Transcript Slide 1

Dealmakers’ Workshop:
Health Care Services Investing
February 26, 2013
@ACGPhilly with #ACGPHL
Sponsored by
Welcome & Introductions
Barbara Shander
Partner,
Morganin
Lewis
The fiscal
problems
the U.S.
and
Program Chair, ACG Philadelphia
#ACGPHL
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www.acg.org/philadelphia
Glenn Barenbaum
Manager
The fiscalSenior
problems
in the U.S.
- Transaction Advisory Services
Ernst & Young
#ACGPHL
3
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DealMaker Panelists
Tim Johnson, England & Company
Russell Pederson, Sellers Dorsey
Dan Shoenholz, Ernst & Young
Tom Schneider, Gemino Healthcare Finance
Mike Gaffney, EDG Partners
Moderator:
Steve Economou, Curtis Financial
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Steve Economou
Director
The fiscalManager
problems
in the U.S.
Curtis Financial Group, LLC
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Health Care Services Mergers & Acquisitions
Total Announced Transactions By Year
# of Deals
$35,000
600
530
513
$30,000
500
418
$25,000
400
$20,000
269
$33,327
253
300
$15,000
$20,361
$10,000
$5,000
# of Deals
Aggregate Trans Size ($ in millions)
Aggregate Value of Deals with Reported Value
200
$22,111
100
$8,302
$4,846
$0
0
2008
2009
2010
2011
2012
Source: Capital IQ and Curtis Financial Group research
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Tim Johnson
Director
The fiscalManager
problems
in the U.S.
England & Company
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England & Company
►
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England & Company – middle market focused investment bank
► Offices in New York and Washington DC
Our principals apply vast transactional experience and deep industry
knowledge to deliver exceptional results for our clients
Our investment bankers have been involved as agent, principal or
advisor in:
► Dozens of M&A transactions worth more than $5 billion in total
consideration
► More than 100 private placements aggregating over $10 billion in
capital raised
We primarily focus our resources on the following industries:
► Healthcare Services & IT (Laboratory services a key focus area)
► Software & Information Technology
► Energy & Infrastructure Technology
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England & Company –
Recent Healthcare Transactions
has acquired
has led the buyout of
has been acquired by
has completed a recapitalization
led by
has completed a recapitalization
and management buyout led by
has acquired
has acquired
has been acquired by
has been acquired by
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Why Invest in Healthcare?
►Large
and Rapidly Growing Market
►Favorable demographic trends (aging population)
►ACA (“Obamacare”) projected to cover additional ~30 million
►Highly fragmented sub-sectors with natural acquirers
►Advances in IT can level the playing field for smaller companies
►High-level
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Trends / Issues:
Emphasis on prevention
Continued reimbursement pressures
Shift towards outcomes based-payments
Pushing care to the lowest cost provider
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US Healthcare Spending
National Health Expenditure 2005 – 2021 ($Billions)
►
►
$ 2.8 trillion market (17%+ of the US economy)
Healthcare spending projected to grow ~6% per year
over the next decade
Source: CMS
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Aging US Population
US Population Over 65
80mm
71,453,471
70mm
63,523,732
60mm
54,631,891
50mm
46,790,727
40,243,713
40mm
34,991,753
36,695,904
30mm
20mm
10mm
0mm
Census 2000
Projection 2005
Projection 2010
Projection 2015
Projection 2020
Projection 2025
Projection 2030
Source: US Census Bureau
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US Healthcare Spending by Sector
US Health Care Spending by Sector (2011)
Source: CMS
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Russell Pederson
Managing
Principal
The fiscal
problems
in the U.S.
Sellers Dorsey
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Role of Government in Healthcare
•
Government is the principal driver of the healthcare industry – As purchaser of health plans, payor of providers,
financer of coverage, and regulator
•
Public sector is largest payor of:
 Health insurance premiums
 Hospital care
 Drugs, biologics, diagnostics, devices, and supplies
 Physician, clinics, and other ambulatory care
 Nursing facilities, home health, and other long-term services and supports
•
In many sub-segments – biologics, diagnostics, long-term care – the public sector is a monopsony
•
The government’s market influence goes far beyond reimbursement. Federal and state policy drive virtually
every aspect of the industry:
•
Pricing, coverage and benefit design, business arrangements, sales and marketing, operations, clinical care,
innovation, and technology
•
Affects every player – providers, manufacturers, and insurers
•
Medicare and Medicaid policies – coverage decisions, reimbursement methods, performance reporting, and care
delivery expectations – drive the marketplace. Private payors typically follow the government’s lead.
•
State and local government spend more on health care than private employers
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Opportunities
•
Over $1.8 trillion in new federal and state-funded premium revenue in first 10 years (2014-2023).
•
Health Insurance Exchanges:
 New, complex, highly regulated marketplace
 Will replace 80%+ of current individual insurance market
 Could replace over 50% of small business market
 Significant interaction with Medicaid market
•
Medicaid expansion:
 ACA Medicaid expansion, streamlined eligibility, woodwork effect, and crowd out will increase Medicaid
enrollment by 20 million+
 In revenue, Medicaid health plan market will exceed size of Medicare Advantage market
•
Medicare-Medicaid integration for dual eligibles:
 $350 billion market – only 15% of now under risk
 Huge opportunity for health plans.
 Additional opportunities for companies in care management / IT spaces.
•
•
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Information Technology / Information Services:
States primed for IT transformation
Traditional service providers struggling to adapt
•
Managed long-term care
•
Acquisition non-profit players (health plans and health systems) and conversion to for-profit status
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Risks

Medicare and Medicaid are fiscally unsustainable:
 Further budget cuts are inevitable
 High risk of technical, budget driven changes with major implications for specific sectors

Significant price competition in Exchange market

Premium sticker shock under adjusted community rating

Complexity and uncertainty of ACA changes:
 ACA is unprecedented in size, scope, and complexity.
 No precedents, many scenarios
 “Cognitive risk” where decision makers freeze and miss opportunities
 Requires nimble, policy-savvy strategy
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Providers are slow to adapt their business model and operations. Under significant pressure. Lack
capabilities, expertise, alignment, data, and capital

Lack of expertise navigating federal and state government and public programs:
 Most healthcare businesses remain dangerously unsophisticated
 Push back on need to understand complexity, politics
 Boards lack experts in public programs
 Due diligence more complex, specialized
 Most analysts are mile wide and inch deep

Health insurers risk becoming regulated utilities. Low but predictable margins

Compliance risks will increase for all players
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Trends

Healthcare cost containment will become top priority. This includes:
 Eliminating unnecessary spending, especially preventable events
 Accelerated payment reform. New incentives for providers and consumers to reduce costs, reward
efficiency.
 Fraud and abuse reduction – Continued, expanded
 Pricing based on acquisition cost

Strong, intense focus on data and evidence throughout marketplace:
 Value of products and services
 Decision making
 Coverage and reimbursement
 Transparency of clinical and economic performance

New framework for reimbursement:
 Continued, faster efforts to replace fee-for-service with performance-based reimbursement
 Move from volume metric (volume and unit price) to value (outcomes, quality, net costs)
 Fundamental change to financial paradigm for providers. Significant impact on manufacturers

Political gridlock between White House and Congress
 Major federal legislative changes will be difficult and rare
 Power will shift to federal agencies (CMS, OMB) and States
 Policies affecting industry will be made through budgets, rulemaking, waivers, and sub-regulatory
guidance
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Dan Shoenholz
Partner/Principal
Ernst & Young Commercial Advisory
& Healthcare
The fiscal
problemsPractice
in the U.S.
Commercial Due Diligence
Healthcare Considerations
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Introduction
►
E&Y: Transaction Advisory Services business
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Focused Healthcare and Life Sciences professionals
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Dedicated Commercial Advisory Services Team – diligence/strategy
►Experience working on hundreds
of healthcare/life sciences deals
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Healthcare: Commercial Diligence Themes
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Fragmented/local markets
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Multiple stakeholders with evolving decision-making dynamics
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Regulation and regulatory change
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Funding and reimbursement pressures
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Consolidation/integration of business models
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Revenue/operational benefits to scale
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Industry Backdrop/Key Unique CDD Issues:
Providers
Driver
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Risk shifts to providers
Unique Commercial Diligence Issues
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Industry consolidation
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IT and Services outsourcing
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Labor availability
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Demographics
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Target’s payer mix
Pricing/reimbursement trends
Validation of efficiency potential
Payer concentration in local markets
Threats/opportunities from provider
consolidation/”ACOs”
Roll-up opportunities
Current/future propensity to outsource services
Pricing/spending environment
Customer ability to/interest in in-sourcing
Labor pools for qualified professionals
Accreditation requirements
Wage trends
Population trends
Disease incidence/prevalence
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Industry Backdrop/Key Unique CDD Issues:
Providers
Driver
Unique Commercial Diligence Issues
Changes in buying power
(docs/administrators)
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Same store sales/facility-level
analysis
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Procedure mix/trend
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Pricing and setting sustainability across modality/acuity of
treatment
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Local market dynamics
(competition/physician)
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Local market share
Competitive positioning/differentiation
Physician availability and affiliation
New entrants
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Regulatory changes (federal/state)
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Decision-making process within provider networks
Relative significance of key stakeholders
Unit-level performance and trends
Environmental drivers of performance
Medicaid/Medicare pricing and coverage
CON/site approvals
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Industry Backdrop/Key Unique CDD Issues:
Payers
Driver
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Regulatory changes
Unique Commercial Diligence Issues
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HCIT
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Consolidation
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Local market dynamics
(competition/physician)
Business efficiency
Impact of regulations on patient population and
reimbursement
Opportunities for new models (ACOs, Health Exchanges)
Opportunities for business models focused around data/
analytics
Competitive differentiation through HCIT
Provider landscape
Opportunities/threats from payer-provider consolidation
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Local market share
Effectiveness of provider network
New entrants
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MLR/ALR trending and peer comparisons
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Health Care CDD Best Practices
► Physician and administrator
perspective on buying process: understand
relative influence, identify key physician influencers
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Local (MSA)-level perspective: granular analysis of patient/provider
demographics, competition, payer mix, regulations
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Location-level analysis: define winning formula and assess ability to
replicate
► Regulatory
perspective (Federal and sometimes state): can determine
attractiveness of local market/overall business model
► Benefits
to scale and ability to achieve it: efficiencies, available targets
Begin to assess critical issues pre-LOI, and front-load them in the post-LOI
process, to get an early view on valuation in front of deal-killer issues!
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Mike Gaffney
Co-Founder
& Managing
The
fiscal problems
in Director
the U.S.
EDG Partners
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EDG Partners
Singular Focus on
Healthcare
By committing ourselves exclusively to healthcare, EDG offers a
well-defined view of the industry, its future, and how
companies can excel. In addition, EDG offers relationships built
over 65 years of healthcare experience.
Operating
Experience
Having founded and run public and private healthcare
companies, EDG appreciates what it means to “make payroll”
and navigate the operational challenges of growth.
Strategic Partners
Because we view an investment as a partnership, EDG offers
ourselves as a source of strategic insight. Leveraging EDG’s
investment and operating experience, we seek to be thoughtful
partners helping as needed but making sure we are not an
obstruction to the creativity and leadership occurring within
portfolio company’s.
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Successful Dealmaking in Healthcare
• Back the Jockey – with an eye on the quality of the Horse
• Keen eye on big market participants – especially the government – most
businesses are price takers
• Biggest investment risk – significant volatility; tourists
• Our expectation for the future:
– Change – Obamacare; Retail Health Insurance; Demographics…
– Uncertainty – 2000 pages of legislation; 20% of regulations written;
significant state level variability…
– Opportunity – for businesses that create value
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Tom Schneider
Chief Operating and Credit Officer
Geminoproblems
HealthcareinFinance
The fiscal
the U.S.
Lending to Healthcare Service Companies
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Healthcare Lending
 Impact of Reimbursement Trends and Healthcare Reform on
Provider Financing Needs
 Due Diligence Considerations
 Management Experience
 Regulatory Issues
 AR Valuation/Monitoring Changes in Reimbursement
 Overpayment Liabilities
 QOE Analysis and Clinical Due Diligence
 Structuring/Financial Covenants
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Upcoming Events
Mark Your Calendar
acg.org/philadelphia
March 21, 2013
March Breakfast: Private Equity & Human Capital
April 4, 2013
Young DealMakers’ Happy Hour
April 11, 2013
Corporate Executives’ Dinner - Human Capital Integration
April 18, 2013
The Role of the Family Office in M&A
April 22 - 25, 2013
InterGrowth - Orlando, Fl
May 16, 2013
May Breakfast: Annual Lenders’ Panel Discussion
#ACGPHL
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