McGuireWoods LLP | 1 CONFIDENTIAL Accounting for the Value of an Employed Physician Legal Restrictions –Self-Referral Laws –Anti-Kickback –Fair Market Value

McGuireWoods LLP | 2 CONFIDENTIAL Stark Law: Overview Generally, physicians cannot make referrals for “DHS” where there is a financial relationship unless they meet an exception Civil Statute, Fines, Strict Liability Can Likely Meet Stark Exception for Bona Fide Employment: Employment must be for identifiable services FMV compensation which does not take into account the volume/value of referrals Commercially reasonable agreement Also State law counterparts.

McGuireWoods LLP | 3 CONFIDENTIAL Anti-Kickback Statute Generally, cannot offer or receive any remuneration with intent to induce referrals Applies to everyone Criminal Statute, Intent-Based, Jail and Fines Safe Harbor (immune from prosecution) - Must satisfy all elements of safe harbor -Also State law counterparts “Remuneration” does not include compensation made to a person with a bona fide employment relationship with the employer Compensation must be fair market value

McGuireWoods LLP | 4 CONFIDENTIAL State Law Considerations Corporate Practice of Medicine –Prohibition on ownership by non-physicians –Prohibition on employment of physicians Certificate of Need laws may be implicated in an asset purchase if certain types of assets/equipment are being acquired.

McGuireWoods LLP | 5 CONFIDENTIAL Professional Service Agreements Spectrum of Options – some legal/some may not be (Stark/AKS applicable) –Global Payment PSA –Practice Management Arrangement –Traditional –Hybrid

McGuireWoods LLP | 6 CONFIDENTIAL Bona Fide Employment Compensation can in no way be tied to volume/value of referrals and be FMV Compensation may consist of some combination of an annual base salary and productivity bonus Productivity bonuses are permissible if directly related to services actually performed by the physician Compensation Plans are commonly used

McGuireWoods LLP | 7 CONFIDENTIAL Tax-Exempt Concerns Protect tax exempt status of the Hospital Avoid Private Inurement – organization must not engage in activities that result in inurement of the organization’s net earnings to a private shareholder/individual Avoid Private Benefit – organization may not engage in substantial activities that cause the organization to be operated for the benefit of a private interest rather than a public interest so that it has a substantial non-exempt purpose

McGuireWoods LLP | 8 CONFIDENTIAL Tax Exempt Considerations Factors to Consider –objective evidence demonstrating a need for the particular specialty in the service area –reasonable relationship to promoting and protecting health –amount paid is reasonable and any private benefit to the physician is outweighed by community benefit –Board played an active role in making these demonstrations

McGuireWoods LLP | 9 CONFIDENTIAL Referrals Cannot compensate for value/volume of referrals Generally can require employed physicians to make referrals, subject to certain exceptions.

McGuireWoods LLP | 10 CONFIDENTIAL Fair Market Value Independent valuation Important to defend under AKS, to meet Stark exception and to address tax exempt issues

McGuireWoods LLP | 11 CONFIDENTIAL Transaction Considerations Process and Structure - Transaction Structures Asset Purchase Attempt to limit pre-existing liabilities that the practice may have Allows the practice owners to retain cash, accounts receivable and certain other assets Practice Hospital, Foundation, or Hospital- Owned Practice $ Assets

McGuireWoods LLP | 12 CONFIDENTIAL Transaction Considerations Process and Structure - Transaction Structures Stock Purchase Rarely used by hospitals that have an existing entity used to employ physicians May be unavoidable if key leases or contracts that must be assigned cannot be transferred in an asset structure. Acquiring Practice Entity Target Physician Practice Hospital $ Stock

McGuireWoods LLP | 13 CONFIDENTIAL Transaction Considerations Process and Structure - Transaction Structures Merger Typically used when similar-sized practices are combining Retains all liabilities of both entities Retains key licenses and permits Avoids need for recredentialing or assignment of contracts Target Physician Practice Hospital Acquiring Practice Entity $ Merger

McGuireWoods LLP | 14 CONFIDENTIAL Transaction Considerations Due Diligence Issues –Practice debt/liabilities/equipment lease arrangements –Do physicians own landlord? Do they want that arrangement to continue post-closing? Lease payments must be FMV –Tail Insurance – Will Hospital or Physicians be responsible for cost? Should value be included in valuation? –Transfer of Employees Will Hospital employ all employees? Transfer of benefits? Assumption of PTO, credit for years served for vacation accrual and other benefits?

McGuireWoods LLP | 15 CONFIDENTIAL Transaction Considerations Process and Structure - Transaction Structures Post-Closing Physician Employment Employment Agreement Can be employed by either: hospital directly; an affiliate (wholly-owned) practice; foundation; or faculty practice plan in an academic medical center. Compensation Structure Base Salary/Income Guaranty Productivity-Based Bonus Recruitment of New Physicians to the Practice “Ancillary Services” Revenues – Often includes DHS. May not be able to divide these revenues as the physicians previously had.

McGuireWoods LLP | 16 CONFIDENTIAL Other Acquisition Considerations –Medical Director Agreement –Physician Owned Equipment/Leases –Call Coverage Agreements –Management Agreements –Consulting Agreements –Retirement of key physicians –Medicare/Medicaid Provider numbers –Physician Ownership of Competitors –Retirement Plans/Employee Benefits

Physician Integration Geoff Gardner VP Finance, Novant Medical Group

1,100+ 1,141 Physicians 394 Physician extenders 1,535 Overall providers 348 Practices 6,170 Employees* *includes physicians and physician extenders

Integration Analysis What We Do Consider the clinic’s and the physician’s overall alignment with Novant’s mission Include potential impact on patients in the analysis Consider the possibilities for improvements in clinical efficiency and integration and quality of care Consider the need for the specialty within the service area Analyze asset purchases, lease assumptions, and other items on a FMV basis Review the ongoing financial performance of clinics

Integration Analysis What We DON’T Do Consider facility impact in the context of setting or modifying physician compensation or any form of remuneration Use financial data in a vacuum from other factors

Sample Report Practice Financials Shared with medical group management, clinic management, and lead MD monthly Basis for internal benchmarking and best practice discussions

Sample Reports Referral Pattern Data from physician practice management system Can be run by clinic location or by physician Represents referrals to physicians, facilities and ambulatory centers Used as a tool to determine potential connectivity issues between clinics

Fiscal Year 2011

Paid bonuses based on referrals Rent free office space No contracts for other financial arrangements 26

Methodology developed in 2003 Unique Medical Group patients identified by SS# and birthdate Patient list provided to the Local Ministries who matched with medical record number Patients were run through the hospital cost accounting system to capture inpatient and outpatient activity

The strategic impact of the hospital physician alignment strategy is measured by the variable contribution margin (VCM) to each local ministry. The VCM is calculated by taking net income and subtracting the variable expenses, representing the income available to cover overhead expenses. The analysis then compares the VCM to the physician investment by each local ministry.

This Report shall not be provided to anyone other than an Authorized Recipient, it should not be distributed by and should only be presented at a meeting in an electronic presentation format. If paper copies are distributed at a meeting, each Authorized Recipient who received a copy of the Referral Report shall at the conclusion of the presentation return the Referral Report to the individual who distributed the Referral Report for retention by an authorized analyst/custodian.

Analysis was completed on the three local ministries with: – A high level of competition in their area – Largest number of providers – A robust cost accounting system – Significant investment per provider Return versus investment was 2.3 to1 overall Report will be generated annually based on the fiscal year