agreement. After all costs of issuing the Bonds have been paid, any amounts remaining in the Expense Fund shall be transferred to the Project Fund. To the extent the Expense Fund is insufficient to pay any of the above costs, the Borrower shall be liable for the deficiency and shall pay an amount equal to such deficiency as directed by the Trustee. (Section 305) Project Fund A Project Fund is established to be held by the Trustee. The balance of the proceeds of the sale of the Bonds after distribution as set forth in the Agreement shall be promptly deposited in the Project Fund. The moneys in the Project Fund and any investments held as part of such Fund shall be held in trust and, except as otherwise provided in the Agreement, shall be applied by the Trustee solely to the payment or reimbursement of Project Costs. If there is an Event of Default known to the Trustee with respect to payments to the Rebate Fund or Debt Service Fund or to the Issuer or the Trustee, the Trustee may use the Project Fund without requisition to make up the deficiency, and the Borrower shall restore the funds so used. Completion of the Project shall be evidenced by the filing with the Trustee and the Issuer of a certificate signed by an Authorized Officer of the Borrower stating that the Project has been substantially completed so as to permit efficient use in the operations of the Borrower and setting forth any Project Costs remaining to be paid from the Project Fund. Any balance in such Fund not then needed to pay Project Costs shall be transferred to the Debt Service Fund. (Section 401) Application of Moneys

If available moneys in the Debt Service Fund are not sufficient on any day to pay all principal (including

sinking fund installments), redemption price and interest on the Outstanding Bonds then due or overdue, such moneys (other than any sum in the Debt Service Fund irrevocably set aside for the redemption of particular Bonds or required to purchase Bonds under outstanding purchase contracts) shall, after payment of all charges and disbursements of the Trustee in accordance with the Agreement, be applied first to the payment of interest, including interest on overdue principal, in the order in which the same became due (pro rata with respect to interest which became due at the same time) and second to the payment of principal (including sinking fund installments) without regard to the order in which the same became due (in proportion to the amounts due). For this purpose interest on overdue principal shall be treated as coming due on the first day of each month. Whenever moneys are to be applied pursuant to the provisions described under this heading, such moneys shall be applied at such times, and from time to time, as the Trustee in its discretion shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall exercise such discretion it shall fix the date (which shall be the first of a month unless the Trustee shall deem another date more suitable) upon which such application is to be made, and upon such date interest on the amounts of principal paid on such date shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the fixing of any such date. When interest or a portion of the principal is to be paid on an overdue Bond, the Trustee may require presentation of the Bond for endorsement of the payment. (Section 306)

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Payments by the Borrower The Borrower shall pay or cause to be paid in immediately available funds to the Trustee for deposit in the

Debt Service Fund the amounts specified in the Agreement at the times specified in the Agreement. The payments to be made by the Borrower under the Agreement shall be appropriately adjusted to reflect

the date of issue of Bonds, any earnings on amounts in the Debt Service Fund and any purchase or redemption of Bonds, so that there will be available on each payment date in the Debt Service Fund the amount necessary to pay the interest and principal or redemption price or sinking fund installment due or coming due on the Bonds.

At any time when any principal (including sinking fund installments) of the Bonds is overdue, the

Borrower shall also have a continuing obligation to pay to the Trustee for deposit in the Debt Service Fund an amount equal to interest on the overdue principal but the payments required under the Agreement shall not otherwise bear interest.

Payments by the Borrower to the Trustee for deposit in the Debt Service Fund under the Agreement in an

amount sufficient to pay principal and interest then due on the Bonds shall discharge the obligation of the Borrower to the extent of such payments; provided, that if any moneys are invested in accordance with the Agreement and a loss results therefrom so that there are insufficient funds to pay or redeem principal of (including sinking fund installments) and interest on the Bonds when due, the Borrower shall supply the deficiency. (Section 307) Unconditional Obligation

To the extent permitted by law, the obligation of the Borrower to make payments to the Issuer and the

Trustee under the Agreement shall be absolute and unconditional, shall be binding and enforceable in all circumstances whatsoever, shall not be subject to setoff, recoupment or counterclaim and shall be a general obligation of the Borrower to which the full faith and credit of the Borrower are pledged. (Section 308) Investments

Pending their use under the Agreement, moneys in the Funds and accounts established pursuant to the

Agreement may be invested by the Trustee in Permitted Investments (as defined below) maturing or redeemable at the option of the holder at or before the time when such moneys are expected to be needed and shall be so invested pursuant to written direction of the Borrower if there is not then an Event of Default known to the Trustee, provided that the Borrower shall not request, authorize or permit any investment which would cause any Bonds to be classified as “arbitrage bonds” as defined in IRC Section 148. Notwithstanding the foregoing, any amount of moneys deposited in the Project Fund pursuant to the Agreement which has not been expended by the date three years from the date of issuance of the Bonds shall be invested only in Permitted Investments with a yield not more than 1/8% higher than the yield on the Bonds, unless permitted by an Opinion of Bond Counsel, or in Permitted Investments described in clause (b) of the definition of “Permitted Investments” below without regard to yield. Any investments pursuant to this section shall be held by the Trustee as a part of the applicable Fund and shall be sold or redeemed to the extent necessary to make payments or transfers or anticipated payments or transfers from such Fund, subject to the notice provisions of Section 9-611 of the UCC to the extent applicable.

Except as set forth below, any interest realized on investments in any Fund and any profit realized upon the sale or other disposition thereof shall be credited to the Fund with respect to which they were earned and any loss shall be charged thereto. Earnings (which for this purpose include net profit and are after deduction of net loss) on the Expense Fund shall be transferred to the Project Fund not less often than quarterly and credited against payments otherwise required to be made thereto.

The term “Permitted Investments” means (a) Government or Equivalent Obligations or shares of any open-end or closed-end management type investment company or trust registered under 15 U.S.C. §80(a)-1 et seq., provided that the portfolio of such investment company or trust is limited to Government or Equivalent Obligations and repurchase agreements fully collateralized by such obligations, and provided further that such investment company or trust shall take custody of such collateral either directly or through a custodian satisfactory to the Trustee, (b) “tax exempt bonds” as defined in IRC §150(a)(6), other than “specified private activity bonds” as

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defined in IRC §57(a)(5)(C), rated at least AA or Aa2 by S&P and Moody’s, respectively, or the equivalent by any other nationally recognized rating agency, at the time of acquisition thereof or shares of a so-called money market or mutual fund that do not constitute “investment property” within the meaning of IRC §148(b)(2), provided either that the fund has all of its assets invested in such “tax exempt bonds” of such rating quality or, if such obligations are not so rated, that the fund has comparable creditworthiness through insurance or otherwise and which fund is rated AAm or AAm-G if rated by S&P, (c) negotiable certificates of deposit or other evidences of deposit issued by a nationally or state-chartered bank or a state or federal savings and loan association or by a state-licensed branch of a foreign bank, which have assets of not less than $1,000,000,000, provided that the senior debt obligations of the issuing institution are rated “AA-” or “Aa3” or better by S&P and Moody’s, respectively, and mature not more than two years after the date of purchase, (d) bills of exchange or time drafts drawn on and accepted by a commercial bank (otherwise known as bankers acceptances), provided that such bankers acceptances may not exceed 180 days maturity, and provided further that the accepting bank has the highest short-term letter and numerical rating as provided by S&P or Moody’s, (e) Repurchase Agreements, (f) money market funds rated at least AAm or AAm-G by S&P, including without limitation, (1) the STAR Fund, and (2) one or more money market mutual fund portfolios of the Wells Fargo Funds or any other mutual fund for which the Trustee or any of its affiliates serve as an investment manager, administrator, servicing agent, and/or custodian or subcustodian, notwithstanding that (A) the Trustee or an affiliate of the Trustee receives fees from such funds for services rendered, (B) the Trustee charges and collects fees for services rendered pursuant to the Agreement, which fees are separate from the fees received from such funds, and (C) services performed for such funds and pursuant to the Agreement may at times duplicate those provided to such funds by the Trustee or its affiliates, (g) investment agreements with providers rated at least AA and Aa2 by S&P and Moody’s, respectively, (h) collateralized investment agreements with providers rated at least A and A2 by S&P and Moody’s, respectively, (i) Federal Agency Securities and participation certificates issued by the Federal National Mortgage Association, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, Federal Farm Credit Bank System, Student Loan Marketing Association, World Bank or Federal Agricultural Mortgage Corporation, and (j) commercial paper which is rated at the time of purchase at least A-1+ by S&P or P-1 by Moody’s and which matures not more than 270 days after the date of purchase. The term “Repurchase Agreement” shall mean a written agreement under which a bank or trust company which has a capital and surplus of not less than $50,000,000 or a government bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York sells to, and agrees to repurchase from the Issuer or the Trustee obligations issued or guaranteed by the United States or other securities identified in the Section; provided that the market value of such obligations is at the time of entering into the agreement at least one hundred and three percent (103%) of the repurchase price specified in the agreement and that such obligations are segregated from the unencumbered assets of such bank or trust company or government bond dealer; and provided further that unless the agreement is with a bank or trust company, such agreement shall require the repurchase to occur on demand or on a date certain which is not later than one (1) year after such agreement is entered into and shall expressly authorize the Trustee or the Issuer, as the case may be, to liquidate the purchased obligations in the event of the insolvency of the party required to repurchase such obligations or the commencement against such party of a case under the federal Bankruptcy Code or the appointment of or taking possession by a trustee or custodian in a case against such party under the Bankruptcy Code. Any such investments may be purchased from or through the Trustee. (Section 310)

Default by the Borrower Events of Default; Default. “Event of Default” in the Agreement means any one of the events set forth

below and “default” means any Event of Default without regard to any lapse of time or notice. (a) Debt Service. Any principal (including sinking fund installments) of or interest on any

Bond shall not be paid when due, whether at maturity, by acceleration, upon redemption or otherwise for Bonds required to be paid by the Borrower shall not be paid as provided in the Agreement.

(b) Payments by the Borrower. The Borrower shall fail to make any payment required of it

under the Agreement to the Trustee for the benefit of the Bondholders when the same comes due and payable.

(c) Other Obligations. The Borrower shall fail to make any other required payment to the

Trustee and such failure is not remedied within seven (7) days after written notice thereof is given by the Trustee to the Borrower; or the Borrower shall fail to observe or perform any of its other agreements,

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covenants or obligations under the Agreement and such failure is not remedied within sixty (60) days after written notice thereof is given by the Trustee to the Borrower.

(d) Warranties. There shall be a material breach of a warranty made in the Agreement by the

Borrower as of the date it was intended to be effective and the breach is not cured within sixty (60) days after written notice thereof is given by the Trustee to the Borrower.

(e) Voluntary Bankruptcy. The Borrower shall commence a voluntary case under the federal

bankruptcy laws, or shall become insolvent or unable to pay its debts as they become due, or shall make an assignment for the benefit of creditors, or shall apply for, consent to or acquiesce in the appointment of, or taking possession by, a trustee, receiver, custodian or similar official or agent for itself or any substantial part of its property.

(f) Appointment of Receiver. A trustee, receiver, custodian or similar official or agent shall

be appointed for the Borrower or for any substantial part of its property and such trustee or receiver shall not be discharged within sixty (60) days.

(g) Involuntary Bankruptcy. The Borrower shall have an order or decree for relief in an

involuntary case under the federal bankruptcy laws entered against it, or a petition seeking reorganization, readjustment, arrangement, composition, or other similar relief as to it under the federal bankruptcy laws or any similar law for the relief of debtors shall be brought against it and shall be consented to by it or shall remain undismissed for sixty (60) days.

(h) Breach of Other Agreements. A breach shall occur (and continue beyond any applicable

grace period) with respect to a payment by the Borrower of debt service with respect to the payment of other Indebtedness of the Borrower for borrowed money with respect to loans exceeding $20,000,000, or with respect to the performance of any agreement securing such other Indebtedness or pursuant to which the same was issued or incurred, or an event shall occur with respect to provisions of any such agreement relating to matters of the character referred to under this heading, so that a holder or holders of such Indebtedness or a trustee or trustees under any such agreement accelerates or is empowered to accelerate any such Indebtedness; but an Event of Default shall not be deemed to be in existence or to be continuing under this clause (g) if (A) the Borrower is in good faith contesting the existence of such breach or event and if such acceleration is being stayed by judicial proceedings, (B) the power of acceleration is not exercised and it ceases to be in effect, or (C) such breach or event is remedied and the acceleration, if any, is wholly annulled. The Borrower shall notify the Issuer and the Trustee of any such breach or event immediately upon the Borrower's becoming aware of its occurrence and shall from time to time furnish such information as the Issuer or the Trustee may reasonably request for the purpose of determining whether a breach or event described in this clause (g) has occurred and whether such power of acceleration has been exercised or continues to be in effect. Waiver. If the Trustee determines that a default has been cured before the entry of any final judgment or

decree with respect to it, the Trustee may waive the default and its consequences, with the written consent of the Issuer, by written notice to the Borrower and shall do so, with the written consent of the Issuer, upon written instruction of the owners of at least twenty-five percent (25%) in principal amount of the Outstanding Bonds. (Section 501) Remedies for Events of Default

Remedies. If an Event of Default occurs and is continuing:

Acceleration. The Trustee may, and upon the written request of the registered owners of a

majority in principal amount of the Outstanding Bonds, shall, by written notice to the Borrower and the Issuer, declare immediately due and payable the principal amount of the Outstanding Bonds and the payments to be made by the Borrower therefor, and accrued interest on the foregoing, whereupon the same shall become immediately due and payable without any further action or notice.

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If, at any time after such declaration and before the entry of a judgment or decree for payment of the money due, all amounts payable under the Agreement except principal and interest on the Bonds which are due solely by reason of such declaration and acceleration shall have been paid or provided for by deposit with the Trustee and all existing Events of Default shall have been cured, then, unless otherwise directed in writing by the registered owners of Bonds representing a majority of the principal amount of the Outstanding Bonds, the Trustee shall rescind and annul such declaration and acceleration, but no such rescission shall affect any subsequent Event of Default or the consequences thereof.

Rights as a Secured Party. The Trustee may exercise all of the rights and remedies of a secured

party under the UCC with respect to securities in the Debt Service Fund, Project Fund and Expense Fund, including the right to sell or redeem such securities and the right to retain the securities in satisfaction of the obligations of the Borrower under the Agreement. (Section 502)

Court Proceedings

The Issuer may enforce the obligations of the Borrower under the Agreement by legal proceedings for the

specific performance of any covenant, obligation or agreement contained in the Agreement, whether or not any breach has become an Event of Default, or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach by the Borrower of the provisions of the Agreement, including (to the extent the Agreement may lawfully provide) court costs, reasonable attorneys’ fees and other costs and expenses incurred in enforcing the obligations of the Borrower under the Agreement.

Subject to certain provisions specified in the Agreement, the Trustee may enforce the obligations under the

Agreement by legal proceedings for the specific performance of any covenant, obligation or agreement contained in the Agreement, whether or not an Event of Default exists, or for the enforcement of any other appropriate legal or equitable remedy, and may recover damages caused by any breach of the provisions of the Agreement, including (to the extent the Agreement may lawfully provide) court costs, reasonable attorneys’ fees and other costs and expenses incurred in enforcing the obligations under the Agreement. (Section 503)

Revenues after Default

The proceeds from the exercise of the rights and remedies under the Agreement shall be remitted to the

Trustee upon receipt and in the form received. After payment or reimbursement of the reasonable expenses of the Trustee and the Issuer in connection therewith the same shall be applied, first to the remaining obligations of the Borrower under the Agreement (other than obligations to make payments to the Issuer for its own use) in such order as may be determined by the Trustee, and second, to any unpaid sums due the Issuer for its own use. Any surplus thereof shall be paid to the Borrower. (Section 504)

Remedies Cumulative

The rights and remedies under the Agreement shall be cumulative and shall not exclude any other rights

and remedies allowed by law, provided there is no duplication of recovery. The failure to insist upon a strict performance of any of the obligations of the Borrower or to exercise any remedy for any violation thereof shall not be taken as a waiver for the future of the right to insist upon strict performance by the Borrower or of the right to exercise any remedy for the violation. (Section 505)

Resignation or Removal of the Trustee

The Trustee may resign on not less than thirty (30) days’ notice given in writing to the Issuer, the

Bondowners and the Borrower, but such resignation shall not take effect until a successor has been appointed and has accepted such appointment. The Trustee will promptly certify to the Issuer that it has mailed such notice to all Bondowners and such certificate will be conclusive evidence that such notice was given in the manner required. The Trustee may be removed by written notice from (i) the owners of a majority in principal amount of the Outstanding Bonds to the Trustee, the Issuer and the Borrower, or (ii) so long as no default or Event of Default exists, from the Borrower to the Trustee and the Issuer, or (iii) for cause by the Issuer. (Section 604)

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Action by Bondowners Any request, authorization, direction, notice, consent, waiver or other action provided by the Agreement to

be given or taken by Bondowners may be contained in and evidenced by one or more writings of substantially the same tenor signed by the requisite number of Bondowners or their attorneys duly appointed in writing. Any request, consent or vote of the owner of any Bond shall bind all future owners of such Bond. Bonds owned or held by or for the account of the Issuer or the Borrower shall not be deemed Outstanding Bonds for the purpose of any consent or other action by Bondowners. (Section 801)

Proceedings by Bondowners

No Bondowner shall have any right to institute any legal proceedings for the enforcement of the Agreement

or any applicable remedy under the Agreement, unless the Bondowners have directed the Issuer to act and furnished the Issuer indemnity as provided in the Agreement and have afforded the Issuer reasonable opportunity to proceed, and the Issuer shall thereafter fail or refuse to take such action.

No Bondowner shall have any right to institute any legal proceedings for the enforcement of the obligations

of the Issuer under the Agreement or any applicable remedy under the Agreement, unless the Bondowners have directed the Trustee to act and furnished the Trustee indemnity as provided in the Agreement and have afforded the Trustee reasonable opportunity to proceed, and the Trustee shall thereafter fail or refuse to take such action.

Subject to the foregoing, any Bondowner may by any available legal proceedings enforce and protect its

rights under the Agreement and under the laws of The Commonwealth of Massachusetts. (Section 802)

Rates and Charges The Borrower agrees, subject to any governmental restrictions, its fiduciary obligations and limitations

imposed by law, to charge and collect rates and charges which, together with any other moneys legally available to it, shall provide moneys sufficient at all times: (a) to make the payments required by the Agreement and comply with the Agreement in all other respects; and (b) to satisfy all other obligations of the Borrower in a timely fashion. (Section 904) Annual Reports and Other Current Information

The Borrower shall from time to time render such reports concerning the condition of the Project or

compliance with the Agreement as the Issuer or the Trustee may reasonably request. Within one hundred fifty (150) days after the close of each fiscal year, the Borrower shall furnish to the Trustee, the Issuer and Bondowners requesting the same, copies of its audited financial statements. The Borrower shall furnish to the Issuer and to the Trustee, within one hundred eighty (180) days after the close of each fiscal year, a certificate signed by its chief operating officer or an Authorized Officer stating that the Borrower has caused its operations for the year to be reviewed and that in the course of that review, no default under the Agreement has come to its attention or, if such a default has appeared, a description of the default. (Section 905) Maintenance of Corporate Existence

The Borrower shall maintain its existence as a nonprofit corporation qualified to do business in

Massachusetts and shall not dissolve or dispose of its assets, or consolidate with or merge into another entity or entities, or permit one or more other entities to consolidate with or merge into it, except that it may consolidate with or merge into one or more other entities, or permit one or more other entities to consolidate with or merge into it, or transfer all or substantially all of its assets to one or more other entities (and thereafter dissolve or not dissolve as it may elect), if (a) the surviving, resulting or transferee entity or entities each is a corporation described in Section 501(c)(3) of the IRC having the status and powers set forth in the provisions specified in the Agreement, (b) the transaction does not result in a conflict, breach or default referred to in the provision specified in the Agreement, and (c) the surviving, resulting or transferee entity or entities each (i) assumes by written agreement with the Issuer and the Trustee all the obligations of the Borrower under the Agreement, (ii) notifies the Issuer and the Trustee of any change in the name of the Borrower and (iii) executes, delivers, registers, records and files such other instruments as

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the Issuer or the Trustee may reasonably require to confirm, perfect or maintain any security granted under the Agreement. (Section 906) Restrictions on Encumbrance, Sale and Lease of Property

The Borrower agrees that it will not create or suffer to be created or exist any Lien upon any Property now owned or hereafter acquired by it other than Permitted Liens.

Permitted Liens shall consist of Liens which are described in one or more of the following clauses:

(i) Any judgment lien or notice of pending action against the Borrower, so long as such judgment or pending action is being contested and execution thereon is stayed;

(ii)(A) 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, to (1) terminate such right, power, franchise, grant, license or permit, provided that the exercise of such right would not materially impair the use of the Property or materially and adversely affect the value thereof, or (2) purchase, condemn, appropriate or recapture, or designate a purchaser of, such Property; (B) any Liens on any Property for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any Liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed 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, and laborers, have been due for less than sixty (60) days; and (C) easements, rights-of-way, servitudes, restrictions and other minor defects, encumbrances, and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the value thereof;

(iii) Any Lien existing on the date hereof provided that no such Lien (or the amount of Indebtedness secured thereby) may be extended, to apply to any Property of the Borrower not subject to such Lien on such date, unless such Lien as so extended, or otherwise qualifies as a Permitted Lien under the Agreement;

(iv) Purchase money security interests, and security interests existing on any Property prior to the time of its acquisition through purchase, merger, consolidation or otherwise, or placed upon Property to secure a portion of the purchase price thereof, or lessor’s interests in leases required to be capitalized in accordance with generally accepted accounting principles; provided that the aggregate principal amounts secured by any such interests shall not exceed at the time of incurring or assumption the fair market value of such Property;

(v) Liens arising by reason of good faith deposits in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits 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;

(vi) 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 the Borrower 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 similar arrangements, or to share in the privileges or benefits required for companies participating in such arrangements;

(vii) Any Lien arising by reason of an Irrevocable Deposit;

(viii) Any Lien in favor of a trustee on the proceeds of Indebtedness prior to the application of such proceeds or on moneys to repay Indebtedness while held in a debt service reserve fund, or on any moneys to secure payment of the trustee’s fees;

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(ix) Liens on moneys deposited by patients or others with the Borrower as security for or as prepayment for the cost of patient care;

(x) Liens on Property received by the Borrower through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of such Property or the income thereon, up to the fair market value of such Property

(xi) Statutory rights of the United States of America by reason of federal funds made available under 42 U.S.C. §291 et seq. and similar rights under other federal and state statutes relating to the Hill-Burton program;

(xii) Liens for taxes or special assessments not then delinquent or which are being contested in good faith;

(xiii) Liens on Property due to rights of third-party payors for set-off or recoupment of amounts paid to the Borrower;

(xiv) Liens securing Indebtedness incurred after the date of the Agreement in accordance with the provisions of the Agreement;

(xv) Any Lien created or permitted by the Agreement;

(xvi) Any Lien arising solely by reason of a lease of Property to others which lease would not have any material adverse effect upon (A) the security for the Bonds, if any, (B) the operations of the Property, or (C) the Debt Service Coverage Ratio;

(xvii) Any Lien upon Property the loss of which Property would not have any material adverse effect upon (A) the security for the Bonds, if any, (B) the operations of the Property, or (C) the Debt Service Coverage Ratio; and

(xviii) Any Lien on Property securing Indebtedness provided a parity Lien on such Property is granted in favor of the Issuer securing the Bonds equally and ratably. (Section 907)

Debt Service Coverage Ratio

The Borrower shall maintain or cause to be maintained a Debt Service Coverage Ratio in any fiscal year of at least 1.0 to 1.0. If the Borrower shall fail to so maintain such ratio, then within thirty (30) days after publication of the Partners System’s audited financial statements, the Borrower shall retain a consultant to make recommendations as to how such ratio may be achieved in subsequent years. Failure to follow the consultant’s recommendations shall not be a default or an Event of Default under the Agreement so long as the Debt Service Coverage Ratio in the immediately following fiscal year is at least 1.0 to 1.0. A consultant’s report will not be required in the year immediately following a year when a consultant’s report has been rendered if (i) such report states that the Borrower was precluded from achieving a Debt Service Coverage Ratio of 1.0 to 1.0 by factors beyond its control and that the Borrower has done all that it reasonably could to achieve the highest Debt Service Coverage Ratio reasonably possible under such circumstances, and (ii) an Authorized Officer of the Borrower certifies that these circumstances have persisted into the succeeding fiscal year. (Section 908)

Senior Indebtedness

Except as otherwise described under this heading, the Borrower may incur Indebtedness without limitation.

During any Guarantee Suspension, the Borrower shall not permit an Affiliate to incur Indebtedness, whether secured or unsecured (“Senior Affiliate Indebtedness”) unless such Affiliate delivers to the Issuer a guarantee, substantially similar in form and substance to the Guarantees, securing the Borrower’s obligations under the Agreement equally and ratably with such Senior Affiliate Indebtedness or unless such Senior Affiliate Indebtedness is either:

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(i) Indebtedness that, together with all Senior Indebtedness (as defined below) outstanding on the date thereof, shall be less than 25% of the sum of (a) unrestricted net assets, as shown on the most recent audited consolidated financial statements of the Partners System, and (b) unrestricted net assets, as shown on the most recent audited financial statements, of any Affiliate that is not included in the Partners System’s audited financial statements; or

(ii) (A) Indebtedness of a Person subsequently becoming, or being merged into or otherwise combined with, an Affiliate; (B) Indebtedness of a Person substantially all of whose tangible and intangible assets are subsequently acquired by an Affiliate, which is assumed in connection with such acquisition; and (C) any refinancing of Indebtedness described in the foregoing clauses (A) and (B) that does not increase the principal amount thereof by more than twenty percent (20%) or extend the security therefor; provided, however, (1) such Indebtedness was not incurred in contemplation of becoming, or being merged into or otherwise combined with, an Affiliate or of such acquisition, and (2) the amount of all Indebtedness incurred pursuant to this paragraph (ii) and all Indebtedness incurred pursuant to paragraph (i) hereof does not exceed thirty-five percent (35%) of the sum of (x) the unrestricted net assets of the Partners System as shown on the most recent consolidated audited financial statements of the Partners System, and (y) the unrestricted net assets, as shown on its most recent audited financial statements, of any Affiliate not included in the Partners System’s consolidated financial statements and of the Person becoming, or being merged into, or combined with, or whose assets are acquired by, an Affiliate.

During any Guarantee Suspension, the Borrower shall not incur Indebtedness that is secured by a Lien on any Property (other than a Permitted Lien) (“Borrower Senior Indebtedness” and, collectively with Senior Affiliate Indebtedness, “Senior Indebtedness”), except in accordance with the Agreement, unless such Senior Borrower Indebtedness is either:

(i) Indebtedness that, together with all Senior Indebtedness outstanding on the date thereof, shall be less than 25% of the sum of (a) unrestricted net assets, as shown on the most recent audited consolidated financial statements of the Partners System, and (b) unrestricted net assets, as shown on the most recent audited financial statements, of any Affiliate that is not included in the Partners System’s audited financial statements; or

(ii) (A) Indebtedness of Persons subsequently becoming, or being merged into or otherwise combined with, Affiliates; (B) Indebtedness of Persons, substantially all of whose tangible and intangible assets are subsequently acquired by an Affiliate, which is assumed in connection with such acquisition; and (C) any refinancing of Indebtedness described in the foregoing clauses (A) and (B) that does not increase the principal amount thereof by more than twenty percent (20%) or extend the security therefor; provided, however, (1) such Indebtedness was not incurred in contemplation of becoming, or being merged into or otherwise combined with, an Affiliate or of such acquisition, and (2) the amount of all Indebtedness incurred pursuant to this paragraph (ii) and all Indebtedness incurred pursuant to paragraph (i) hereof does not exceed thirty-five percent (35%) of the sum of (x) the unrestricted net assets of the Partners System as shown on the most recent consolidated audited financial statements of the Partners System, and (y) the unrestricted net assets, as shown on its most recent audited financial statements, of any Affiliate not included in the Partners System’s consolidated financial statements and of the Person becoming, or being merged into, or combined with, or whose assets are acquired by, an Affiliate.

If Brigham or BWHC shall issue Indebtedness secured by a pledge, lien, mortgage, security interest or other encumbrance on any of its tangible or intangible property (other than such an encumbrance on property financed by such Indebtedness or on the proceeds of such Indebtedness provided only to secure such Indebtedness), the Borrower shall cause Brigham or BWHC, as applicable, to extend such encumbrance also to secure Brigham’s and BWHC’s obligations under the Brigham’s and BWHC’s Guarantee.

If either MGH or the General shall hereafter issue Indebtedness secured by a pledge, lien, mortgage, security interest or other encumbrance on any of its tangible or intangible property (other than such an encumbrance on property financed by such Indebtedness or on the proceeds of such Indebtedness provided only to secure such Indebtedness), the

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Borrower shall cause MGH or the General, as applicable, to extend such encumbrance also to secure the General’s and MGH’s obligations under the General’s and MGH’s Guarantee. (Section 909) Transfer of Assets

The Borrower shall not sell, transfer or dispose of assets, nor will it permit any Affiliate to sell, transfer or dispose of assets (“Asset Transfers”) unless permitted by any one or more of the following exceptions:

(a) Asset Transfers of assets that are worn out, obsolete or no longer used or useful, or expected within the next twelve months to be no longer used or useful, in the conduct of its operations;

(b) Asset Transfers to the Borrower or to any Affiliate provided that neither Brigham nor the General shall transfer all or substantially all of its assets to another Affiliate or Affiliates unless prior thereto such Affiliate or Affiliates shall execute a guarantee similar to the Guarantees, in form and substance satisfactory to the Issuer;

(c) Asset Transfers for consideration equivalent to the fair market value of the asset sold, transferred or disposed of (“Asset FMV”); provided that neither Brigham nor the General will transfer its property, plant or equipment or any of its businesses or operations in any year, whether for consideration or as an Unrecompensed Transfer (as defined in (d) below), in excess of 7.5% of the net book value of their property, plant and equipment appearing in their most recent audited financial statements (the “Measurement Year”) unless an Authorized Officer of the Borrower shall certify together with appropriate assumptions and calculations that the sum of the excess of the revenues over expenses of the transferring institution plus its depreciation and amortization expense for such Measurement Year, assuming such transfer occurred at the beginning thereof, would have been at least 70% of what it in fact was;

(d) Subject to the provisions of clause (c) above, Asset Transfers for no consideration or for a consideration less than Asset FMV, to the extent of the difference between Asset FMV and such consideration (collectively, “Unrecompensed Transfers”), in an amount not exceeding in any fiscal year 5% of the sum of (i) the unrestricted net assets of the Partners System as shown on the most recent audited financial statements of the Partners System, and (ii) the unrestricted net assets, as shown on its most recent audited financial statements, of any Affiliate not included in the Partners System’s consolidated financial statements;

(e) Subject to the provisions of clause (c) above, Unrecompensed Transfers, subject to receipt of a certificate of an Authorized Officer of the Borrower, together with appropriate assumptions and calculations, that, had such Unrecompensed Transfer occurred on the first day of the Measurement Year, the Debt Service Coverage Ratio for such year would have been either (i) at least 3.0, or (ii) at least 70% of what it actually was but in no event less than 1.5. For purposes of calculating the Debt Service Coverage Ratio as if such Unrecompensed Transfer had occurred, principal payments in the Measurement Year shall be adjusted to include any principal or sinking fund payments on any Indebtedness if such payments constitute more than 20% of the original amount of such Indebtedness and are due in any of the three years subsequent to the Measurement Year. No Unrecompensed Transfer shall occur pursuant to this paragraph (e) if the Guarantees no longer are in full force and effect and, after giving effect thereto, the Borrower could not incur $1.00 of Senior Indebtedness pursuant to the Agreement. (Section 910)

Amendment The Agreement may be amended by the parties without Bondowner consent for any of the following

purposes: (a) to subject any property to the lien of the Agreement, (b) to add to the covenants and agreements of the Borrower or to surrender or limit any right or power of the Borrower, or (c) to cure any ambiguity or defect, or to add provisions which are not inconsistent with the Agreement and which do not impair the security for the Bonds.

Except as provided in the foregoing paragraph, the Agreement may be amended only with the written consent of the owners of a majority in principal amount of the Outstanding Bonds; provided, however, that no amendment of the Agreement may be made without the unanimous written consent of the affected Bondowners for any of the following purposes: (i) to extend the maturity of any Bond; (ii) to reduce the principal amount, or interest rate of any Bond; (iii) to make any Bond redeemable other than in accordance with its terms; (iv) to create a

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preference or priority of any Bond or Bonds over any other Bond or Bonds; or (v) to reduce the percentage of the Bonds required to be represented by the Bondowners giving their consent to any amendment.

Any amendment of the Agreement shall be accompanied by an Opinion of Bond Counsel delivered to the

Trustee and the Issuer to the effect that the amendment (i) is permitted by the Agreement and (ii) will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes. (Section 1001) Defeasance

When there are in the Debt Service Fund sufficient funds, or Government or Equivalent Obligations in such

principal amounts, bearing interest at such rates and with such maturities as will provide sufficient funds to pay or redeem the Bonds in full, and when all the rights under the Agreement of the Issuer and the Trustee have been provided for, upon written notice from the Borrower to the Issuer and the Trustee, the Bondowners shall cease to be entitled to any benefit or security under the Agreement except the right to receive payment of the funds deposited and held for payment and other rights which by their nature cannot be satisfied prior to or simultaneously with termination of the lien of the Agreement (including obligations of the Borrower under the Agreement), the security interests created by the Agreement (except in such funds and investments) shall terminate, and the Issuer and the Trustee shall execute and deliver such instruments as may be necessary to discharge the lien and security interests created under the Agreement; provided, however, that if any such Bonds are to be redeemed prior to the maturity thereof, the Issuer shall have taken all action necessary to redeem such Bonds and notice of such redemption shall have been duly mailed in accordance with the Agreement or irrevocable instructions so to mail shall have been given to the Trustee. Upon such defeasance, the funds and investments required to pay or redeem the Bonds in full shall be irrevocably set aside for that purpose, subject, however, to the Agreement, and moneys held for defeasance shall be invested only as provided above herein. Any funds or property held by the Trustee and not required for payment or redemption of the Bonds in full shall, after satisfaction of all the rights of the Issuer and the Trustee, be distributed to the Borrower upon such indemnification, if any, as the Issuer or the Trustee may reasonably require. (Section 203)

One Financial CenterBoston, MA 02111

617-542-6000 617-542-2241 fax www.mintz.com

APPENDIX D

PROPOSED FORM OF BOND COUNSEL OPINION

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. BOSTON | LONDON | LOS ANGELES | NEW YORK | SAN DIEGO | SAN FRANCISCO | STAMFORD | WASHINGTON

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January 28, 2016 Massachusetts Development Finance Agency 99 High Street Boston, Massachusetts 02110

$423,990,000 Massachusetts Development Finance Agency

Revenue Bonds, Partners HealthCare System Issue, Series Q (2016) Dated their Date of Delivery

We have acted as bond counsel to Partners HealthCare System, Inc. (the “Borrower”) in connection with the issuance by the Massachusetts Development Finance Agency (the “Issuer”) of the above-referenced bonds (the “Bonds”). In such capacity, we have examined the law and such certified proceedings and other papers as we have deemed necessary to render this opinion, including the Loan and Trust Agreement dated as of January 1, 2016 (the “Agreement”), among the Issuer, the Borrower and Wells Fargo Bank, N.A., as trustee (the “Trustee”).

As to questions of fact material to our opinion we have relied upon representations and covenants of the Issuer and the Borrower contained in the Agreement and in the certified proceedings and other certifications of public officials furnished to us, and certifications of officials of the Borrower and others, without undertaking to verify the same by independent investigation.

The Bonds are issued pursuant to the Agreement. The Bonds are payable solely from funds to be provided therefor by the Borrower pursuant to the Agreement. Under the Agreement, the Borrower has agreed to make payments sufficient to pay when due the principal (including sinking fund installments, if any) and redemption price of and interest on the Bonds. Such payments and other moneys payable to the Issuer or the Trustee under the Agreement, including proceeds derived from any security provided thereunder (collectively, the “Revenues”), and the rights of the Issuer under the Agreement to receive the same (excluding, however, certain administrative fees, indemnification, and reimbursements), are pledged and assigned by the Issuer as security for the Bonds. The Bonds are payable solely from the Revenues.

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Massachusetts Development Finance Agency January 28, 2016 Page 2

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We express no opinion with respect to compliance by the Borrower with applicable legal requirements with respect to the Agreement or in connection with the construction or operation of the Project (as defined in the Agreement) being financed and refinanced by the Bonds.

Reference is made to our opinion of even date with respect to, among other matters, the corporate existence of the Borrower, the power of the Borrower to carry out the Project, the power of the Borrower to enter into and perform its obligations under the Agreement, the authorization, execution and delivery of the Agreement by the Borrower, and the current qualification of the Borrower as an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”). We note that such opinion is subject to the limitations and conditions described therein. Failure of the Borrower to maintain its status as an organization described in Section 501(c)(3) of the Code or to use the Project in activities of the Borrower that do not constitute unrelated trades or businesses 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.

Based on our examination, we are of the opinion, under existing law, as follows:

1. The Issuer is a duly created and validly existing body corporate and politic and a public instrumentality of The Commonwealth of Massachusetts with the power to enter into and perform the Agreement and to issue the Bonds.

2. The Agreement has been duly authorized, executed and delivered by the Issuer and is a valid and binding obligation of the Issuer enforceable against the Issuer. As provided in Chapter 23G of the General Laws of The Commonwealth of Massachusetts, the Agreement creates a valid lien on the Revenues and on the rights of the Issuer or the Trustee on behalf of the Issuer to receive Revenues under the Agreement (except certain rights to indemnification, reimbursements and fees).

3. The Bonds have been duly authorized, executed and delivered by the Issuer and are valid and binding special obligations of the Issuer, payable solely from the Revenues and other funds provided therefor in the Agreement.

4. Interest on the Bonds (including any original issue discount properly allocable to the owners thereof) is excluded from the gross income of the owners of the Bonds for federal income tax purposes. In addition, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes; however, such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. In rendering the opinions set forth in this paragraph, we have assumed compliance by the Issuer and the Borrower with all requirements of the Code that must be satisfied subsequent to the issuance of the Bonds in order that interest thereon be, and continue to be, excluded from gross income for federal income tax purposes. The Borrower and, to the extent necessary, the Issuer have covenanted in the Agreement to comply with all such requirements. Failure by the

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Issuer or the Borrower to comply with certain of such requirements may cause interest on the Bonds to become included in gross income for federal income tax purposes retroactive to the date of issuance of the Bonds. We express no opinion regarding any other federal tax consequences arising with respect to the Bonds.

5. Interest on the Bonds is exempt from Massachusetts personal income taxes and the Bonds are exempt from Massachusetts personal property taxes. We express no opinion regarding any other Massachusetts tax consequences arising with respect to the Bonds or any tax consequences arising with respect to the Bonds under the laws of any state other than Massachusetts.

This opinion is expressed as of the date hereof, and we neither assume nor undertake any obligation to update, revise, supplement or restate this opinion to reflect any action taken or omitted, or any facts or circumstances or changes in law or in the interpretation thereof, that may hereafter arise or occur, or for any other reason.

The rights of the holders of the Bonds and the enforceability of the Bonds and the Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted to the extent constitutionally applicable, and their enforcement may also be subject to the exercise of judicial discretion in appropriate cases.

Very truly yours, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

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APPENDIX E

FORM OF CONTINUING DISCLOSURE AGREEMENT

This Continuing Disclosure Agreement (this “Disclosure Agreement”) is executed and delivered by Partners HealthCare System, Inc. (the “Institution”), Digital Assurance Certification, L.L.C., as the initial dissemination agent (in such capacity, the “Dissemination Agent”) and Wells Fargo Bank, N.A., as Trustee (in such capacity, the “Trustee”) in connection with the issuance of $423,990,000 Massachusetts Development Finance Agency Revenue Bonds, Partners HealthCare System Issue, Series Q (2016) (the “Bonds”). The Bonds are being issued pursuant to a Loan and Trust Agreement, dated as of January 1, 2016 (the “Agreement”), by and among the Massachusetts Development Finance Agency (the “Agency”), the Institution and the Trustee. The proceeds from the sale of the Bonds are being loaned by the Agency to the Institution pursuant to the Agreement. The Institution and the Trustee covenant and agree as follows:

SECTION 1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Institution and the Trustee for the benefit of the Bondowners and in order to assist the Participating Underwriters (defined below) in complying with the Rule (defined below). The Institution and the Trustee acknowledge that the Agency has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Agreement, and has no liability to any person, including any Bondowner of the Bonds, with respect to any such reports, notices or disclosures.

SECTION 2. Definitions. In addition to the definitions set forth in the Agreement, 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 Report” shall mean any Annual Report provided by the Institution pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement.

“Bondowner” shall mean the registered owner of a Bond, and any beneficial owner thereof, as established to the reasonable satisfaction of the Trustee or the Institution.

“Dissemination Agent” shall mean the initial Dissemination Agent or any successor Dissemination Agent designated in writing by the Institution and which has filed with the Institution, the Trustee and the Agency a written acceptance of such designation. The initial Dissemination Agent shall be Digital Assurance Certification LLC. The same entity may serve as both Trustee and Dissemination Agent. In the absence of a third party Dissemination Agent, the Institution shall serve as Dissemination Agent.

“EMMA System” shall mean the MSRB’s Electronic Municipal Market Access system.

“Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Agreement.

“MSRB” shall mean the Municipal Securities Rulemaking Board established pursuant to Section 15B(b)(1) of the Securities Exchange Act of 1934, or any successor thereto or to the functions of the MSRB contemplated by this Disclosure Agreement.

“National Repository” shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. The MSRB is currently the sole National Repository.

“Participating Underwriter” shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds.

“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, including any official

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interpretations thereof issued either before or after the effective date of this Disclosure Agreement which are applicable to this Disclosure Agreement.

SECTION 3. Provision of Annual Reports:

(a) The Dissemination Agent, not later than 150 days after the end of the Institution’s fiscal year, commencing with fiscal year ending September 30, 2016 (the “Filing Deadline”), shall provide to each National Repository an Annual Report. Not later than fifteen (15) business days prior to said date, the Institution (if it is not the Dissemination Agent) shall provide the Annual Report to the Dissemination Agent. In each case, the Annual 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; provided that the audited financial statements of the Institution may be submitted separately from and at a later date than, the balance of the Annual Report if such audited financial statements are not available as of the Filing Deadline. If the Institution submits its audited financial statements at a later date, it shall provide unaudited financial statements by the Filing Deadline and shall provide the audited financial statements as soon as practicable after the audited financial statements become available.

(b) The Dissemination Agent shall file a report with the Institution, the Agency and the Trustee certifying that the Annual Report has been provided pursuant to this Disclosure Agreement, stating the date it was provided; such report shall include a certification from the Institution that the Annual Report complies with the requirements of this Disclosure Agreement.

(c) If the Dissemination Agent has not received an Annual Report from the Institution by the Filing Deadline, and upon inquiry of the Institution learns that an Annual Report has not been filed with the MSRB, the Dissemination Agent shall send a notice to the MSRB substantially in the form of Exhibit A.

(d) If the Institution at any time determines that an Annual Report has not been provided to the MSRB by the Filing Deadline, the Institution shall send, or cause the Dissemination Agent to send, a notice to the MSRB substantially in the form of Exhibit A.

SECTION 4. Content of Annual Reports. Each Annual Report shall contain or incorporate by reference the following information relating to the Institution for or as of the most recently completed fiscal year of the Institution:

1) audited financial statements, and

2) To the extent not included in the audited financial statements:

a) a summary of utilization statistics for the Institution,

b) a summary of revenues and expenses, with comparative information for the preceding fiscal year,

c) a summary description of investments and investment policy,

c) a summary description of liquidity and capital resources data,

d) a summary of sources of patient service revenue for the Institution, and

e) a summary description of changes in outstanding indebtedness.

The Institution agrees that the financial statements provided pursuant to Sections 3 and 4 of this Disclosure Agreement shall be prepared in conformity with generally accepted accounting principles, as in effect

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from time to time. Any or all of the items listed above may be incorporated by reference from other documents, including official statements of debt issues with respect to which the Institution is an “obligated person” (as defined by the Rule), which have been filed with each National Repository or the Securities and Exchange Commission (the “SEC”). If the document incorporated by reference is a final official statement, it must be available from the MSRB. The Institution shall clearly identify each such other document so incorporated by reference.

SECTION 5. Reporting of Certain Events.

(a) This Section 5 shall govern the giving of notices of the occurrence of any of the following Listed Events with respect to the Bonds in a timely manner, but in any event within ten (10) business days after the occurrence of any such Listed Event:

1. principal or interest payment delinquencies on the Bonds;

2. occurrence of any default under the Agreement (other than as described in clause (1) above), if material;

3. any unscheduled draw on debt service reserves reflecting financial difficulties;

4. any unscheduled draw on credit enhancements reflecting financial difficulties;

5. any change in the provider of a credit or liquidity facility or any successor thereto or its failure to perform;

6. the rendering of an opinion of bond counsel to the effect that there has been an adverse development affecting the tax exempt status of the Bonds, or 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 of determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;

7. modifications to the rights of the Bondowners, if material;

8. giving of a notice of redemption of any Bonds (the giving of notice of regularly scheduled mandatory sinking fund redemption shall not be deemed material for the purposes of this Section 5), if material, or tender offers for the Bonds;

9. defeasance of the Bonds or any portion thereof;

10. the release, substitution or sale of property securing repayment of the Bonds, if material;

11. any change in the rating on the Bonds or the rating of the Institution;

12. bankruptcy, insolvency, receivership or similar event of the Institution;

Note to clause (12): For the purposes of the event identified in clause (12) above, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for the Institution in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or government authority has assumed jurisdiction over substantially all of the assets or business of the Institution, or if such jurisdiction has been assumed by leaving the existing governing 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 Institution;

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13. the consummation of a merger, consolidation, or acquisition involving the Institution or the sale of all or substantially all of the assets of the Institution, 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. appointment of a successor or additional Trustee or the change of the name of the Trustee, if material.

(b) Whenever the Institution obtains knowledge of the occurrence of a Listed Event, the Institution shall, in a timely manner as set forth above, file or direct the Dissemination Agent to file a notice of such occurrence with the MSRB, with a copy to the Agency.

SECTION 6. Termination of Reporting Obligation. The Institution’s obligations under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds, or upon delivery to the Trustee of an opinion of counsel expert in federal securities laws selected by the Institution and acceptable to the Trustee to the effect that compliance with this Disclosure Agreement no longer is required by the Rule. If the Institution’s obligations under the 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 Institution and the original Institution shall have no further responsibility hereunder.

SECTION 7. Dissemination Agent.

(a) The Institution 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 Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be Digital Assurance Certification LLC.

(b) Any filing under this Disclosure Agreement may be made by filing the same with any transmission agent or conduit, including any “central post office” or similar entity, assuming or charged with responsibility for accepting notices, documents or information for transmission to each National Repository, to the extent permitted by the SEC or SEC staff or required by the SEC. For this purpose, permission shall be deemed to have been granted by the SEC staff if and to the extent the transmission agent or conduit has received an interpretive letter, which has not been withdrawn, from the SEC staff to the effect that using such agent to transmit information to each National Repository will be treated for purposes of the Rule as if such information were transmitted directly to each National Repository. Any filing under this Disclosure Agreement shall be made by transmitting such filing to the MSRB through the EMMA System, which is accessible at http://emma.msrb.org.

SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, the Institution and the Trustee may amend this Disclosure Agreement (and the Trustee shall agree to any amendment so requested by the Institution and which does not affect the rights and remedies of the Trustee or Dissemination Agent) and any provision of this Disclosure Agreement may be waived, if such amendment or waiver is supported by an opinion of counsel expert in federal securities laws acceptable to both the Institution and the Trustee to the effect that such amendment or waiver would not, in and of itself, violate the Rule. Without limiting the foregoing, the Institution and the Trustee may amend this Disclosure Agreement if (a) such amendment is 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 Institution or of the type of business conducted by the Institution, (b) this Disclosure Agreement, as so amended, would have complied with the requirements of the Rule at the time the Bonds were issued, taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c)(i) the Trustee determines, or the Trustee receives an opinion of counsel expert in federal securities laws and acceptable to the Trustee to the effect that, the amendment does not materially impair the interests of the Bondowners or (ii) the amendment is consented to by the Bondowners as though it were an amendment to the Agreement, pursuant to Section 1001 of the Agreement. The annual financial information will explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided. If an amendment is made to an undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financial information for the year in which the

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change is made should present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

SECTION 9. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent the Institution from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If the Institution chooses to include any information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by this Disclosure Agreement, the Institution shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 10. Default. In the event of a failure of the Institution or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Trustee may (and, at the request of Bondowners of at least 25% aggregate principal amount of Outstanding Bonds, shall) take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Institution or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. Without regard to the foregoing, any Bondowner or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking specific performance by court order, to cause the Institution 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 Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of the Institution or the Trustee to comply with this Disclosure Agreement shall be an action to compel performance.

SECTION 11. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Section 603 of the Agreement is hereby made applicable to this Disclosure Agreement as if this Disclosure Agreement were (solely for this purpose) contained in the Agreement. The Trustee and the Dissemination Agent, respectively, shall have only such duties as are specifically set forth in this Disclosure Agreement, and the Institution agrees to indemnify and save the Dissemination Agent, its 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 gross negligence or willful misconduct. The obligations of the Institution under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

SECTION 12. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of the Institution, the Trustee, the Dissemination Agent, the Participating Underwriters, the Agency and Bondowners from time to time of the Bonds, and shall create no rights in any other person or entity.

SECTION 13. Disclaimer. No Annual Report or notice of a Listed Event filed by or on behalf of the Institution under this Disclosure Agreement shall obligate the Institution to file any information regarding matters other than those specifically described in Section 3 and Section 4 hereof, nor shall any such filing constitute a representation by the Institution or raise any inference that no other material events have occurred with respect to the Institution or the Bonds or that all material information regarding the Institution or the Bonds has been disclosed. The Institution shall have no obligation under this Disclosure Agreement to update information provided pursuant to this Disclosure Agreement except as specifically stated herein.

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SECTION 14. 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.

Date: January 28, 2016

PARTNERS HEALTHCARE SYSTEM, INC. By Title: WELLS FARGO BANK, N.A., as Trustee By Authorized Officer DIGITAL ASSURANCE CERTIFICATION, L.L.C.,

as Initial Dissemination Agent

Authorized Officer

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EXHIBIT A

NOTICE TO MSRB OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: Massachusetts Development Finance Agency Name of Bond Issue: Revenue Bonds, Partners HealthCare System Issue, Series Q (2016) Name of Institution: Partners HealthCare System, Inc. Date of Issuance: January 28, 2016 NOTICE IS HEREBY GIVEN that Partners HealthCare System, Inc. (the “Institution”) has not

provided an Annual Report with respect to the above named Bonds as required by the Continuing Disclosure Agreement dated January 28, 2016 by and among the Institution, Digital Assurance Certification, L.L.C., as the initial Dissemination Agent, and Wells Fargo Bank, N.A., as Trustee.

Dated:

[DISSEMINATION AGENT]

cc: Partners HealthCare System, Inc.

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(2016)

Massachusetts Development Finance Agency · 2016. 1. 25. · Wells Fargo Bank, N.A., is serving as...

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