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I?:, A /I All providers participating in the Medicare program are required to comply with regulations which set forth conditions of participation. Failure to meet a condition of participation may subject the provider to suspension and/or termination from Medicare. In the past two years, the Secretary, through participating state agencies, has focused compliance review of. conditions of participation on certain types of providers including psychiatric hospitals. It is anticipated that such focus review may continue in future periods. On January 10, - 1985, the Secretary issued regulations' which permit eligible prepaid medical plans to contract with the Secretary to provide -- Medicare services, and.to be reimbursed in a prospective per capita basis for such services. The number of such plans and of the Medicare beneficiaries in them may increase as a result of increases in payment to these organizations. This could have an adverse impact on that portion of Debtor's revenue that is derived from Medicare and Medicaid if Debtor's Medicare utilization or Medicare payment is reduced due to these new plans, or could have a positive impact if HII is able to contract at a federal rate with the new plans. Medicaid is a program of medical assistance, funded jointly by the federal government and the states, for certain needy individuals and their dependents. Under Medicaid, the federal government provides grants to states that have medical assistance programs that are, consistent with federal standards. Prior to 1981, states were required to reimburse hospitals on a reasonable cost basis for inpatient services under Medicaid. Federal " legislation enacted in 1981 repealed the reasonable cost standard and requires that the Medicaid payment rate be reasonable and adequate to meet the costs of efficiently and economically operated facilities, among other requirements. In response to this legislation, many states have made a variety of changes to their. Medicaid programs. A number of states have changed to a prospective payment system in response to the new Medicaid system. The Debtor is certified as a provider for the Medicare and Medicaid services by the appropriate government agencies. The requirements for certification under Medicare and Medicaid are subject to change, and in order to remain qualified for such programs, it may be necessary for the Debtor to effect changes from time to time in its' facilities, equipment, personnel and services. Although the Debtor intends to continue to participate in such programs to the extent that it is profitable to do so, there is no assurance that its hospital will continue to qualify for participation. Within the statutory framework of the Medicare/Medicaid programs, there are substantial areas subject to administrative rulings, interpretations and discretion which may affect participation and/or payments under either or both such programs. In addition, the federal or state goveenment might in the future reduce the funds available under such programs or eequire more stringent utilization review of hospital facilities, eithee of which could have a material adverse effect on HII's future revenues. - 26 - a-ZOISS ,