industry analysis healthcare services and facilities

INDUSTRY ANALYSIS:

Healthcare Services and Facilities

December 2012

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Ancient philosopher Virgil once said that “Health is the greatest wealth.” This is why humans would do anything to find cure

for their illnesses. In the U.S., healthcare represents the single largest sector within the economy.

The U.S. public expenditure for healthcare has been increasing at a steady pace in the last few decades. From about $250

million in 1980, the health bill rose to over $1 trillion in the mid-1990s. By 2005, health spending was $1.9 trillion. In 2010,

total health expenditures reached $2.5 trillion. This translates to $8,402 per person or 17.9 percent of the nation’s Gross Do-

mestic Product (GDP), up from 17.6 percent in 2009. U.S. health spending is the highest among Organisation for Economic

Co-operation and Development (OECD) countries and almost eight points higher than the OECD average of 9.5 percent. In

the report The New Gold Rush, accounting firm PricewaterhouseCoopers said healthcare spending will represent nearly 20

percent of the U.S. GDP by 2019.

Healthcare services include the prevention, treatment, and management of mental and physical diseases provided by doc-

tors of medicine, health practitioners, nursing and personal care facilities. They also encompass operators of facilities that

these services are performed in such as dental laboratories, hospitals, doctors’ offices, kidney dialysis centers, laboratory

testing services, nursing homes, as well as companies providing clerical services, pharmacy management services, collection

agency services, staffing services and outsourced sales and marketing services.

The country’s healthcare system involves a multi-payer system. Government payers include Medicare and Medicaid. A social

insurance program administered by the government, Medicare provides health insurance coverage to people who are aged

65 and above, as well as those who are under 65 with permanent disabilities. Medicare bills are paid from trust funds. Med-

icaid is the health insurance program administered for people and families with low incomes and resources. Medical bills

under this program are paid from federal, state and local tax funds. The State Children’s Health Insurance Program (SCHIP) is

a health coverage program administered at the state level for children from low-income families and those whose parents do

not qualify for Medicaid. Under military healthcare, the available federal health programs are the Civilian Health and Medi-

cal Program of the Uniformed Services (TRICARE/CHAMPUS), Civilian Health and Medical Program of the Department of

Veterans Affairs (CHAMPVA), and the care provided by the Department of Veterans Affairs (VA).

Corporate payers include employers or workers’ unions that provide employment-based insurance. This type of payment

dominates health insurance coverage in the U.S. There are also self-payers which refer to individuals who directly purchase

health insurance from private insurance providers.

The Major Players. The U.S. healthcare sector encompasses about 800,000 doctors’ offices, emergency care units, hospitals,

nursing homes and social services providers with combined annual revenue of more than $2 trillion. Information on the top

firms follows, with 2011 revenue.

• CVS Caremark Corporation (CVS) – CVS Caremark was formed in 2007 through the merger of CVS/pharmacy and

Caremark. It is an integrated pharmacy services provider, combining a pharmaceutical services company with a phar-

macy chain. As one of the largest pharmacy benefit managers in the U.S., it provides plan sponsors and participants

access to a network of approximately 64,000 pharmacies. Revenue: $107.7 billion.

• Medco Health Solutions –Medco is a leading pharmacy benefit manager with the largest mail order pharmacy opera-

tions in the U.S. It provides pharmacy services for private and public employers, health plans, labor unions and indi-

viduals served by Medicare Part D Prescription Drug Plans. Revenue: $70 billion.

Industry Overview

INDUSTRY ANALYSIS


December 2012 | 2

• Express Scripts –Express Scripts processes pharmaceutical claims for members at network pharmacies and at their

own mail order pharmacies. It manages drug plans for corporations, unions and government agencies including the

TRICARE program of the U.S. Department of Defense. In April 2012, Express Scripts received regulatory approval for its

purchase of Medco for $29 billion. The deal is the largest in pharmacy services in a decade, surpassing the $21.7-billion

merger that formed CVS Caremark. The transaction makes Express Scripts the largest pharmacy benefits company, top-

pling CVS Caremark. Revenue: $46.1 billion.

• HCA Holdings –HCA is the largest operator of private healthcare facilities in the world. The company is comprised of

locally managed facilities that include about 164 hospitals and 106 freestanding surgery centers across 20 stated in

the U.S. and the U.K. In March 2011, HCA listed on the NYSE after raising $3.8 billion in the largest-ever private equity-

backed initial public offering. Revenue: $32.5 billion.

• Community Health Systems (CHS) – CHS is one of the country’s leading operators of general acute care hospitals. Its

affiliates own, operate or lease over 133 hospitals in 29 states. In more than 60 percent of the markets served, CHS-

affiliated hospitals are the sole provider of healthcare services. Revenue: $13.8 billion.

• Tenet Healthcare (THC) –THC owns and operates 49 acute care hospitals in 11 states and 84 outpatient centers. Apart

from acute care, the company’s hospitals offer radiology and respiratory therapy, clinical laboratories, pharmacies, and

operating and recovery rooms. Revenue: $9.6 billion.

• Quest Diagnostics – The 44-year-old company is a leading provider of diagnostic, testing, information and services

in the U.S. It is headquartered in New Jersey, operates in Brazil, Mexico, Puerto and the United Kingdom, and owns a

laboratory in India. Revenue: $7.5 billion.

• DaVita –DaVita is a leading provider of kidney care in the U.S., delivering dialysis services and education to patients

with chronic kidney failure and end stage renal disease. It operates and provides administrative services at 1,642 dialysis

facilities and serves approximately 128,000 patients. Revenue: $6.9 billion.

• Omnicare – The Kentucky-based firm provides pharmaceutical services for senior citizens who live in nursing homes

and assisted-living centers in Canada and the U.S. Catering to the needs of approximately 68,000 patients across 47

states, Omnicare is the largest service provider to long-term care facilities. Revenue: $6.2 billion.

Regulation. Healthcare services in the U.S. are subject to extensive regulation at the federal and state levels. The United

States Department of Health and Human Services oversees the various federal agencies involved in healthcare such as the

Food and Drug Administration, the Centers for Disease Prevention, the Agency of Health Care Research and Quality, the

Agency for Toxic Substances and Disease Registry, and the National Institutes of Health. At the state level, states have their

own health departments.

Revenue. The constant need to prevent illnesses and treat diseases fuels the healthcare services industry. The country’s aging

population and the increasing medicalization of U.S. society are also driving a greater demand for such services. Healthcare

service providers and facilities earn from treating patients and providing other services such as diagnostic testing, pharmacy

benefits management and personal care.

December 2012 | 3

INDUSTRY ANALYSIS


• Depending on who is paying, service providers or facilities are paid using various sources. In 2009, data from the Cent-

ers for Medicare & Medicaid Services (CMS) show that 71 percent of the nation’s health dollar came from private and

government health insurance, 12 percent from out of pocket sources, 7 percent from other third party payers and pro-

grams, 6 percent from investment, and 3 percent from government and public health activities. Of the 71 percent which

came from health insurance, 32 percent was from private health insurers, 20 percent was from Medicare, 15 percent was

from Medicaid (federal, state and local), and 4 percent was from SCHIP and VA.

•

• Private insurers usually pay healthcare bills on the basis of per-diems or fee-for-service schedules. These fees are nego-

tiated yearly between each hospital and each insurance carrier. Under the Medicaid program for the poor and disabled,

hospitals receive either case-based payment, a set amount of dollars per day of in-patient stay (per-diem payments), or

fees for individual services and supplies (fee-for-service payments). For the Medicare program for the elderly, hospitals

are paid a flat fee per hospital case, with a different per-case price for each of around 750 distinct diagnostically related

cases.

•

• Generally, Medicare and Medicaid pay the lowest margins, and sometimes below costs, while private insurance pays

higher margins, and out-of-pocket payers by far pay the highest rates.

•

• Latest Activities. While the healthcare services industry did not escape the recession altogether, it saw a better fate

than most industries. Most of the major players continued to display solid performance when the downturn hit in 2007:

DaVita (7.9 percent), Quest Diagnostics (6.9 percent), HCA Holdings (5.4 percent), and Medco (4.6 percent). At 74.2 per-

cent, CVS Caremark recorded the highest increase in revenue. This is attributed to CVS’ acquisition of benefits provider

Caremark in 2007. CHS saw a whopping $72.7-percent increase in revenue owing to its acquisition of Triad Hospitals

in mid-2007. Its revenue rose from $4.36 billion in 2006 to $7.54 in 2007 after including Triad’s operating results from

July 25, 2007 to December 31, 2007. Among the heavyweights, only Omnicare reported that its revenue declined (-4.2

percent).

•

• Even after the recession worsened in 2008, all leading companies posted increases as companies and individuals con-

tinued to avail of various healthcare services. Express Scripts reported a revenue increase of 19.8 percent, while Medco’s

revenue saw a 15.7-percent increase. In 2009, most of the industry players reported gains. CHS registered the largest

increase (47.9 percent). This growth is attributed to a 44.5-percent increase in total hospital admissions compared with

2007. The increase in admissions resulted from the expansion of the company’s hospital portfolio in 2007 after it ac-

quired Triad. Its acquisition of two hospitals in the fourth quarter of 2008 also boosted admissions. Only Tenet Health-

care (-2.9 percent) and Omnicare (-1.1 percent) saw modest declines.

•

• In 2010, most of the major players saw significant increases in revenue: Medco (10.3 percent), Community Health Sys-

tems (6.9 percent), DaVita (5.5 percent), and HCA Holdings (2.1 percent). Express Scripts almost doubled its revenue

from $24.7 billion in 2009 to $45 billion in 2010, following its $4.7-billion acquisition of NextRx from WellPoint. Only

three heavyweights bucked the trend, reporting modest declines in revenue: CVS Caremark (-2.3 percent), Quest Di-

agnostics (-1.2 percent), and Omnicare (-0.7 percent). Further increases were witnessed in 2011: CVS Caremark (11.8

percent), DaVita (8.6 percent), Community Health Systems (6.4 percent), HCA Holdings (5.9 percent), Tenet Healthcare

(4 percent), Express Scripts (2.5 percent), Quest Diagnostics (1.9 percent), and Omnicare (0.7 percent).

•

• The industry is enjoying growth in revenue that is not connected to economic cycles, which reflects the long-term

growth in healthcare spending. This revenue growth, however, also coincides with increased costs to them, as health-

care costs have spiraled down the line. This unsustainable cost spiral will inevitably result in cost-cutting from both

public and private healthcare payers, and demands for more transparency in pricing will emerge. Furthermore, much of

the growth from industry leaders in recent years is a result of acquisitions, indicating that the industry is consolidating,

bracing for future cuts. The specific areas of the industry that will be hurt the most from this scenario, however, are yet

to be determined.

December 2012 | 4

INDUSTRY ANALYSIS


It is an exciting time for the healthcare services industry as the U.S. is facing health reforms that will affect the number of

people covered by some form of health insurance, the number of people being treated by healthcare providers, as well as the

number and type of healthcare procedures that will be performed. The rapidly changing healthcare industry is also in the

middle of many technological advances that are changing the way medical information is handled. Trends, opportunities,

and threats in this industry follow:

• Medicare Fraud – News of Medicare and Medicaid fraud continue to make headlines. In May 2011, Quest Diagnostics

agreed to pay $241 million to resolve a lawsuit brought by a California competitor that alleged the clinical laboratory

services provider overbilled the state’s Medicaid program. In May 2012, the U.S. Justice Department and the Health

and Human Services Department charged 107 individuals including clinical social workers, doctors, nurses and office

managers for trying to defraud the Medicare healthcare program for the disabled and elderly for approximately $452

million. According to U.S. authorities, this is the largest Medicare fraud sweep to date. Prior to this, the U.S. government

charged 91 people in connection with a host of schemes that sought to defraud Medicare out of $295 million. Since 2007,

the Justice Department has charged more than 1,300 people for falsely billing Medicare more than $4 billion.

•

• Revisiting Medical Malpractice Caps – In the past, medical malpractice caps were seen as a way of limiting the skyrock-

eting costs of malpractice premiums. Recently, a number of states have been revisiting a law that capped malpractice

awards against doctors and hospitals for non-economic damages. In 2010, the states of Georgia and Illinois struck

down a law that limited rewards for malpractice victims. In February 2010, the Illinois Supreme Court overturned the

state’s Medical Malpractice Act of 2005, a law that limited the amount medical malpractice victims could receive for

non-economic damages to $1 million from hospitals and $500,000 from doctors. The court stated that in enacting the

law in 2005, the legislature violated the state Constitution’s separation of powers clause by imposing decisions that

should be reserved for judges and juries. In March 2010, the Georgia Supreme Court made a similar ruling overturn-

ing a state law that limited jury non-economic damages rewards for malpractice victims to $350,000. In a unanimous

decision, the Court held that damage caps violate the right to trial by jury as guaranteed under the Georgia Constitution.

•

• In March 2011, New York Governor Andrew M. Cuomo’s Medicaid reform task force proposed to cap medical malprac-

tice awards for non-economic losses at $250,000. The task force estimated that its proposed medical malpractice dam-

ages cap would save the state government $208.4 million in each of the next four budget years. After opposition from

the New York State Bar Association and other groups, the proposal was dropped. Similarly, in June 2011, North Carolina

passed a bill that limits the amount of non-economic damages that a plaintiff can be awarded in a medical malpractice

lawsuit. Governor Beverly Perdue, however, vetoed the bill shortly after.

•

• In March 2012, U.S. District Judge Rodney Gilstrap of Marshall ruled that a Texas law limiting non-economic damages

in medical malpractice cases to $250,000 is constitutional. The decision ends a four-year legal battle that started in

2008 when a group of medical malpractice victims filed a lawsuit, claiming that the damage award limits violated the

U.S. Constitution’s Fifth Amendment prohibition against the state taking private property not for public use, and the

Fourteenth Amendment’s due process clause.

•

• In April 2012, the Missouri Supreme Court ruled that the state’s cap on non-economic damages is constitutional. The

decision stemmed from a lawsuit filed by Ronald Sanders over the care and eventual death of his wife in 2003. A jury

awarded Sanders $920,745.88 in past economic damages and $9.2 million in past and future non-economic damages

– a total of $10.1 million. The Jackson County Circuit Court then cut the $9.2 million in total non-economic damages to

$1.26 million, in accordance with Missouri’s cap on such damages. The Missouri Supreme Court then ruled to uphold

the decision to limit non-economic damages, but it remanded the case to a lower court, ordering it to recalculate the

non-economic damages that had been awarded to Sanders.

December 2012 | 5

Industry Trends

INDUSTRY ANALYSIS


• Mergers and Acquisitions – In April 2012, the Federal Trade Commission (FTC) approved the merger of healthcare

services heavyweights Express Scripts and Medco. Express Scripts’ $29-billion acquisition of Medco created the largest

pharmacy benefits firm in the U.S. with about $116 billion in revenue.

• To add new offerings to their roster of tests, diagnostics companies and laboratories also are acquiring other firms spe-

cialize in gene-based medical testing, infectious disease and cancer testing, and neurological disease testing. Mergers

and acquisitions are used to expand market access and explore potential revenue generating sources.

• Below are some of the notable transactions in 2011 and 2012.

•

• 2011

- Quest Diagnostics acquired Celera Corp. for $344 million.

- Quest Diagnostics acquired Athena Diagnostics for $740 million.

- Labcorp acquired Clearstone Central Laboratories. (terms undisclosed)

- Express Scripts acquired NextRx for $4.67 billion.

- HCA Holdings agreed to acquire full ownership of HealthONE, a joint venture created it created with the Colo-

rado Health Foundation in 1995. ($1.45 billion)

- HCA acquired the Miami-based Mercy Hospital. (terms undisclosed)

- Tenet Healthcare acquired the Southeastern Spine Institute Ambulatory Surgery Center. (terms undisclosed)

- Tenet Healthcare acquired Imaging Specialists of West Broward LLC. (terms undisclosed)

• 2012

- Express Scripts acquired Medco for $29.1 billion.

- Community Health Systems acquired Moses Taylor Health Care System. (terms undisclosed)

- Labcorp acquired Orchid Cellmark for $85 million.

- CVS Caremark bought the Medicare Prescription Drug Plan (PDP) business of healthcare insurance firm Health-

net. (terms undisclosed)

- HCA Holdings acquired a minority stake in AirStrip Technologies. (terms undisclosed)

- Quest Diagnostics acquired S.E.D. Medical Laboratories. (terms undisclosed)

December 2012 | 6

• Bracing for the Impact of Obamacare – After a long drawn-out debate, the U.S. witnessed the Democratic-led partisan

passage of the historic Patient Protection and Affordable Care Act (PPACA) into law on March 23, 2010. The healthcare

reform package will expand coverage to 32 million Americans who are currently uninsured. It mandates that by 2014,

Americans must have adequate insurance coverage or else pay a fine, called the “individual mandate.” It is estimated

that this move will bring down the number of uninsured Americans from 19 percent in 2010 to 8 percent by 2016.

• It will also close the Medicare prescription drug “donut hole” (the Medicare Part D coverage gap) by 2020. This means

that seniors who hit the donut hole in 2010 will receive a $250 rebate. In 2011, seniors in the gap started receiving a

50-percent discount on brand name drugs. Major player CVS Caremark is working towards acquiring a leading position

in Medicare Part D by growing its Medicare PDP business. In 2011, it purchased the Medicare PDP business of Universal

American. It also bought the Medicare PDP business of HealthNet.

•

• As expected, Obamacare is riddled with controversy. In January 2011, Congress voted 245 to 189 in a Republican-led

partisan vote in favor of repealing the law. A month later, President Obama said he was willing to amend the law to give

states the opportunity to opt out of the legislation’s most controversial provisions, including the “individual mandate”

requiring nearly all Americans to buy health insurance by 2014 or face penalties.

INDUSTRY ANALYSIS


• Questioning the constitutionality of the individual mandate and the entire Act, a majority of the states, as well as a

number of individuals and organizations have filed actions in federal courts. Two of four federal appellate courts have

upheld the act. Another appellate court ruled the federal Anti-Injunction Act prevents the issue from being decided until

taxpayers begin paying penalties in 2015, while a fourth declared the individual mandate unconstitutional.

•

• The battle over Obamacare has moved to the Supreme Court as 26 states in the U.S. seek to get the legislation declared

unconstitutional. They argue that the healthcare law violates the constitution and tramples on individual liberties. After

hearing oral arguments in March 2012, the Supreme Court is expected to issue its decision in the summer of 2012.

•

• Increasing Use of IT in Healthcare Services – The past decade saw the healthcare sector moving toward an increasing

use of information technology. Health information technology (HIT) involves the comprehensive management of health

information across computerized systems and its secure exchange between consumers, providers, government and

quality entities, and insurers. Proponents say that HIT improves healthcare quality, reduces healthcare costs, prevents

medical errors, and increase administrative efficiencies. In 2004, President Bush signed an Executive Order entitled

President’s Health Information Technology Plan, which asked the U.S. healthcare industry to adopt electronic health re-

cords (EHRs) by 2014. A study by RAND Health found that the U.S. could save over $81 billion annually by adopting HIT.

•

• In 2009, President Obama signed the Health Information Technology for Economic and Clinical Health Act (HITECH

Act), part of the American Recovery and Reinvestment Act of 2009 (ARRA), to stimulate the adoption of EHRs. The

EHR Incentive Program pays eligible professionals and hospitals to adopt, implement, upgrade, or “meaningfully use”

certified EHR technology. Incentives will be offered until 2015, after which time penalties may be levied for failing to

demonstrate such use.

•

• According to CMS, the U.S. government has paid more than $5.7 billion in 2011 to health professionals to encourage the

use of EHRs. Over 110,000 health care providers and 2,400 hospitals had been paid to use the new technology as of

May 2012. Figures from CMS show that about 48 percent of all eligible hospitals and critical access hospitals in the U.S.

have received an incentive payment for using an EHR and that 44 states are participating in the Medicaid EHR Incen-

tive Program.

•

• Rising Incidents of Data Breaches – As companies in the healthcare services industry set up Health Information Tech-

nology systems, healthcare experts warn against an increasing risk of patient data breach.

•

• In March 2012, the Utah Department of Technology Services (DTS) revealed that sensitive Medicaid information of

780,000 individuals was stolen in a hacking incident. Information was hacked from 224,000 files that contained Med-

icaid Eligibility Inquiries and from the records of Medicaid and Children’s Health Insurance Plan recipients. The breach

happened after a configuration error occurred at the password authentication level, allowing the hacker to circumvent

the security system of DTS. New data security procedures have been set in place after the incident.

•

• A month later, Atlanta-based Emory Healthcare announced that 10 computer discs containing personal data of 315,000

surgery patients went missing from storage in February 2012. An estimated 228,000 of the missing records included

Social Security Numbers. Emory is now providing all affected patients with credit monitoring services and access to

identity protection services. In May 2012, the Massachusetts-based South Shore Hospital agreed to pay $750,000 to set-

tle a case of data breach that occurred in 2010. The case involves loss of back-up files containing the health information

of 800,000 patients. The hospital was also ordered to adopt data security protocols.

December 2012 | 7

INDUSTRY ANALYSIS


• Declining Number of Doctors Threatens Healthcare Services Industry – The healthcare services industry is threatened

by the declining number of physicians. There are about 700,000 active physicians in the U.S. today. According to the

American Association of Medical Colleges (AAMC), there was a shortage of 13,700 physicians nationwide in 2010. The

nonprofit organization expects the gap to get even wider in 2014. Its Center for Workforce Studies predicts that the

shortage will grow to 62,900 doctors by 2015 and 91,500 by 2020.

•

• The AAMC says reforms such as the universal healthcare coverage will worsen the shortage as it will contribute to the

overall demand for doctors. Furthermore, to reduce spiraling costs, government-run insurance, such as Medicare, will

continue to cut its payments to providers – the very programs that the new healthcare reform act expands – which will

provide fewer funds to pay doctor salaries and further exacerbate the doctor shortage. The greatest demand is seen in

primary care. Under the new law, family physicians, general practitioners, internists and pediatricians are expected to

have a greater role. However, the number of new graduates who are entering primary care practice is not enough to re-

place those who are retiring. Between 2002 and 2007, the number of medical school students entering family medicine

slid by more than 25 percent. Basically, a disconnect exists between the ever-increasing cost of medical school and the

stiffening salaries the U.S, healthcare system is willing to pay doctors, particularly for primary care doctors, creating an

ongoing and growing shortage of doctors.

•

• Whistleblower Lawsuits – A number of major players were slapped with multi-million whistleblower lawsuits. In May

2011, Quest Diagnostics agreed to repay the state of California $241 million for overcharges to Medi-Cal. The settlement

stemmed from a 2005 lawsuit brought by a whistleblower who accused the company of systematically overcharging

Medi-Cal for over 15 years. The whistleblower also claimed that Quest Diagnostics gave kickbacks to doctors and hos-

pitals that referred Medi-Cal patients and charged Medi-Cal up to six times more than what were charged other patients

for tests.

•

• In 2010, Nancy Reuille, a former auditor and care management supervisor at Lutheran Hospital from 1985 to 2008, sued

the hospital for admitting patients who did not meet the Medicare’s in-patient status criteria. In 2007, CHS acquired

Lutheran when it purchased its parent company, Triad Hospitals. According to the whistleblower, Lutheran Hospital

and CHS operated a “purposely deficient” billing system that overbilled the federal government and private insurance

companies. In April 2012, the U.S. District in Fort Wayne granted the U.S. Department of Justice six more months to

decide whether it will intervene as co-plaintiff in the case.

•

• Obesity – An individual is considered obese when his body mass index (BMI), the measure of body fat based on a per-

son’s height and weight, goes beyond 30. The increasing number of obese and overweight individuals in the U.S. over the

past 30 years has become a key driver in the prevalence of chronic diseases such as arthritis, diabetes and hypertension.

A startling number of American children are now obese, with record levels having diabetes. According to the American

Society for Metabolic & Bariatric Surgery, obesity is a serious medical condition that causes 110,000 deaths each year.

Obesity has become an epidemic in the U.S., which has significant social and financial impacts to the overall economy.

According to health economist Justin Trogdon, obesity increases per capita Medicare expenditures by $1,723 per year

and the annual medical burden of obesity forms nearly 8.5 percent of annual Medicare expenditures. He added that total

obesity-attributable health care spending in the U.S. was projected to increase from $79 billion in 2008 to $344 billion

in 2018.

December 2012 | 8

INDUSTRY ANALYSIS


The information in this section covers a broader industry than this the rest of this report.

Healthcare providers are being squeezed between spiraling costs from various societal pressure points, and a broad array of

payers attempting to keep a lid on prices. Industry players must consider a number of business initiatives to survive in such

an environment. Pursuing, and not pursuing, these initiatives come with risks for companies in this industry.

Business initiatives for the healthcare providers and services industry fall across four different high-level categories: strat-

egy, marketing and sales, service and support, and compliance. Strategy business initiatives primarily address efforts to

pursue growth opportunities. Marketing and sales business initiatives stress the need to grow revenue with new products

to both existing and new markets. The service and support initiative outlines the need for healthcare providers to move to

electronic health records as soon as possible. Compliance initiatives underscore the importance of reviewing compliance

procedures and lobbying politicians as reform of healthcare is discussed.

Full-service hospital chains should lay the groundwork for competing in a healthcare marketplace that has specialist hospi-

tals. They need to develop a business model that enables them to profit on an unbundled basis possibly by considering their

set of services more as a federation of practices with cash-flow arrangements between administrative overhead, core shared

services (i.e., operating theatres, emergency departments, intensive care, and laboratories to list a few areas), and the various

focused healthcare practice areas.

Managed care plans need to continue building scale and scope through acquisitions in order to extend their geographical

footprint, develop more robust networks of physicians and hospitals, and develop leverage they need to use with both payers

and providers. Healthcare providers must fight fire with fire and build up their own scale in order to come to more competi-

tive terms with payers and managed care organizations.

Additionally, hospitals and physician practices should develop strategies to partner with new retail clinics that are appear-

ing in shopping malls and general merchandise stores, if only to get referrals from these clinics. Healthcare providers are on

track to become a more fragmented system, with providers located close to consumer’s homes, shopping, and businesses,

as well as in urban centers. Local physician practices need to participate in this trend or lose business. Although margins are

lower, increased volume might make up the difference, particularly the increased volume that will come from an aging and

increasingly heavier society.

Healthcare providers must go beyond scale and develop a quality presence in the marketplace to better compete in the

emerging consumer-driven health plan (CDHP) market that will demand more information about quality of treatment and

outcomes of that treatment. Focusing on quality, and relaying the perception of quality, will help to alleviate the negative im-

pact of the recent stream of hospital scandals. However, the cost of medical equipment is astronomical when on the cutting

edge of quality. Insurance companies, corporate payers, government payers, and increasingly patients sharing more costs are

pushing down on skyrocketing medical costs. Healthcare providers will need to balance the high cost of the latest equipment

with providing high quality services.

New healthcare delivery models such as Accountable Care Organizations (ACOs) promise to hold costs in check while pro-

viding a broad spectrum of coordinated care, but they create new risks for healthcare providers. In particular, providers

assume additional financial risk under these arrangements, but many are not well-prepared to manage those risks. A Com-

monwealth Fund survey, for example, found that only about half of hospitals participating or planning to participate in an

ACO reported that they have the financial strength to accept risk. Additionally, about one third of hospitals surveyed did not

have processes in place for monitoring the use and costs of services compared with revenue received or allowed.

December 2012 | 9

Business Initiatives and Risks

Strategy

INDUSTRY ANALYSIS


Components of the Strategy business initiatives include:

• Redefine the business model;

• Pursue growth through acquisitions;

• Pursue growth through partnerships and alliances;

• Establish quality leader focus; and

• Attract and retain high-caliber talent.

The following tables outline risks associated with these Strategy business initiatives.

December 2012 | 10

Marketing and SalesThe healthcare providers and services industry is evolving from the managed care “take-it-or-get-sicker” era to a time of

increasing choice for payers and consumers, albeit at significantly greater financial and healthcare risks to consumers. The

industry has traditionally involved a two-step sales process: first MCOs sell to corporate payers and then those payers offer

various choices to their employees. Healthcare providers have to provide services regardless of what is sold in the process.

This will soon be augmented with customers getting more into the decision process, particularly their interactions with

healthcare providers. As increasingly more customers use health spending accounts for small medical expenses and pur-

chase high-deductible PPO products (i.e., basically CDHPs) they will shop for best value or lowest price services. Corporate

payers and MCOs are hoping that not only this behavior takes place, but that it forces healthcare provider prices down or at

least slows down the acceleration of healthcare costs.

MCOs must generate revenue and profit with CDHPs to both their existing markets and new markets. MCOs have to target

and market to corporations that will purchase CDHPs of various designs. They should also form partnerships with financial

services firms to offer a bundled package of high-deductible policies and investment options to payers and their employees.

Financial services firms will become either explicit partners with MCOs or market their services directly to corporate payers

to provide investment and financial management products to those employees choosing CDHPs.

Strategic Operational

• Ineffectivebusinessmodel/positioningstrategy• Failureofacquisitions,jointventures,oralliances• Newgeographicinitiativeleadstoregulatoryandpoliticalexposures• Businessinitiativedamagescompany’sreputation• Businessinitiativedilutescompany’sbrand

• Businessinitiativefailsfromlackofqualifiedhumancapital• Inefficientoperationsrenderinitiativeunprofitable• Customersatisfactionsuffersfrompoorquality• Customersatisfactionsuffersfrompoorserviceandsupport

Financial Hazard

• Largecapitalinvestmentscausecashstrain• Inadequatecapitalinvestmentsrestrainfuturegrowth• Inadequatecashflowtosupportdailyoperations• Highlyleveragedcapitalstructurecausesburdensomeinterestpay-

mentsordefault.• Largeamountsofassetsatriskduetohighcollateralcommitments.

• Lawsuitsarisingfrominfringementofcopyrightsorpatents• Lawsuitsarisingfromperformanceornon-performanceof

professionalservices• Lawsuitsarisingfromcontractdisputes.• Lawsuitsarisingfromemployment-relatedactivities.

INDUSTRY ANALYSIS


December 2012 | 11

Hospitals and physician practices must also provide services in ways that differentiate them from their competition. Some

hospitals are now building luxury wings for mothers-to-be even in these times of tight and decreasing profit margins. Physi-

cian practices are building specialty hospitals, and many of these specialty hospitals can provide higher quality attention at a

more affordable price than traditional hospitals. The fact that consumers are willing to accept the substantial inconveniences

and expenses of traveling abroad to find more affordable quality healthcare is an indication that opportunities are being

missed by traditional hospital structures.

Information is vital in this era of consumer choices, and to all participants: corporate payers, healthcare providers, and

patients. MCOs need to develop and market pay-for-performance products that both healthcare providers and payers find

acceptable. They can better accomplish this by working with healthcare standards providers in order to set, track, and adjust

thresholds of medical standards of care for the diagnosis and treatment of various diseases and conditions. Healthcare pro-

viders will increasingly be required to provide information on prices and performance to all stakeholders.

Components of the Marketing and Sales business initiatives are:

• Grow revenue through increased penetration of existing markets with new products and services;

• Grow revenue through penetration of new markets with new products and services; and

• Provide stakeholders access to information.

The following tables outline risks associated with the Marketing and Sales business initiatives.


• Newproduct/servicefailsinthemarket• Businessinitiativedamagescompany’sreputation• Businessinitiativedilutescompany’sbrand• Inadequateorineffectualallocationofresources

• Businessinitiativefailsfromlackofqualifiedhumancapital• Inefficientoperationsrenderinitiativeunprofitable• Inadequatesupportcauseproducts/servicestofail• Customersatisfactionsuffersfrompoorquality• Customersatisfactionsuffersfrompoorserviceandsupport

Financial Hazard

• Inadequatecapitalinvestmentsrestrainfuturegrowth• Largecapitalinvestmentscausecashstrain• Inadequatecashflowtosupportdailyoperations• Inflationcausescostincreases

• Lawsuitsarisingfromcontractdisputes• Lawsuitsfromshareholdersarisingfromerrorsoromissions

ofdirectorsorofficers• Lawsuitsarisingfrominfringementofcopyrightsorpatents• Lawsuitsarisingfromperformanceornon-performanceof

professionalservices

INDUSTRY ANALYSIS


December 2012 | 12

Service and Support

Compliance

Healthcare providers whether running large multi-chain hospitals, physician group practices or individual private practices

must transform their paper records to electronic health records and shift their paper-based operations to digital operations.

Medicare will probably be the force majeure that drives the formation of the country’s electronic health information infra-

structure but it is imperative that healthcare providers work requisite government agencies to hasten the end result.

Electronic records will reduce errors, promote medical collaboration, improve patient treatment, and save significant

amounts of money. The road to this result won’t be easy. There are serious and significant security and privacy issues. Stand-

ards will be needed not only in their own right but also to drive integration between any national health information infra-

structure and various systems of hospitals, clinics, physician practices, and other healthcare provider delivery locations

around the country. It is inevitable that paper-based records will eventually become digitized, stored, secured, and shared.

The costs will be substantial, as will the savings.

The Service and Support business initiative is:

• Implement technology to improve the efficiency and effectiveness of customer service areas.

The following tables outline risks associated with the Service and Support business initiative.

Hospitals are under the gun. Their profit margins are getting slimmer. Non-profit hospitals are also being squeezed by the

same forces of supply and demand except the demand for their services is by people who either can not pay any of their bill

or very little of their bill. It has been alleged that some non-profit hospitals are using aggressive tactics to collect payment

for their services. It has also been alleged that some of these non-profit hospitals are overcharging people without insurance.

Furthermore, many healthcare experts believe that healthcare providers tend to push patients into unnecessary procedures

to help fatten their margins. Complying with regulations is critical to not only avoid liability, but also to maintain a high

quality image. Periodic comprehensive reviews of compliance procedures are necessary to ensure compliance to an ever-

growing list of complex healthcare regulations.


• Inadequateorineffectualallocationofresources• Businessinitiativedamagescompany’sreputation• Disruptionsfromdivestitureofassets• Businessinitiativedilutescompany’sbrand

• Productdevelopmentstallsfromineffectivesourcingofresources• Businessinitiativefailsfromlackofqualifiedhumancapital• Inadequateinformationprocessingsystemscreateinefficiencies• Breakdownofinternalcontrols• Inadequatesupportcauseproducts/servicestofail

Financial Hazard

• Declineincreditrating• Lowbankborrowingcapacity/inadequatelinesof

credit• Lackofaccesstocapitalmarkets

• Lawsuitsarisingfromperformanceornon-performanceofpro-fessionalservices

• Lawsuitsarisingfromemployment-relatedactivities• Lawsuitsbyshareholdersarisingfromerrorsoromissionsof

directorsorofficers• Lawsuitsarisingfrominfringementofcopyrightsorpatents

INDUSTRY ANALYSIS


December 2012 | 13

The entire U.S. healthcare system is under the gun. Profit margins are getting slimmer despite skyrocketing insurance premi-

ums because costs are mushrooming. Citizens across-the-board want reform, from the working poor without insurance, to

soccer moms with unaffordable health insurance costs, to the growing list of middle class employees losing health benefits.

Employers are eager to reform as well, as a healthy workforce is important to the efficiency of their businesses. Healthcare is

certain to be a major issue in the 2008 presidential election, and politicians are certain to do something significant in years

to come.

Regardless if the solution implemented is a single-payer government-run system, or a consumer-driven system, or some-

thing in between, the result will have a substantial impact on this industry. More government involvement is likely, even in

a consumer-driven system as proponents are calling for government-supported vouchers to help make health insurance

more affordable to all. This clearly means more government pressures on prices to help keep costs of these programs down.

Industry players need to be active in lobbying politicians at the federal and state levels to ensure that any future system is

reasonably implemented and economically sound.

Components of Compliance business initiatives are:

• Review compliance procedures to ensure compliance to regulations; and

• Lobby government to achieve desired regulatory outcomes.

The following tables outline the risks associated with Compliance business initiatives.


• Disruptionsfromdivestitureofassets.• Businessinitiativedamagescompany’sreputation.• Businessinitiativedilutescompany’sbrand.• Liabilityassumedbycontract.

• Complianceproceduresbreakdowncreatesliabilityexposure.• Breakdownofinternalcontrols.• Customersatisfactionsuffersfrompoorserviceandsupport.

Financial Hazard

• Inadequatecashflowtosupportdailyoperations• Declineincreditrating• Lowbankborrowingcapacity/inadequatelinesof

credit• Lackofaccesstocapitalmarkets• Improperfinancialstatementdisclosuresandac-

countingstandards

• Lawsuitsarisingfromperformanceornon-performanceofpro-fessionalservices

• Lawsuitsbyshareholdersarisingfromerrorsoromissionsofdirectorsorofficers

• Lawsuitsarisingfromemployment-relatedactivities• Theft,robbery,orfraudbythirdparties

INDUSTRY ANALYSIS


December 2012 | 14

SIC Codes: SIC Codes:

740 Veterinary Services

741 Veterinary Services For Livestock

742 Veterinary Services For Animal Specialties

8000 Health Services

8071 Medical Laboratories

8072 Dental Laboratories

8080 Home Health Care Services

8082 Home Health Care Services

8090 Miscellaneous Health And Allied Services, Nec

8091 Health And Allied Services, Nec

8092 Kidney Dialysis Centers

8093 Specialty Outpatient Facilities, Nec

8099 Health And Allied Services, Nec

8010 Offices And Clinics Of Doctors Of Medicine

8011 Offices And Clinics Of Doctors Of Medicine

8020 Offices And Clinics Of Dentists

8021 Offices And Clinics Of Dentists

8031 Offices And Clinics Of Doctors Of Osteopathy

8040 Offices And Clinics Of Other Health Care Practitioners

8041 Offices And Clinics Of Chiropractors

8042 Offices And Clinics Of Optometrists

8043 Offices And Clinics Of Podiatrists

8049 Offices And Clinics Of Health Practioners, Nec

8050 Nursing And Personal Care Facilities

8051 Skilled Nursing Care Facilities

8052 Intermediate Care Facilities

8059 Nursing And Personal Care Facilities, Nec

8060 Hospitals

8062 General Medical And Surgical Hospitals

8063 Psychiatric Hospitals

8069 Specialty Hospitals, Except Psychiatric

8070 Medical And Dental Laboratories

8081 Outpatient Care Facilities

8360 Residential Care

INDUSTRY ANALYSIS


December 2012 | 15

Competitors

Top 20 U.S. Companies Sorted by Sales

Ticker Company

Name

Market

Cap

(in Millions)

Sales

(in

Millions) Employees

Sales Per

Employee Net

Income

Price

Earnings

Ratio

CVS CVS Caremark

Corporation 58,853.64 107,100.00 202,000 530,198.01 3,461.00 16.23

ESRX Express Scripts Holding Company

51,134.34 46,272.30 13,120 3,526,852.13 1,275.80 31.11

CYH Community Health

Systems Inc. 2,493.30 13,626.17 88,000 154,842.81 201.95 8.99

THC Tenet Healthcare

Corporation 2,480.67 8,854.00 57,705 153,435.57 82.00 216.45

DGX Quest Diagnostics Inc 9,429.81 7,510.49 42,000 178,821.19 470.57 13.50

UHS Universal Health

Services Inc. 4,284.83 7,495.60 65,400 114,611.59 398.17 10.28

DVA DaVita Inc. 10,582.54 6,982.21 41,000 170,297.90 478.00 20.07

OCR Omnicare Inc. 3,811.63 6,182.92 14,600 423,487.80 86.92 25.31

HMA Health Management

Associates Inc. 1,920.00 5,804.45 50,100 115,857.30 178.71 12.28

LH Laboratory Corporation of

America Holdings

8,296.31 5,542.30 31,000 178,783.87 519.70 14.54

KND Kindred Healthcare

Inc 557.19 5,521.76 77,800 70,973.81 -53.48

SXCI SXC Health Solutions

Corp. 6,702.87 4,975.50 1,433 3,472,083.74 91.79 29.09

LPNT LifePoint Hospitals

Inc. 1,986.65 3,026.10 23,000 131,569.56 162.90 11.20

SLC Select Medical Holdings Corporation

1,489.58 2,804.51 28,800 97,378.71 107.85 10.44

HLS HealthSouth

Corporation 2,133.24 2,027.40 22,000 92,154.54 208.70 15.07

SUNH Sun Healthcare Group

Inc. 216.03 1,930.34 28,697 67,266.26 -291.77

BIOS Bioscrip Inc 539.15 1,818.03 2,523 720,581.05 7.87 456.00

GTIV Gentiva Health

Services Inc 305.67 1,798.78 17,300 103,975.60 -450.53 -0.66

MD MEDNAX Inc. 3,492.69 1,588.25 6,967 227,967.27 218.00 15.04

WOOF VCA Antech Inc. 1,703.42 1,485.36 9,900 150,036.46 95.41 17.49

INDUSTRY ANALYSIS


Stock and Financial Performance Trends

December 2012 | 16

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems

Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Most Recent Quarter Date

6/30/2012 6/30/2012 6/30/2012 6/30/2012 6/30/2012 6/30/2012

Sales $30,714.00M $27,721.00M $3,746.43M $2,265.00M $1,906.81M $178.57M

Cost of Goods

Sold $24,834.00M $25,542.20M $3,274.22M $1,977.00M $1,054.23M $144.26M

Selling, General

and Administrative

Expense

$3,742.00M $685.7M $429.79M $12.49M

Operating Income

Before Depreciation

$2,138.00M $1,493.10M $472.21M $288M $422.79M $16.08M

Depreciation and

Amortization $431M $605.2M $179.8M $104M $71.86M $4.56M

Operating Income

After Depreciation $1,707.00M $887.9M $292.41M $184M $350.94M $11.52M

Interest Expense $131M $175.2M $151.61M $102M $42.64M $1.75M

Non-operating

Income (Expense) $6.6M $13.18M $6.22M $0.14M

Special items $(355.8)M $(2.3)M $(4)M $(15.6)M $(2.57)M

Pretax Income $1,576.00M $363.5M $151.69M $78M $298.92M $7.13M

Healthcare Services and Facilities Income Statement

INDUSTRY ANALYSIS


December 2012 | 17

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems

Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Income Taxes - Total

$610M $192.6M $49.52M $30M $112.39M $2.99M

Minority Interest $(1)M $18.81M $2M $8.77M $0.16M

Income Before

Extraordinary

Items

$967M $170.9M $83.36M $46M $177.76M $3.97M

Dividends -

Preferred $4M

Income Before

Extraordinary Items - Available

for Common

$967M $170.9M $83.36M $42M $177.76M $3.97M

Common Stock

Equivalents -

Dollar Savings

$(0.72)M

Income Before Extraordinary

Items - Adjusted

for Common Stock

Equivalents

$967M $170.9M $83.36M $42M $177.04M $3.96M

Net Income (Loss) $966M $170.9M $83.36M $(2)M $177.7M $3.97M

Healthcare Services and Facilities Income Statement (cont’d)

Healthcare Services and Facilities Balance Sheet

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems

Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Most Recent Quarter Date

6/30/2012 6/30/2012 6/30/2012 6/30/2012 6/30/2012 6/30/2012

Assets

Cash and Short

Term Investments $1,828.00M $1,448.90M $115.11M $82M $173.74M $15.5M

Accounts

Receivable/

Debtors-Total

$6,124.00M $5,997.80M $2,055.29M $1,334.00M $941.47M $57.85M

Inventories –

Total $10,428.00M $1,423.80M $358.6M $154M $90.1M $10.13M

Current Assets – Other – Total

$919M $790.8M $468.16M $994M $271.87M $10.29M

Current Assets –

Total $19,299.00M $9,661.30M $2,997.16M $2,564.00M $1,477.18M $93.77M

Property, Plant

and Equipment –

Total (Net)

$8,614.00M $1,768.50M $7,048.22M $4,181.00M $788.63M $31.4M

Intangible Assets

– Total

Assets – Other – Total

$37,676.00M $46,628.70M $5,827.62M $1,740.00M $7,127.05M $342.85M

Assets – Total $65,589.00M $58,058.50M $15,873.01M $8,485.00M $9,392.85M $486.24M

INDUSTRY ANALYSIS


December 2012 | 18

Healthcare Services and Facilities Balance Sheet (cont’d)

Healthcare Services and Facilities Cash Flow

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems

Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Liabilities and Net Worth

Debt in Current Liabilities – Total

$205M $1,929.30M $83.88M $237M $444.5M $14.22M

Current Liabilities

– Other $8,028.00M $1,989.90M $1,044.80M $991M $0M $20.59M

Current Liabilities

– Total $13,136.00M $12,843.80M $1,899.12M $1,872.00M $1,324.72M $86.67M

Long-Term Debt –

Total $9,208.00M $16,312.30M $9,241.49M $4,511.00M $3,378.19M $140.18M

Long-Term Debt

Due in One Year

Account Payable/ Creditors – Trade

$4,903.00M $8,924.60M $770.45M $644M $880.22M $51.72M

Deferred Taxes –

Balance Sheet $3,894.00M $704.72M $0M $7.54M

Liabilities – Other $1,438.00M $6,774.10M $998.98M $857M $668.8M $41.77M

Income Taxes

Payable $0.14M

Liabilities – Total $27,676.00M $35,930.20M $12,844.32M $7,240.00M $5,371.71M $291.13M

Minority Interest $367.91M $16M $2.49M

Preferred/

Preference Stock

(Capital) – Total

$45M $0.11M

Common/Ordinary Equity – Total

$37,913.00M $22,128.30M $2,596.08M $1,131.00M $3,995.20M $195M

Common/Ordinary

Stock (Capital) $17M $8.1M $0.92M $27M $2.15M $0.92M

Treasury Stock –

Total (All Capital) $14,001.00M $6.68M $1,879.00M $2,902.53M $30.88M

Capital Surplus/

Share Premium Reserve

$28,744.00M $20,918.10M $1,101.22M $4,410.00M $2,357.65M $145.25M

Retained Earnings

$23,153.00M $1,202.10M $1,500.62M $(1,427.00)M $4,537.94M $81.3M

Shareholders

Equity-Total $37,913.00M $22,128.30M $2,596.08M $1,176.00M $3,995.20M $195.11M

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems

Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Most Recent Annual Date

12/31/2011 12/31/2011 12/31/2011 12/31/2011 12/31/2011 12/31/2011

Operating Activities (Indirect)

Depreciation and

Amortization $1,568.00M $334.4M $657.66M $443M $281.1M $8.92M

Operating

Activities - Net

Cash Flow

$5,856.00M $2,192.00M $1,261.91M $497M $895.47M $33.05M

INDUSTRY ANALYSIS


December 2012 | 19

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems

Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Investing Activities

Investing Activities - Net

Cash Flow

$(2,410.00)M $(123.9)M $(1,195.78)M $(503)M $(1,243.44)M $(21.89)M

Capital

Expenditures $1,872.00M $144.4M $776.71M $475M $161.56M $6.87M

Financing Activities

Cash Dividends

(Cash Flow) $674M $24M $64.66M $0.75M

Financing

Activities - Net Cash Flow

$(3,460.00)M $3,030.50M $(235.44)M $(286)M $63.55M $2.84M

Valuation Ratios

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Price to Earnings (TTM)

16.23 31.11 8.99 216.45 13.5 29.08

Price to Sales

(TTM) 0.51 0.8 0.17 0.28 1.24 0.7

Profitability Ratios(%)

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Operating Margin (TTM)

5.56 3.2 7.81 8.12 18.4 6.45

Operating Margin

(TTM) 3 Year Avg. 5.82 4.32 8.52 8.14 18.58

EBITDA Margin

(TTM) 6.96 5.39 12.6 12.72 22.17 8.57

EBITDA Margin

(TTM) 3 Year Avg. 7.3 5.41 13.31 12.75 22.23 8.32

Pretax Margin

(TTM) 5.13 1.31 4.05 3.44 15.68 4.39

Pretax Margin (TTM) 3 Year Avg.

5.3 3.43 4.11 3.23 15.96 5.22

Effective Tax Rate

(Annual) 38.71 52.98 32.65 38.46 37.6 42.56

Effective Tax Rate

(Annual) 3 Year

Avg.

38.48 36.92 30.74 -179.2 37.79 39.47

Healthcare Services and Facilities Cash Flow (cont’d)

Healthcare Services and Facilities Financial Ratio Comparisons

INDUSTRY ANALYSIS


December 2012 | 20

Healthcare Services and Facilities Financial Ratio Comparisons (cont’d)

Management Effectiveness Ratios

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Return on Assets 5.66 3.09 1.76 0.74 7.42 4.23

Return on Assets (3 Year Avg.)

5.64 8.11 1.89 5.52 7.16

Return on Equity 9.75 8.8 11.02 4.83 18.82 11.09

Return on Equity

(3 Year Avg.) 16.35

Coverage & Leverage Ratio

CVS Caremark

Corporation

Express

Scripts

Holding

Company

Community

Health

Systems Inc.

Tenet

Healthcare

Corporation

Quest

Diagnostics

Inc

Average

Industry

Times Interest earned (TTM)

13.03 5.07 1.93 1.8 8.23 8.15

EBITDA/

Interest(TTM) 16.32 8.52 3.11 2.82 9.92 10.11

EBITDA - Capex/

Interest (TTM) 10.08 8.14 0.57 0.36 8.1 8.73

Debt to Capital

(MRQ) 0.2 0.45 0.75 0.79 0.49 0.46

Debt to Equity

(MRQ) 0.25 0.82 3.59 4.2 0.96 0.79

Debt (avg. 12 mos.)

to EBITDA (TTM)

1.23 3.15 4.92 4.09 2.48 2.18

Free CF (TTM)

to Total Debt

(avg. 12 mos.)

39.68 23.18 3.83 -0.68 20.65 0.15

Liquidity & Activity Ratios

CVS Caremark

Corporation

Express Scripts

Holding

Company

Community Health

Systems Inc.

Tenet Healthcare

Corporation

Quest Diagnostics

Inc

Average

Industry

Current Ratio

(MRQ) 1.47 0.75 1.58 1.37 1.12 1.08

Quick Ratio

(MRQ) 0.61 0.58 1.14 0.76 0.84 0.84

AR Turnover (MRQ)

19.39 16.04 7.43 6.89 8.16 12.4

Inventory

Turnover 9.11 66.99 35.5 50.7 47.05 58.44

AP Turnover 20.01 9.64 18.37 12.49 4.46 7.66

INDUSTRY ANALYSIS


December 2012 | 21

MSCAd Industry Large LossesAdvisen’s Master Significant Case & Action database (MSCAd) compiles details and statistics on significant large losses, in-

cluding management liability cases such as securities class actions, auditing and other management malpractice, state and

federal government regulatory fines, employment liability cases and errors and omissions litigation. This also includes EEOC

settled litigation, ERISA/Fiduciary Duty, Malpractice, Anti-Trust, Fraud, Trade Practices, and Contract Cases.

MSCAd is the most comprehensive, accurate source of this data available to the industry. Our information is compiled by a

dedicated research team using numerous sources such as Stanford Securities, Federal agencies such as the Department of

Justice, the EEOC, and the Securities & Exchange Commission, research tools such as LEXIS/NEXIS, major law firms and

claims administrators, State insurance commissioners and attorneys general, and other sources. The consolidated data is

subject to ongoing review and rigorous audit procedures to ensure both accuracy and timeliness.

Cases Filtered For:

Industry Filters

Dates: 2012,2011,2010,2009,2008

Case Count: 286

MSCAd Large Losses – 5 Year Trend

INDUSTRY ANALYSIS


December 2012 | 22

MSCAd Large Losses – Case Category Breakdown

MSCAd Large Losses – Case Category Breakdown

INDUSTRY ANALYSIS


MSCAd Large Losses – Recent 10 cases

MSCAd Large Losses – Top 10 by Settlement Amount ($)

Case ID Company Name Company

ID Category/Type

Accident

Date Filing Date Status

Total

Amount($)

696142 Sutter Health 1049127 Management & Strategy/Anti-trust

10/01/2005 09/17/2012 Pending

696605

The Children's

Hospital Corporation

1039156 General Litigation/

Child/Sexual Abuse 09/13/2012 Pending

697353 Assisted Living

Concepts Inc 1068069

Securities/Derivative

Shareholder Action 09/13/2012 Pending

695585 Healthways Inc 1030870 Securities/Derivative


695228 Sunrise Senior

Living, Inc. 1091448

Securities/Breach of Fiduciary Duties:

Class Action

09/06/2012 Pending

695500

National

Healthcare

Corp.

1082795

Business & Trade Practices/Breach of

Fiduciary Duties:

Business

09/04/2012 Pending



Securities/Securities

Class Action 08/29/2012 Pending

692704 DaVita Inc. 1091290 Securities/Derivative




Securities/Wells

Notice 08/02/2012 Investigation

693108 Amedisys, Inc. 1065231 Employment/Wage

and Hour 11/01/2009 07/25/2012 Pending

Case ID Company

Name

Company

ID Category/Type

Accident

Date Filing Date Status

Total

Amount($)

654142 Quest Diagnostics

Inc

1029511 Business & Trade Practices/Fraudule

nt Trade Practices

04/15/2009 Settled 302,000,000

684625 Assisted Living Concepts Inc

1068069 Business & Trade Practices/Breach of

Contract

04/26/2012 Settled 100,000,000

680440 Dignity Health 1050251

Employment/ Discrimination &

Harassment:

Gender/Sexual

08/15/2006 06/24/2009 Award 82,330,485

643660 CVS Caremark

Corporation 1000616

General Litigation/ Undetermined/

Other

09/01/2007 10/12/2010 Settled 77,600,000

682749 Tenet Healthcare

Corporation

1081973 Business & Trade Practices/Billing

Fraud

04/10/2012 Settled 42,750,000

674320 CVS Caremark Corporation

1000616 Employment/Wage and Hour

09/05/2005 02/23/2009 Settled 34,000,000

644814

Duke

University

Health System, Inc.

1000901

Professional

Practices/Medical/Healthcare

11/21/2008 Settled 26,000,000

620054 Healthways,

Inc. 1030870

Securities/Securitie

s Class Action 06/05/2008 Settled 23,600,000

641654 Sutter Health 1049127 Criminal Risks/

Theft/Robbery 01/01/2006 08/26/2010 Settled 21,500,000

656521 CVS Caremark

Corporation 1000616

Business & Trade

Practices/Billing

Fraud

09/30/2008 Settled 17,500,000

December 2012 | 23

INDUSTRY ANALYSIS


December 2012 | 24

Insurance Program PricingADVx tracks changes in average premiums paid upon the renewal of commercial lines insurance policies. The index is the

composite of four lines of business: domestic property, general liability, workers compensation and directors & officers li-

ability, weighted by their relative premium volume as reported in Best’s Aggregates and Averages. Premiums are adjusted to

2000 dollar value. Policy renewal data are collected and compiled by Advisen from retail and wholesale insurance brokers

and risk managers.

Composite

Percent Change

Individual Lines of Business

Percent Change

INDUSTRY ANALYSIS


Recent Industry News of Top 5 Competitors

CVS Caremark Corp Announces New Share Repurchase Authorization for up to $6 Billion of Common Stock; Approves Quarterly Dividend2012-09-19CVS Caremark Corp announced that its Board of Directors has approved a new share repurchase program for up to $6.0 bil-lion of the Company’s outstanding common stock. The share repurchase authorization, which is effective immediately, per-mits the Company to effect the repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The Company also stated that this new share repurchase program is expected to be completed over a multi-year period. CVS Caremark also announced that its Board of Directors has approved a quarterly dividend of $0.1625 per share on the Common Stock of the Corporation, payable November 2, 2012, to holders of record on October 22, 2012.

CVS Caremark Corporation Raises FY 2012 EPS Guidance2012-08-07CVS Caremark Corporation announced that for fiscal 2012, it expects adjusted earnings per share (EPS) of $3.32 to $3.38, up from its previous guidance of $3.23 to $3.33. The Company currently expects to deliver GAAP diluted earnings per share from continuing operations of $3.09 to $3.15 for fiscal 2012, up from its previous guidance of $3.01 to $3.11. According to I/B/E/S Estimates, analysts are expecting the Company to report EPS of $3.33 for fiscal 2012.

CVS Caremark Corporation Announces Quarterly Dividend2012-07-05CVS Caremark Corporation announced that its Board of Directors has approved a quarterly dividend of $0.1625 per share on the Common Stock of the Corporation, payable August 3, 2012, to holders of record on July 23, 2012.

Express Scripts Holding Co Raises FY 2012 EPS Guidance2012-08-07Express Scripts Holding Co announced that for fiscal 2012, it expects adjusted earnings per share (EPS) in the range of $3.60 to $3.75. According to I/B/E/S Estimates, analysts are expecting the Company to report EPS of $3.53 for fiscal 2012.

Express Scripts Holding Co And Walgreens Announce New Pharmacy Network Agreement2012-07-19Express Scripts Holding Co and Walgreens announced the companies have reached a multi-year pharmacy network agree-ment that includes rates and terms under which Walgreens will participate in the broadest Express Scripts retail pharmacy network available to new and existing clients. The companies are not disclosing the terms of the new contract. Walgreens will be part of the broadest network of pharmacies available to Express Scripts clients, as of September 15, 2012. Express Scripts will work to ensure a smooth transition for those plan sponsors who will want to include Walgreens pharmacies in their network.

Express Scripts Holding Co Issues FY 2012 EPS Guidance In Line With Analysts’ Estimates2012-05-10Express Scripts Holding Co announced that for fiscal 2012, it expects adjusted earnings per share (EPS) in the range of $3.36 to $3.66. According to I/B/E/S Estimates, analysts are expecting the Company to report EPS of $3.63 for fiscal 2012.

Community Health Systems Inc Reaffirms FY 2012 Revenue And EBITDA Guidance; Raises Low End Of Prior FY 2012 EPS Guidance2012-07-25Community Health Systems, Inc. announced that for fiscal 2012, it expects revenues to be in the range of $12.8-$13.2 billion and adjusted EBITDA to be in the range of $1.970-$2 billion and Income from operations to be in the range of $3.90-$4.10 per share. According to I/B/E/S Estimates, analysts on an average were expecting the Company to report revenues of $12.9 billion for fiscal 2012.

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INDUSTRY ANALYSIS


December 2012 | 26

Community Health Systems Inc Announces Completion Of Offering Of $1.2 Billion Of 7.125% Senior Notes Due 20202012-07-18Community Health Systems Inc announced that its wholly-owned subsidiary, CHS/Community Health Systems, Inc. (the Issuer), had completed its offering of $1.2 billion aggregate principal amount of 7.125% Senior Notes due 2020. As previ-ously announced, the Company intends to use the proceeds of the offering to purchase any and all of the IssueraCOs ap-proximately $934 million aggregate principal amount of 8a % Senior Notes due 2015 that are validly tendered and not validly withdrawn in the cash tender offer announced on July 3, 2012, to pay for consents delivered in connection therewith, to pay related fees and expenses and, to the extent any proceeds remain, for general corporate purposes.

Community Health Systems Inc Announces Offering Of $1,000 Million Of Senior Notes Due 20202012-07-09Community Health Systems Inc announced that its wholly-owned subsidiary, CHS/Community Health Systems, Inc., intends to offer $1,000 million aggregate principal amount of Senior Notes due 2020, subject to market and other conditions. The offering will be made by means of an underwritten public offering pursuant to an automatic shelf registration statement filed with the Securities and Exchange Commission. The Company intends to use the proceeds of the offering to purchase any and all of the IssueraCOs approximately $934 million aggregate principal amount of 8a % Senior Notes due 2015 that are validly tendered and not validly withdrawn in the cash tender offer announced on July 3, 2012, to pay for consents delivered in con-nection therewith, to pay related fees and expenses and, to the extent any proceeds remain, for general corporate purposes. The underwriters in connection with the offering are Credit Suisse, BofA Merrill Lynch, Citigroup, Credit Agricole CIB, Gold-man, Sachs & Co., J.P. Morgan, Morgan Stanley, RBC Capital Markets, SunTrust Robinson Humphrey, Wells Fargo Securities, Deutsche Bank Securities, Fifth Third Securities, Inc., Mitsubishi UFJ Securities, Scotiabank and UBS Investment Bank.

Tenet Healthcare Corp Announces Completion Of Its Private Offering Of 4.75% Senior Secured Notes Due 2020 And 6.75% Senior Notes Due 20202012-10-16Tenet Healthcare Corp announced the completion of its previously announced private offering of $500 million aggregate principal amount of its 4.75% Senior Secured Notes due 2020 and $300 million aggregate principal amount of its 6.75% Sen-ior Notes due 2020. The proceeds from the offering will be used to purchase Tenet`s 7.375% Senior Notes due 2013 (the Notes) in a tender offer. Tenet will use any remaining net proceeds for purchases of its other outstanding senior notes through public or privately negotiated transactions, and for general corporate purposes, including the repayment of indebtedness and draw-ings under its senior secured revolving credit facility and strategic acquisitions. The terms of the tender offer are contained in an offer to purchase dated October 1, 2012 and a related letter of transmittal. The tender offer will expire on October 29, 2012.

Tenet Healthcare Corp Announces Private Offering Of Senior Secured Notes And Senior Unsecured Notes2012-10-01Tenet Healthcare Corp announced that it is offering to sell $500 million aggregate principal amount of senior secured notes maturing in 2020 and $300 million aggregate principal amount of senior unsecured notes maturing in 2020 through a pri-vate placement. The senior secured notes will be guaranteed by and secured by a pledge of the capital stock and other own-ership interests of certain of TenetaCOs subsidiaries. The proceeds from the offering will be used to purchase TenetaCOs 7.375% senior notes due 2013 in a tender offer. Tenet will use remaining net proceeds for repurchases of its outstanding senior notes through publicly or privately negotiated transactions, and for general corporate purposes, including the repayment of indebtedness and drawings under its senior secured revolving credit facility and strategic acquisitions.

Tenet Healthcare Corp’s Subsidiary to Acquire InforMed Health Care Solutions2012-10-01Tenet Healthcare Corp announced that its subsidiary Conifer Health Solutions, LLC has entered into a definitive agreement to acquire InforMed Health Care Solutions located in Annapolis. Financial terms of the transaction were not disclosed.

Quest Diagnostics Inc Lowers FY 2012 Revenue Guidance; Lowers High End Of Prior FY 2012 EPS Guidance To A Range Below Analysts’ Estimates; Reaffirms FY 2012 EBIT Guidance2012-10-17Quest Diagnostics Inc announced that for fiscal 2012, it expects revenues to grow approximately 0.5%, compared to the prior outlook of between 1% and 2%, earnings per diluted share (EPS) to be between $4.45 and $4.55, compared to the prior outlook of $4.45 to $4.60 and operating income as a percentage of revenues to approximate 18%, unchanged from the prior outlook. The Company reported net revenues of $7.511 billion in fiscal 2011. According to I/B/E/S Estimates, analysts were expecting the Company to report revenue of $7.63 billion, EPS of $4.56 and EBIT of $1.36 billion for fiscal 2012.

INDUSTRY ANALYSIS


Quest Diagnostics Inc To Acquire Clinical Outreach Laboratory From UMass Memorial Medical Center2012-10-16Quest Diagnostics Inc announced that it has signed a definitive agreement to purchase the clinical outreach laboratory busi-ness of UMass Memorial Medical Center, a member of UMass Memorial Health Care and the health care system in Central New England. Term of the transaction were not disclosed.

Quest Diagnostics Inc And 3M Co Launch FDA-Cleared Simplexa Test on 3M Cycler For Molecular Influenza And Respiratory Virus Testing By Moderate Complexity Healthcare Facilities2012-10-09Focus Diagnostics, a business of Quest Diagnostics Inc And 3M Co announced that the U.S. Food and Drug Administration (FDA) has provided 510 clearance and CLIA moderate-complexity categorization to the Simplexa Flu A/B & RSV Direct test on the 3M Integrated Cycler. The new test aids in the qualitative detection and differentiation of RNA of influenza A and B vi-ruses and respiratory syncytial virus (RSV), common causes of respiratory illness. Focus Diagnostics, maker of the Simplexa brand of molecular test kits, and 3M, maker of the 3M Integrated Cycler technology, developed the test through an exclusive global collaboration. The collaboration, formed in 2009, has produced several Simplexa molecular tests, including the first FDA-cleared commercial test for the influenza A H1N1 (2009) virus. Moderate complexity laboratories, defined by the Clini-cal Laboratory Improvement Amendments (CLIA), include certain types of physician’s offices, community hospitals, health clinics and integrated delivery networks.

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INDUSTRY ANALYSIS


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