03/06/2009: "Agreement For A Clinic & Hospital On SJI"

(Note: The Hospital District will not provide an electronic copy of the agreement, and paper copies can only be obtained by written request. The following is a scanned copy of the agreement; and as a result the format is not the same as the original, and there may be slight typos as a result of the scanning program)

SUBSIDY AGREEMENT FOR A
COMBINED CLINIC AND HOSPITAL FACILITY

THIS AGREEMENT FOR A COMBINED CLINIC AND HOSPITAL FACILITY ("Agreement") is made and entered into as of the __ day of March, 2009 ("the Effective Date") by and between PeaceHealth, a Washington nonprofit corporation that is qualified as exempt from federal income taxation pursuant to Section 501 (c) (3) of the Internal Revenue Code of 1986, as amended, ("PeaceHealth") and the San Juan County Public Hospital District No.1 (the "District"), a Washington State Public Hospital District organized pursuant to the Revised Code of Washington Title 70, Chapter 44. PeaceHealth and the District are jointly referred to hereinafter as "the Parties".

RECITALS

A. Peace Health is organized for the charitable purpose of promoting health. It owns and operates hospitals and medical clinics in the Pacific Northwest, including St. Joseph Hospital and the PeaceHealth Medical Group-Whatcom Region that are located in Bellingham, Washington.
B. Through its hospital and physician clinics in Bellingham, Peace Health has long provided medical care to a significant percentage of residents of the District when they found it necessary to leave the District for medical care.
C. PeaceHealth has expertise in constructing, licensing, securing regulatory approvals for, staffing and operating combined critical access hospitals and hospital based physician clinics in settings similar to San Juan Island.
D. The District has the authority under RCW 70.44.003 to provide hospital services and other medical services to residents of the District and other persons.
E. The District has the power, under RCW 70.44.060 (3) and RCW 70.44.240 to contract with other corporations for the services provided by said hospital district.
F. The District has taxing authority, under RCW 70.44.060(6), pursuant to which it may collect regular property taxes and has taxing authority, under RCW 84.55.010, pursuant to which it may increase the amount of its regular property taxes on an annual basis without voter approval subject to statutory limits.
G. Pursuant to the provisions of RCW 84.55.050 and subject to statutory limits, the District may also collect additional taxes through temporary levy increases as approved by the voters. In 2000, the voters of the District did approve a temporary levy increase that will expire at the end of calendar year 2015 and the District anticipates collecting taxes pursuant to that temporary levy increase until its expiration.
H. The District owns a medical clinic building and an emergency medical services facility which are located at 550 and 540 Spring Street, respectively, in Friday Harbor, San Juan 'Island, Washington where it operates both the Inter Island Medical Center (the "IIMC") and the San Juan County Public Hospital District No.1 emergency medical services facility, ("EMS").
J. The District has concluded that the size and design of its current medical clinic building is inadequate to meet future needs, the real estate on which it is located is not large enough for construction of a new, larger medical facility to accommodate the current and future needs of residents of, and visitors to, the District, who would benefit from the provision of an expanded range of health care services, including limited inpatient care.
J. The District has further concluded that the IIMC is not financially sustainable as currently configured. The operational losses of the IIMC are again exceeding the amount of tax revenue available to the District to cover those losses, and these losses
are projected to increase annually. -
K. Based on analysis by healthcare consultants jointly hired by'the District and PeaceHealth, the District has concluded that if a larger clinic were combined with a critical access hospital ("combined clinic/hospital facility") and operated by a larger healthcare system with experience with combined clinic/hospital facilities in rural and undeserved areas, that could bring economies of scale to the purchasing, information technology and support service functions, the combined clinic/hospital facility would achieve long-term financial sustainability.
L. The District desires to enable a long-term, financially sustainable healthcare solution for its residents while expanding the range of health care services by providing a subsidy to Peace Health in exchange for its agreement to purchase real estate, construct, license, secure regulatory approvals for, staff and operate a new combined clinic/hospital facility that would be located on a larger site.
M. The District further desires to co-locate its EMS with the combined clinic/hospital facility in an adjacent structure, which would be built by PeaceHealth and which the District woul,d subsequently purchase, along with the underlying land and infrastructure improvements, at fair market value.
N. Peace Health believes it can further its charitable purpose of providing health care services to District residents and visitors by purchasing real estate, constructing, licensing, securing regulatory approvals for, staffing and operating the combined clinic/hospital facility, as well as constructing a co-located facility suitable for purchase by the District and use by EMS, subject to the conditions of: (1) receiving at least ten million dollars of initial philanthropic assistance from the San Juan Hospital Committee; (2) receiving a long-term subsidy from the District; and (3) selling to the District at fair market value the portion of its real estate, and the infrastructure improvements thereto, on which it has builta new facility suitable for the EMS and enough land for the future construction of an adjacent helipad.
O. The Parties intend that their mutual understandings be set forth in this
Agreement. .
P. In furtherance of the recitals above, the District desires to contract with Peace Health and Peace Health desires to contract with the District, both doing so upon the mutually agreed terms and conditions set forth in this Agreement.

AGREEMENT

NOW THEREFORE, in consideration of the recitals above, the mutual benefits to be derived and all terms, conditions and covenants set forth in this Agreement, the adequacy of which is acknowledged, and intending to be legally bound, the Parties agree as follows:

SECTION 1
OBLIGAT10NS AND RIGHTS OF PEACEHEALTH

1.1.1 Acquisition of Real Estate. PeaceHealth shall assume all financial responsibility for, and shall exercise due diligence in, acquiring real property upon which the combined clinic/hospital facility and the co-¬located EMS facility can be located (the "Property"), subject to the prior receipt of a financial donation in the amount of the property's purchase price or, at PeaceHealth's discretion, prior receipt of a gift of real estate that Peace Health deems suitable. Peace Health further agrees that it shall confer with the District concerning real property acquisition for the combined clinic/hospitaL facility, that the District shall have the right to provide input concerning selection and that Peace Health shall give good faith consideration to such input.
1.1.2 Annexation and Re-Zone of Real Property. Subject to receipt of adequate philanthropic donations to cover its expenses, Peace Health shall assume all responsibility for, and shall exercise due diligence in effecting, the Property's annexation to the city of Friday Harbor and zoning that will permit the use of the property for the combined clinic/hospital facility and an EMS facility. PeaceHealth shall consult with the District board on a regular basis concerning the accomplishment of these obligations.
1.1.3 Provision of Utilities. PeaceHealth shall assume all financial responsibility for, and shall exercise due diligence in, providing utilities to the Property. The utilities shall include city water and sewer, electricity, standard telephone service and T1 telephone connection or its
equivalent. .
1.1.4 Design and Permitting of the Combined Clinic/Hospital Facility.
Peace Health shall assume all financial responsibility for, and exercise due diligence in, developing architectural plans and specifications and applying for construction permits for the combined clinic/hospital facility. PeaceHealth agrees that the combined clinic/hospital facility shall, at a minimum, contain space to accommodate ten inpatient beds, six full time practicing physicians, onsite digital imaging, including computerized tomography ("CT"), an emergency medicine department, and procedure rooms and supporting services; provided that the District and PeaceHealth may mutually amend those specifications. Peace Health further agrees that the District board shall have the right to review the plans and specifications for the combined clinic/hospital facility and provide input concerning them.
1.1.5 Design and. Permitting of the EMS Facility and Associated Infrastructure.
PeaceHealth shall assume all financial responsibility for, and exercise due diligence in, developing architectural plans and specifications and applying for construction permits for the EMS facility. PeaceHealth
further agrees that the District board shall have the right to review the plans and specifications for the combined clinic/hospital facility and
provide input concerning them. .
1.1.6 Certificate of Need. PeaceHealth shall assume all financial responsibility for, and exercise due diligence in, securing any required certificate of need from the State of Washington for the combined clinic/hospital facility.
1.1.7 Construction and Licensing. PeaceHealth shall assume all financial responsibility for, and shall exercise due diligence in constructing and licensing, the combined clinic/hospital facility and the EMS facility. PeaceHealth shall complete construction by not Jater than four (4) years after receipt of a letter of intent from the state of Washington for a CON.
1.1.8 Provision of Furniture, Equipment arid Supplies. PeaceHealth shall assume all financial responsibility for, and shall exercise due diligence in, providing all furnitwre, equipment, information technology equipment and software and supplies reasonably necessary for the provision of high quality, safe and compassionate healthcare at the combined clinic/hospital facility.
1.1.3 Provision of Utilities. PeaceHealth shall assume all financial responsibility for, and shall exercise due diligence in, providing utilities to the Property. The utilities shall include city water and sewer, electricity, standard telephone service and T1 telephone connection or its
equivalent. .
1.1.4 Design and Permitting of the Combined Clinic/Hospital Facility.
Peace Health shall assume all financial responsibility for, and exercise due diligence in, developing architectural plans and specifications and applying for construction permits for the combined clinic/hospital facility. PeaceHealth agrees that the combined clinic/hospital facility shall, at a minimum, contain space to accommodate ten inpatient beds, six full time practicing physicians, onsite digital imaging, including computerized tomography ("CT"), an emergency medicine department, and procedure rooms and supporting services; provided that the District and PeaceHealth may mutually amend those specifications. Peace Health further agrees that the District board shall have the right to review the plans and specifications for the combined clinic/hospital facility and provide input concerning them.
1.1.5 Design and. Permitting of the EMS Facility and Associated Infrastructure.
PeaceHealth shall assume all financial responsibility for, and exercise due diligence in, developing architectural plans and specifications and applying for construction permits for the EMS facility. PeaceHealth
further agrees that the District board shall have the right to review the plans and specifications for the combined clinic/hospital facility and
provide input concerning them. .
1.1.6 Certificate of Need. PeaceHealth shall assume all financial responsibility for, and exercise due diligence in, securing any required certificate of need from the State of Washington for the combined clinic/hospital facility.
1.1.7 Construction and Licensing. PeaceHealth shall assume all financial responsibility for, and shall exercise due diligence in constructing and licensing, the combined clinic/hospital facility and the EMS facility. PeaceHealth shall complete construction by not later than four (4) years after receipt of a letter of intent from the state of Washington for a CON.
1.1.8 Provision of Furniture, Equipment arid Supplies. PeaceHealth shall assume all financial responsibility for, and shall exercise due diligence in, providing all furniture, equipment, information technology equipment and software and supplies reasonably necessary for the provision of high quality, safe and compassionate healthcare at the combined clinic/hospital facility. PeaceHealth shall have a need for each person's skills at the combined hospital/clinic facility. Such offers of employment shall become effective at the time the combined clinic/hospital facility shall commence operations.
1.1.26 Receipt and Maintenance of Medical Records from the IIMC. Peace Health . shall accept and maintain in accordance with state and federal law the patient medical records from the IIMC.
1.1.27 Interim Educational Offerings. Between the Effective Date of this Agreement and the,date that PeaceHealth shall commence operation of the combined clinic/hospital facility, Peace Health shall make information on educational offerings available to District employees at the IIMC, so thaUhose employees may attend relevant professional education and training programs offered to PeaceHealth physicians and employees at Peace Health facilities in Whatcom County.
1.1.28 Provision of Visiting Specialists. PeaceHealth shall make available medical office space for visiting specialists and shall use good faith efforts to arrange for regular clinic visits by specialty physicians.
1.2.1 Right of First Opportunity to Purchase Furniture, Equipment and Supplies from the IIMC.In the event the District shall declare them surplus, PeaceHealth shall have a right of first opportunity to acquire at appraised fair market value all furniture, equipment and supplies located in the IIMC at the time PeaceHealth shall commence operation of the combined clinic/hospital facility. Appraisal shall be by a mutually agreed appraiser or, if the Parties cannot agree on an appraiser, each Party shall select its own appraiser and the appraisal value shall be established by averaging the appraisals of the two appraisers so selected.
1.2.2 Review of Prospective Tenants. PeaceHealth shall have the right to review and approve in writing all prospective tenants of any property the District may subsequently purchase from PeaceHealth and that is adjacent to that on which the combined clinic/hospital facility is located in order to avoid uses of such property that would be incompatible with PeaceHealth's provision of services under this Agreement; provided, that such approval shall not be unreasonably withheld and further provided that PeaceHealth hereby approves the EMS services of the District as such a tenant.
1.2.3 Right to All Revenue from the Combined Clinic/Hospital Facility.
PeaceHealth shall have the exclusive right to all fees and revenues generated from the operation of the combined clinic/hospital facility, including but not limited to professional and technical fees for the provision
of clinical and ancillary services (such as imaging and laboratory) under this Agreement.
1.2.4 Sub-Contracts. Peace Health may subcontract with other persons or entities to perform any part of the services required of PeaceHealth hereunder.
1.2.5 Right of First Refusal to Provide Additional Healthcare Services. In the event the District shall decide to purchase healthcare services within the District, other than emergency medical response services, Peace Health shall have, and the District hereby grants, a right of first refusal to provide those services at the prices and on terms equal to or better than those offered to the District by any third party. This right of first refusal shall include, but not be limited to: home health, hospice, physician services, nursing services, physical therapy, occupational therapy, oncology services, dietarY and the direct or indirect provision of ancillary services such as imaging or laboratory. .
1.2.6 Non-Compete for Subsidized Services. The District shall not compete with PeaceHealth in the provision 'of those healthcare services that are provided in the combined clinic/hospital facility and for which the District has contracted in this Subsidy Agreement.

SECTION 2
OBLIGATIONS AND RIGHTS OF THE DISTRICT

2.1.1 Cooperation and Support. The District shall fully cooperate with, and provide all reasonably requested support to, Peace Health throughout its efforts to acquire: (1) a certificate of need from the State of Washington for the combined clinic/hospital facility; (2) a critical access hospital designation by CMS; and (3) a hospital based physician clinic designation by CMS, including any requisite survey by the Joint Commission,
2.1.2 Subsidy. Effective as of the date that PeaceHealth shall commen~e operation of the combined clinic/hospital facility and throughout the term of this Agreement, the District agrees to take all actions necessary and within its power, to include in its budget and levy annually within the constitutional and statutory limitations provided by law without a vote of the electors of the District on all taxable property within the District in an amount sufficient, together with other revenues of the District available and to be used therefore, to pay when due an annual subsidy to PeaceHealth to assist Peace Health in providing healthcare services to the District's residents according to the terms of this Agreement. The subsidy shall be in the amount of One Million Four Hundred and Eighty-Three Thousand Eighty¬Two Dollars ($1,483,082.00) dollars for the first calendar year in which the combined clinic/hospital shall operate and shall thereafter annually increase on a compound basis according to the rate shown for the Hospital Only subcomponent of the Consumer Price Index for All Urban Consumers ("CPI-U") published annually in January for the immediately preceding calendar year by the United States Bureau of Labor (hereinafter "the Annual SUbsidy"); provided, however, that at such time as the current temporary levy increase approved by the electors of the District in 2000 shall expire and at any subsequent time that a temporary levy increase which has been designated for the combined clinic/hospital facility shall expire, the Annual SUbsidy shall be reduced by an amount equal to the difference between the District's actual tax levy in the final year of such temporary levy increase and the amount that would have been the District's tax levy in that year without the temporary levy increase.

2.1.2.1 In the event that PeaceHealth shall commence operation of the combined clinic/hospital facility other than on January 1, the Annual Subsidy payable by the District for the partial year shall be prorated by multiplying the Annual Subsidy amount by a fraction in which the numerator is the number of days that Peace Health operated the combined clinic/hospital facility in the partial calendar year and in which the denominator is 365.
2.1.2.2 Payment of the Annual Subsidy shall be made in equal, semi¬annual installments on June 15 and December 15 of each year, with the first payment due upon the first such date occurring after the date on which PeaceHealth .shall commence operation of the combined clinic/hospital facility.
2.1.2.3 Notwithstanding the foregoing, the amount of the Annual
Subsidy payable by the District to PeaceHealth shall in no event exceed ninety-seven percent (the "Maximum Limit") of all of the regular property taxes, as defined in RCW 84.04.140, received by the District in the applicable calendar year, including any additional property taxes received by the District as a result of the current temporary levy increase and any temporary levy increase which shall have been designated for the combined clinic/hospital facility and approved by the electors of the District during the term of this Agreement (pro rated for any partial year of operation of the combined clinic/hospital facility per the formula set forth in section 2.1.2.1 above); provided that at the five year anniversary of the date on which PeaceHealth commenced operation of the combined clinic/hospital facility
and every five years thereafter throughout the duration of this Agreement either PeaceHealth or the District may require an independent audit of the District's reasonable and customary administrative expenses and the Maximum Limit shall be adjusted up or down as deemed necessary by the auditor in order to provide adequate but not excess funds needed by the District to meet its reasonable and customary administrative expenses; further provided, that in no event shall such adjustment to the Maximum Limit ever reduce it to less than ninety-five percent of the District's annual tax revenue.
For the duration of this Agreement, Peace Health shall keep an accounting of the aggregate amount by which each Annual Subsidy due from the District shall exceed the Maximum Limit for each year (hereinafter lithe Shortfall") and, in the event that the Maximum Limit of the District's tax revenue shall subsequently exceed the Annual Subsidy in any calendar year; all such excess shall be paid by the District to
Peace Health to reduce the Shortfall, if one shall exist.
Upon request, PeaceHealth shall have the right to review the financial records of the District, audit the same and receive copies of all audits conducted by outside parties on the District.

2.1.3 Purchase of EMS Facility. As soon as possible, but no later than two (2)
years after PeaceHealth shall have received an occupancy permit for the EMS facility it is to construct, the District shall purchase it from PeaceHealth at fair market appraised value; provided, that if there shall exist a Shortfall, as defined in section 2.1.2.4, at the time the District shall receive the proceeds from the sale of the IIMC and the former EMS facility and if the price paid to PeaceHealth for purchase of the EMS faCility shall be less than the proceeds of the sale of the IIMC and former EMS facility, then such excess proceeds as are necessary to eliminate the Shortfall shall be paid by the District to PeaceHealth.
2.1.4 Interim Lease of EMS Facility. Between the time that PeaceHealth shall have received an occupancy permit for the EMS facility it is to construct and the purchase of it by the District, the District shall rent at fair market appraised value the EMS facility constructed by PeaceHealth according to the triple net lease terms set forth in Attachment 1 hereto.
2.1.5 Provision of Access to Records and Information. Subject to applicable state and federal laws, including those applicable to confidentiality, the District shall provide to PeaceHealth reasonable access to the liMe and its patient charts, books, records and staff in order that PeaceHealth may
2.2.2 Right to Recommend Future Services. The Parties recognize that over the term of this Agreement healthcare will change substantially due to ongoing medical and technological developments. The District shall have the right to provide input on an annual basis concerning the nature and scope of services and procedures provided through the combined clinic/hospital perform due diligence and exercise it rights and obligations under this Agreement.
2.1.6 Closure of the IIMC and Termination of Employment. On the day immediately preceding that on which PeaceHealth shall commence operation of the combined clinic/hospital facility, and subject to PeaceHealth's compliance with all provisions of section 1.1, above, that shall have come due by that time, the District shall close the IIMC and terminate the employment of allllMC clinical providers located there; provided that the District may continue to employ a Superintendant in an administrative role.
2.1.7 Sale of District Properties. The District shall assume all financial responsibility for, and shall exercise due diligence in, selling the IIMC and EMS buildings and the land on which they are located in accordance with the statutory requirements of RCW 70.44.300. The District shall exercise good faith in seeking to so sell and close the sale of those assets prior to or as soon as possible following the date upon Peace Health shall commence operation of the combined clinic/hospital facility and the receipt of an occupancy permit for the EMS building that Peace Health shall construct.
2.1.8 Transfer of Medical Records from the IIMC. Subject to applicable state and federal laws, including those applicable to confidentiality, on or before the' date on which PeaceHealth shall begin operation of the combined clinic/hospital facility, the District shall transfer to PeaceHealth all patient medical records from the IIMC and shall direct any electronic medical record vendors it may have to collaborate with Peace Health so as to successfully transfer any such electronic records.
2.1.9 Collection of Accounts Receivable. The District shall assume all financial responsibility and shall be solely responsible for the collection of any and all accounts receivable from the IIMC; provided that at the District's option Peace Health shall enter a Services Agreement for the collection of such accounts receivable on a contract basis.

2.2 Rights of the District

2.2.1 Right to All Revenue from the IIMG. The District shall have the exclusive right to all fees and revenues generated from the operation of the IIMC prior to Peace Health's operation of the combined clinic/hospital facility. facility and to confirm that all payments from the District are used exclusively for the provision of healthcare services with the District in compliance with Section 1.1.23 hereof. PeaceHealth agrees to give good faith consideration to such District input.
2.2.3 Right of First Opportunity to Purchase the Combined Clinic/Hospital Facility
and Its Contents. If at any time PeaceHealth shall cease to operate the combined clinic/hospital facility, other than as provided in section 7.7, below, then the District shall have a right of first opportunity to acquire it, the land upon which it is located and all furniture, equipment and supplies located in it (this right shall not apply to any proprietary assets of. PeaceHealth, such as software licenses) at fair market appraised value for a period of one year following the date upon which Peace Health ceased to operate it; provided that if the District shall exercise its right of first opportunity, the terms of the purchase and sale agreement shall provide that, at the District's option, PeaceHealth will loan the amount of the purchase price to the District at prime plus one percent for a period of up to three (3) years following the date on which the District exercised its right of first opportunity.

2.2.3.1In recognition of the fact that the combined clinic/hospital was originally funded in part by philanthropic gifts from the community, the District shall be entitled to apply a potential credit against the purchase price from PeaceHealth (the "Philanthropy Credit"). The Philanthropy Credit shall be calculated in four steps, as follows:

Step One shall be to calculate the total amount of philanthropic gifts received by PeaceHealth from the San Juan Community Hospital Committee no later than the opening day of the
.combined clinic/hospital facility that were designated or used for the purchase, improvement and annexation of land and the original construction and equipping of the combined clinic/hospital facility (the "Original Philanthropy") .. The Original. Philanthropy shall not include any amount of philanthropic gifts that were designated or used for the purchase, improvement and annexation of land that PeaceHealth shall have sold to the District and the construction and equipping of the EMS or other facilities that Peace Health shall have sold to the District.

Step Two shall be to create a fraction (the "Fraction of Philanthropic Contribution") in which the numerator shall be the Original Philanthropy and the denominator shall be the total amount of money expended to fund the purchase, improvement and .annexation of land (excluding any land that shall have been' sold to the District for the EMS facility) and the original construction and equipping of the combined clinic/hospital facility.

Step Three shall be to multiply the Fraction of Philanthropic Contribution times the total cumulative losses incurred by Peace Health in its operation of the combined clinic/hospital facility pursuant to this Agreement, the result of which shall be calledthe "Attributed Losses". For purposes of this calculation, the total cumulative losses incurred by PeaceHealth shall mean the total cumulative losses incurred by PeaceHealth after taking into consideration the Annual Subsidy payments made by the District pursuant to the terms of this Agreement.

Step Four shall be to subtract the Attributed Losses from the Original Philanthropy, with the any positive result constituting the Philanthropy Credit and any negative result being disregarded.

2.2.3.2. For purposes of illustrating the application of the calculations described in section 2.2.3.1, above, the following example is provided. Assume that the amount of Original Philanthropy were $10 million; the total amount of money expended to purchase, improve and annex land and to fund the original construction and equipping of the combined clinic/hospital facility were $30 million and the total cumulative losses incurred by PeaceHealth in its operation of the combined clinic/hospital facility pursuant to this Agreement were $6 million. Under these assumed facts, Step one would result in an amount of Original Philanthropy of $10 million. In Step two, the Fraction of Philanthropic Contribution would be 33% ($10 million divided by $30 million), In Step three the Attributed Losses would be $2 million (33% x $6 million). In Step 4 the Attributed Losses of $2 million would be subtracted from the Original Philanthropy of $10 million, which would result in a Philanthropy Credit of $8 million.

SECTION 3
LIABILITIES AND INSURANCE

3.1 No Obligation by Peace Health for Prior Expenses and Claims. Regardless of when they shall be submitted or made, PeaceHealth shall have no obligation for expenses or claims of any nature that shall have arisen or may arise in the future related to operation of the liMe or the condition of the land or building where it is located. This provision shall apply to all claims of any nature whatsoever, including, but not limited to, c1inicalliabHity claims, claims arising from the construction, operation or condition of the buildings and adjacent grounds, environmental liabilities, workers compensation, unemployment compensation, sick leave, vacation pay, retirement benefits, Social Security benefits, or any other employee benefits payable to or for employees. The District agrees to defend and hold PeaceHealth harmless from all such claims.
3.2 No Obligation by the District for Expenses and Claims Related to the Combined Clinic/Hospital Facility. Except for its Annual Subsidy obligation set forth in section 2.1.2 and its Shortfall obligation set forth in section 2.1.2.4, above, and regardless of when they shall be submitted or made, the District shall have no obligation for expenses or claims of any nature related to operation of the combined clinic/hospital facility or the condition of the land or building where it is located. This provision shall apply to all claims of any nature whatsoever, including, but not limited to, clinical liability claims, claims arising from the construction, operation or condition of the' buildings and adjacent grounds, environmental liabilities, workers compensation, unemployment compensation, sick leave, vacation pay, retirement benefits; Social Security benefits, or any other employee benefits payable to or for employees. Peace Health agrees ~o defend and hold the District harmless from all such claims.
3.3 Responsibilities for Future Liabilities. Each of the Parties hereto agrees to be liable for its own conduct and its obligations under this Agreement. In the event that loss or damage results from the future conduct of more than one Party, each Party agrees to be responsible for its own proportionate share of the claimant's damages under the laws of the State of Washington.
3.4 Purchase of Tail Insurance by the District. By or before the time of closing the
IIMC, the District shall have purchased tail insurance coverage on behalf of the IIMC . and all physicians employed there for general liability, employment practices liability and entity and individual professional liability.
3.5 Purchase of Construction Insurance by PeaceHealth. PeaceHealth shall purchase or self-insure a commercially reasonable policy of construction insurance to protect against loss of the combined clinic/hospital buildings, the EMS building and their contents prior to issuance of the occupancy permit.
3.6 Purchase of Property Insurance by PeaceHealth - PeaceHealth shall purchase or self-insure a commercially reasonable policy of all risk property insurance to protect against loss of the combined clinic/hospital buildings and their contents following issuance of the occupancy permit.
3.7 Purchase of General Liability Insurance by PeaceHealth. PeaceHealth shall purchase or self-insure general liability insurance for the combined clinic/hospital facility and operations; provided that such insurance shall have annual limits of not less than one million dollars ($1,000,000) per claim and three million dollars ($3,000,000) aggregate.
3.8 Purchase of Professional Liability Insurance by PeaceHealth. PeaceHealth
. shall purchase or self-insure professional liability insurance for the clinical care it provides through the combined clinic/hospital facility; provided that such insurance shall have annual limits of not less than one million dollars ($1,000,000) per claim and three million dollars ($3,000,000) aggregate.

SECTION 4
TERM & TERMINATION OF THE AGREEMENT

4:1 Initial Term. Unless sooner terminated in accordance with its provisions, this Agreement shall remain in effect for a period of fifty (50) years after the Effective Date; provided that at any time seven years after the Effective Date PeaceHealth shall have the right at will to provide three years written notice of termination and at the expiration of such three-year notice period the Agreement shall automatically terminate. (For example, the earliest a PeaceHealth termination could be effective pursuant to such notice would be ten years after the Effective, Date.)
4;2 Termination Due to External Events. At any time between May 1,2010 and September 1, 2010, PeaceHealth shall have the right to terminate this Agreement in the event:
4.2.1 Peace Health shall not have received from the State of Washington a letter of intent to issue a certificate of need ("CON") for the combined clinic/hospital facility, any portion of it or any services to be provided in it . that require such a CON; or
4.2.2 Peace Health shall not have received philanthropic donations, and/or
pledges for donations that in its sole discretion it deems reliable, committed and available in support of and on a timeline consistent with Peace Health's construction and equipping needs of the combined clinic/hospital facility in an amount of not less than ten million dollars ($10,000,000.00 USD), inclusive of any donations related to PeaceHealth's purchase of the real estate for the combined clinic/hospital facility or the fair market value of real estate that may have been donated for such purpose and inclusive of any donations related to annexation to the city of Friday Harbor and zoning; provided that Peace Health agrees thatthe earliest any pledges for subsequent donations shall be due and payable will be sixty days after PeaceHealth shall have made its decision hereunder; or
4.2.3 There shall have been a material adverse change in the qualifications for, or reimbursement resulting from, designation by CMS and the State of Washington as a critical access hospital or a hospital based physician clinic; or
4.2.4 PeaceHealth shall have made a good faith determination, in its sole discretion, that it cannot access the tax-exempt bond market at acceptable rates and on acceptable terms in order to secure financing for the combined clinic/hospital facility; or
4.2.5 The District shall have materially reduced the core operation of the IIMC from what it was at the time of executing this Agreement; or
4.2.6 PeaceHealth has not received a purchase and sale agreement for the land on which the combined clinic/hospital facility shall be built that, in PeaceHealth's sole discretion, is satisfactory; or
4.2.7 PeaceHealth has not received an annexation agreement from the City of Friday Harbor that, in PeaceHealth's sole discretion, is satisfactory.

The dates set forth above may be amended upon mutual written agreement between the Parties. -.

4.3 Termination for Cause. Either Party may terminate this Agreement in the event the other Party has failed to perform any material term or condition of this Agreement, if such failure has continued for one hundred and five (105) days after the Party seeking termination has delivered formal written notice pursuant to section 6.1, below, of intent to mediate such failure to the other Party.
4.4 Violation of Law or Placing Tax-Exempt Status in Jeopardy. In the event the
performance by either Party of this Agreement should be determined by a state or federal court or governmental agency to be in violation of any statute, ordinance, or be otherwise deemed illegal ("Jeopardy Event"); or, in the event that counsel to PeaceHealth shall opine that this Agreement or any provision of it would place PeaceHealth's tax-exempt status or the tax-exempt status of any current or future PeaceHealth debt instruments in jeopardy ("Jeopardy Event"); then the Parties shall use their best efforts to meet and attempt to negotiate an amendment to this Agreement to remove or negate the effect of the Jeopardy Event. In the event the Parties are unable to negotiate such an amendment, despite their best efforts to db so, within one hundred and twenty (120) days following written notice by either Party of the Jeopardy Event, then either Party may terminate this Agreement; provided that the Parties will use best efforts to transition the responsibilities under this Agreement so as to maintain the continuity of quality patient care through the combined clinic/hospital facility to the community.
4.5 Material Change in Federal Healthcare Reimbursement System. In the event that a material change in the federal healthcare reimbursement system were enacted such that revenue received by PeaceHealth for services rendered through the combined clinic/hospital facility were to decrease by twenty-five (25%) or more during a period of twenty-four months following the change, when compared to the twenty-four months preceding the change, PeaceHealth may terminate this Agreement upon three years written notice. In the event that a material change in the federal healthcare reimbursement system were enacted such that revenue received by Peace Health for services rendered through the combined clinic/hospital facility were to increase by twenty-five (25%) or more during a period of twenty-four months or less, when compared to the twenty-four months preceding the change, Peace Health agrees to utilize the net revenue from such enhanced funding solely for the purpose of providing healthcare in the District.

SECTION 5
REPRESENTATIONS AND WARRANTIES

5.1 District Representations and Warranties. The District represents and warrants as of the date hereof and during the term of this Agreement that:
- 5.1.1 Organization and Qualification. -It is a public hospital district duly organized, validly existing and qualified to conduct its business affairs under the laws of the State of Washington.
5.1.2 Power and Authority. It has the requisite power and authority to execute and deliver this Agreement and the Lease of the EMS facility (the "Lease") and to consummate the transactions contemplated in this Agreement and the Lease.
5.1.3 Authorization. The execution, delivery, and performance of this Agreement and the Lease by the District have been duly authorized pursuant to all necessary action on the part of the District. Specifically, the District has validly adopted resolutions by the Board of Commissioners approving the execution, delivery and performance of this Agreement, the Lease and the transactions contemplated in them in accordance with all applicable laws.
5.1.4 No Additional Vote or Consent Required. No vote, consent, approval, authorization, order, registration or qualification of or with any court, regulatory authority, other governmental body or any other third party, including . residents of the District, is required for the consummation of the actions to be taken by the District in this Agreement or the Lease.
5.1.5 Binding and Enforceable Obligations. This Agreement and the Lease, once they have been duly executed and delivered by both Parties, are valid and binding obligations of the District, enforceable in accordance with their respective terms. 19
5.1.6 No Violation. Neither the execution and delivery of this Agreement and the Lease nor the consummation of the transactions contemplated in them will (a) violate any provision of the District's organizational documents or
(b) violate any judgment, decree or order of any federal, state, or local. court, regulatory authority or other governmental body, or any statute, rule or regulation, applicable to the District.
5.1.7 Litigation. There are no actions, suits, proceedings, or investigations of any nature pending or, to the District's knowledge, threatened, against it or any of the assets. To the District's knowledge, there is no basis for any such action, suit, proceeding or investigation. The District is not subject to or in default under any outstanding judgment, order, writ, injunction or decree of any court or of any governmental agency or instrumentality, and there is no such judgment, order, writ, injunction, or decree of any kind in effect enjoining or restraining the District from taking any action of any kind.
5.1.8 Continuing Operation of the IIMC. The District has, and will continue until time of closure as provided in section 2.1.6, above, operated the IIMC in its normal and ordinary course, in accordance with commonly accepted business practices for medical clinics ..
5.1.9 No Material Change to IIMC Core Operations. Until time of closure as provided in section 2.1.6, above, the District shall not materially reduce the core operation of the IIMC from what it was at the time of executing this Agreement.
5.2 PeaceHealth Representations and Warranties. PeaceHealth represents and
. warrants as of the date hereof and during the term of this Agreement that:
5.2.1 Organization and Qualification. It is a non-profit corporation duly organized, validly existing and qualified to conduct its business affairs under the law.
5.2.2 Power and Authority. It has the requisite power and authority to execute and deliver this Agreement and the Lease and to consummate the transactions contemplated in this Agreement and the Lease.
5.2.3 "Authorization. The execution, delivery, and performance of this Agreement and the Lease by the Peace Health have been duly authorized pursuant to all necessary action on the part of PeaceHealth. Specifically, PeaceHealth has validly adopted resolutions by the Whatcom' Region Governing Board and the PeaceHealth Board of Directors approving the execution, delivery and performance of this Agreement, the Lease and the transactions contemplated in them in accordance with all applicable laws.
5.2.4 No Additional Vote or Consent Required. As of the date hereof, no vote, consent, approval, authorization, order, registration or qualification of or with any court, regulatory authority, other governmental body or any other third party is required for the consummation of the actions to be taken by Peace Health in this Agreement or the Lease.
5.2.5 Binding and Enforceable Obligations. This Agreement and the Lease, once they have been duly executed and delivered by both Parties, are valid and binding obligations of PeaceHealth, enforceable in accordance with their respective terms.
5;2.6 No Violation. Neither the execution and delivery of this Agreement and the Lease nor the consummation of the transactions contemplated in them will . (a) violate any provision of the articles or bylaws of Peace Health or (b) violate any judgment, decree or order of any federal, state, or local court, regulatory authority or other governmental.
5.2.7 Litigation. There are no actions, suits, proceedings, or investigations of any nature pending or to the PeaceHealth's knowledge threatened against it or any of the assets that would prevent if from performing its obligations set forth in this Agreement. Peace Health is not subject to or in d~fault under any outstanding judgment, order, writ, injunction or decree of any court or of any governmental agency or instrumentality, and there is no such judgment, order, writ, injunction, or decree of any kind in effect enjoining or restraining PeaceHealth from taking any action required by this Agreement.
5.2.8 Tax Exemption. PeaceHealth is exempt from federal income taxation under Section 501 (c) (3) of the Code and is not a private foundation as defined in Section 509 of the Code.

SECTION 6
DISPUTE RESOLUTION
6.1 Mediation. In the event of any alleged breach of this Agreement the Parties shall,
within fifteen (15) days of one or both Parties giving the other notice of intent to mediate ("Notice"), designate a neutral third party ("Mediator"). If the Parties cannot agree on a Mediator within such fifteen (15) day period, they shall submit the matter to the Judicial Dispute Resolution organization in Seattle, Washington and agree to utilize the services of a Mediator assigned by that organization. The Mediator shall facilitate discussions between the Parties in an effort to reach a mutually acceptable agreement and the venue for mediation shall be Seattle, Washington. The Parties shall share equally the cost of the Mediator. If the Parties are unable to reach an agreement for whatever reason within ninety (90) days following the date of the Notice, either may proceed to binding arbitration.
6.2 Arbitration. In the event of any dispute under this Agreement, the Parties agree to binding arbitration in Seattle, Washington in accordance with the Commercial Arbitration Rules of the American Arbitration Association and with discovery being governed by the Federal Rules of Civil Procedure applicable in the United States District Court for the Western District of Washington. One arbitrator will be named by each party and a third neutral arbitrator will be named by the arbitrators so chosen. Judgment upon the award rendered by the arbitrators may be entered into the judgment docket of any court having jurisdiction thereof. The cost of arbitration shall be shared equally by the parties to it. Each party shall be solely responsible for its attorneys' fees, if any. The obligations set forth under this section shall survive the termination or expiration of this Agreement.

SECTION 7
MISCELLANEOUS. PROVISIONS

7.1 Independent Medical Decision Making. The Parties acknowledge and agree that, subject to the requirements set forth in their employment or: contract agreements concerning compliance with the medical standard of care and compliance with law, the professional clinical personnel whom Peace Health employs or with whom it contracts for services shall be responsible for and shall have complete authority, responsibility, supervision and control over the provision of all medical care provided at the combined clinic/hospital facility.
7.2 Relationship of the Parties. In the performance of this Agreement, the
relationship created between Peace Health and the District is strictly that of independent contractors. Nothing contained herein shall be construed as creating a partnership or joint venture between the Parties, nor should any employee of the District be considered an employee or agent of PeaceHealth, and no employee of PeaceHealth should be considered an employee or agent of the District. Neither Party, nor any employee of either Party, shall have any claim under this Agreement or otherwise against the other Party for workers compensation, unemployment compensation, sick leave, vacation pay, retirement benefits, Social Security benefits, or any other employee benefits payable for employees of such other Party.
7.3 Applicable Law. This Agreement shall be governed by and interpreted in accordance with Washington State law. Any State or Federal action arising under this agreement shall be filed in Seattle, Washington; provided, however, all suits brought against the District by Peace Health shall be brought in San Juan County to the extent required by RCW 70.44.060(8) or successor legislation.
7.4 Expenses. Whether or not the transactions contemplated by this Agreement are consummated and except as provided in other written documents between the Parties, the District and Peace Health shall each pay its own fees and expenses incident to the negotiation, preparation, execution and performance of this Agreement, including the fees and expenses of its own legal counsel, accountants, and other experts.
7.5 Binding Effect. This Agreement shall bind and inure to the benefit of the parties and their respective successors and permitted assigns.
7.6 Entire Agreement; Amendments. This Agreement and the Lease and their attachments referred to herein (all of which are incorporated in this Agreement by reference) contain the entire agreement between the Parties with respect to its subject matter and supersede any and aI/ previous negotiations, commitments and agreements, whether written or oral. This Agreement cannot be altered or otherwise amended except by a written instrument signed by both Parties.
7.7 Force Majeure. Neither Party shall be liable nor deemed to be in default for any delay or failure in performance under this Agreement or other interruption of service or employment resulting; directly or indirectly, from acts of God, civil or military authority, acts of public enemy, war, accidents, fires, explosions, earthquakes, tsunamis, floods, failure of transportation, machinery or supplies, vandalism, strikes or other work interruptions by Peace Health or its employees or any other cause beyond the reasonable control of either Party; provided that both Parties shall make good faith efforts to perform under this Agreement in the event of any such circumstance.
7.8 Headings; Construction. Headings and subheadings in this Agreement are inserted for convenience and reference only and are not to be considered in the construction of the provisions of this Agreement. This Agreement shall apply to the Parties according to the context and without regard to the number or gender of words or expressions used in this Agreement.
7.9 Notices. Any and all notices or other communications provided for in this Agreement shall be in writing and shall be deemed to have been given when presented personally, as documented by a contemporaneous affidavit of service, or when deposited in the United States mail, postage prepaid, by registered or certified mail, return receipt requested, addressed to the Parties as follows (or to such other address as may be designated by a party in a written notice given in accordance with this Section 7.9).

If to PeaceHealth:
Nancy Steiger
Regional CEO/CMO and Senior Vice President clo St. Joseph Hospital
2901 Squalicum Parkway
Bellingham, Washington 98225
With a copy to:

Stuart P. Hennessey Senior V.P. of Legal Affairs clo PeaceHealth
14432 SE Eastgate Way, Suite 300 Bellevue, Washington 98007-6412

If to the. District:
Beth Gieger, Superintendent
clo San Juan County Public Hospital Dist. NO.1 550 Spring Street
Friday Harbor, San Juan Island, WA

With a copy to:
Bradley Berg
Foster Pepper PLLC 1111 3rd Ave., #3400
Seattle, Washington 98101-3299

7.10 Waiver. No waiver of any right of any party hereto shall be effective unless set out in a writing signed by each party hereto.
7.11 Authority. Each party to this Agreement represents that the execution, delivery and performance by that party of this Agreement have been duly authorized by all necessary action of that Party's governing body. A copy of the resolution of the District commissioners is attached hereto as Attachment 3A and a copy of the resolution adopted by the Peace Health board of directors is attached hereto as Attachment 38.
7.12 Third Parties. It is the express intent of the District and PeaceHealth that this Agreement does not create any rights or expectations in any persons or entities other than the District and PeaceHealth, as a corporation, This Agreement does not create any rights or expectations in any employees or officers of the District.
7.13 Assignment. The District agrees that PeaceHealth may assign this Agreement to any of its affiliated entities, including a member corporation, limited liability company, subsidiary or to a successor corporation with which it may merge, which it may acquire or by which it may be acquired; provided, that such entity shall be a not-for-profit entity with a charitable purpose functionally equivalent to PeaceHealth's and the assignee's operating experience and financial stability shall be reasonable similar to or better than PeaceHealth's. PeaceHealth agrees that the District may assign this Agreement to another municipal corporation; provided that such entity shall have a tax base and financial resources equivalent to or better than the District's.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in duplicate original:
SAN JUAN COUNTY PUBLIC HOSPITAL DISTRICT NO.1