dealmakers’ workshop: health care services investing

Dealmakers’ Workshop:Health Care Services Investing

February 26, 2013

@ACGPhilly with #ACGPHL

Sponsored by

www.acg.org/philadelphia

The fiscal problems in the U.S.

Barbara ShanderPartner, Morgan Lewis

andProgram Chair, ACG Philadelphia

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Welcome & Introductions

#ACGPHL



Glenn BarenbaumSenior Manager

- Transaction Advisory ServicesErnst & Young

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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 EconomouManager Director

Curtis Financial Group, LLC

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Health Care Services Mergers & AcquisitionsTotal Announced Transactions By Year



Tim JohnsonManager Director

England & Company

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England & Company

► 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


has completed a recapitalization and management buyout led by

has led the buyout of

has completed a recapitalizationled by

has been acquired byhas been acquired by

has acquired

has been acquired by

has acquired

has acquired

England & Company – Recent Healthcare Transactions


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 Trends / Issues:► Emphasis on prevention► Continued reimbursement pressures► Shift towards outcomes based-payments► Pushing care to the lowest cost provider


US Healthcare Spending

► $ 2.8 trillion market (17%+ of the US economy)► Healthcare spending projected to grow ~6% per year

over the next decade

National Health Expenditure 2005 – 2021 ($Billions)National Health Expenditure 2005 – 2021 ($Billions)

Source: CMS


Aging US Population

34,991,753 36,695,904

40,243,713

46,790,727

54,631,891

63,523,732

71,453,471

0mm

10mm

20mm

30mm

40mm

50mm

60mm

70mm

80mm

Census 2000 Projection 2005 Projection 2010 Projection 2015 Projection 2020 Projection 2025 Projection 2030

US Population Over 65US Population Over 65

Source: US Census Bureau


US Healthcare Spending by Sector

US Health Care Spending by Sector (2011) US Health Care Spending by Sector (2011)

Source: CMS



Russell PedersonManaging Principal

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


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.

• 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


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

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


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



Dan ShoenholzPartner/Principal

Ernst & Young Commercial Advisory & Healthcare Practice

Commercial Due DiligenceHealthcare Considerations

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Introduction

► E&Y: Transaction Advisory Services business

► Focused Healthcare and Life Sciences professionals

► Dedicated Commercial Advisory Services Team – diligence/strategy

►Experience working on hundreds of healthcare/life sciences deals


Healthcare: Commercial Diligence Themes

► Fragmented/local markets

► Multiple stakeholders with evolving decision-making dynamics

► Regulation and regulatory change

► Funding and reimbursement pressures

► Consolidation/integration of business models

► Revenue/operational benefits to scale


Industry Backdrop/Key Unique CDD Issues:Providers

► Risk shifts to providers

► Industry consolidation

► IT and Services outsourcing

► Labor availability

► Demographics

► 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

Driver Unique Commercial Diligence Issues


Industry Backdrop/Key Unique CDD Issues:Providers

► Changes in buying power (docs/administrators)

► Same store sales/facility-level analysis

► Procedure mix/trend

► Local market dynamics (competition/physician)

► Regulatory changes (federal/state)

► Decision-making process within provider networks► Relative significance of key stakeholders

► Unit-level performance and trends► Environmental drivers of performance

► Pricing and setting sustainability across modality/acuity of treatment

► Local market share► Competitive positioning/differentiation► Physician availability and affiliation► New entrants

► Medicaid/Medicare pricing and coverage► CON/site approvals



Industry Backdrop/Key Unique CDD Issues:Payers

► Regulatory changes

► HCIT

► Consolidation

► 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

► Local market share► Effectiveness of provider network► New entrants

► MLR/ALR trending and peer comparisons



Health Care CDD Best Practices

►Physician and administrator perspective on buying process: understand relative influence, identify key physician influencers

►Local (MSA)-level perspective: granular analysis of patient/provider demographics, competition, payer mix, regulations

►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!



Mike GaffneyCo-Founder & Managing Director

EDG Partners

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EDG Partners

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Singular Focus onHealthcare

Operating Experience

Strategic Partners

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.

Having founded and run public and private healthcare companies, EDG appreciates what it means to “make payroll” and navigate the operational challenges of growth.

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.


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 SchneiderChief Operating and Credit Officer

Gemino Healthcare Finance

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


Upcoming Events

Mark Your Calendar acg.org/philadelphia

March 21, 2013March Breakfast: Private Equity & Human Capital

April 4, 2013Young DealMakers’ Happy Hour

April 11, 2013Corporate Executives’ Dinner - Human Capital Integration

April 18, 2013The Role of the Family Office in M&A

April 22 - 25, 2013

InterGrowth - Orlando, Fl

May 16, 2013May Breakfast: Annual Lenders’ Panel Discussion

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dealmakers’ workshop: health care services investing

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sectorus health care

laboratory services

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