serving georgia’s community hospitals for 28 years alliance membership business meeting october...

Serving Georgia’s community hospitals for 28 years

Alliance Membership Business Meeting October 13, 2011

Special Session Recap

Legislative Issues:•2012 Agenda Items•Look Back at 2011 Session•Look Ahead to 2012 Session

Questions & Discussion

Governor’s Call•Reapportionment•Transportation sales tax •Motor fuel tax

Timeline•Began August 15, 2011•Ended August 31, 2011

Accomplishments•Legislative and Congressional reapportionment maps adopted

•Date of TSPLOST vote not changed

•Motor fuel tax suspension ratified

Access•Expand the delivery of quality healthcare available to all Georgians regardless of their ability to pay. •Implement funding mechanisms that provide full reimbursement to providers of medical services to all populations.

Community BenefitsRecognize the benefits of having community-based organizations that re-invest in their services and facilities in order to keep resources, jobs and quality healthcare in Georgia communities.

Essential Services •Continue to provide tax exemptions that allow not-for-profit hospitals to provide essential but unprofitable services, such as emergency care, trauma, perinatal services and training new physicians.

•Create a sustainable, statewide trauma network that provides excellent care to victims of traumatic accidents.

•Increase funding for healthcare training, including funding for additional medical school and graduate medical education slots.

2011 Look Back •Created the Department of Public Health

•Gave burn centers trauma designation

•Allow EMTs to be compensated for all trauma patients

2012 Look Ahead •Possible minimum standards for not-for-profit exemptions

•Transition of public health duties to new agency

Quality of CareContinue to improve the quality of healthcare outcomes for patients, including the goal of eradicating medication errors and hospital infection rates while guarding against unnecessary and ineffective legislative and regulatory burdens.

Workforce•Increase the supply of qualified healthcare providers practicing in the state of Georgia through increased medical education opportunities and thoughtful accreditation and practice standards.

•Ensure that healthcare workers can perform their duties to the best of their ability by allowing them to use the most medically prudent practices and protecting their physical safety while at work.

Regulations•Rewrite Georgia’s open records act in a manner that provides clarity and transparency while protecting the ability of governmental entities to effectively carry out their duties.

•Allow hospitals to use any federally qualified accreditation entity.

2011 Look Back •Provide pertussis information to parents of newborns

•Greater latitude for community service boards

•Prohibit contingency fees for Medicaid audits- VETOED

•Consolidate Georgia Composite Medical Board and Georgia Board for Physician Workforce

•Created mechanism for Georgia Board of Nursing to license graduates of some non-traditional nursing programs

•Imposed tougher immigration laws

2012 Look Ahead•Rewrite of open records law

•Adoption of new federal accreditation standards

•Clarification of use of “third-arm” process in emergency rooms

•Certification standards for surgical technicians

Medicaid & Medicare•Improve reimbursement levels for all Medicaid & Medicare providers, including supplemental payments for uncompensated care from the Indigent Care Trust Fund.

•Redesign the state’s Medicaid program in a manner that directs the most reimbursement to providers of medical services while lessening the administrative and regulatory burdens on those same providers.

Private Insurance Increase the number of patients with private insurance through the creation of an insurance exchange that is tailored to best suit the needs of Georgia’s citizens and healthcare providers.

2011 Look Back •Amended Fiscal Year 2011

• $2.24B State Funds ($12.28B Total Funds)• No direct cuts to hospital Medicaid rates

•Fiscal Year 2012• $2.45B State Funds ($11.22B Total Funds)• .5% cut to Medicaid provider rates but no

direct cuts to hospital Medicaid rates

•Amended allocation methodology for Disproportionate Share Hospital Program

2011 Look Back •Avoided reduction in hospital provider payment add-on rate

•Allow Georgians to purchase health insurance policies approved in other states

•Imposed prompt pay requirements on third party administrators

•Implemented contingency rate for emergency medical services for county inmates

•Adopted Health Care Compact

2012 Look Ahead•DCH Budget Proposal for AFY 2012 & FY 2013

• No Medicaid or PeachCare cuts

•Redesign of Medicaid program

•Sunset of hospital provider payment in 2013

•Possible creation of individual and small business insurance exchanges

•Changes to Medicare & Medicaid programs as part of federal budget deal & Affordable Care Act

•Reform the state’s tax system in a manner that does not impact the ability of not-for-profit hospitals to fulfill their mission of caring for patients and serving their communities.

•Encourage the continued strength and growth of the healthcare job market through tax policy that allows hospitals to expand services and provide tens of thousands of career opportunities.

•Implement tax policy that discourages unhealthy behavior, like the use of tobacco, rather than imposing financial hardships on healthcare providers.

2011 Look Back •Increased nursing home provider fees and reimbursement rates for SOURCE patients•Debated recommendations by Special Council on Tax Reform and Fairness for Georgians

2012 Look Ahead •Continue discussion of state revenue structure

Industry Consolidation in the Era of Health Reform

Industry Consolidation in the Era of Healthcare Reform

October 13, 2011

1

Healthcare M&A Trends & ActivityCurrent Situation

____________________Source: Wall Street research.

Trends Commentary

Lower patient volumes as patients defer elective services

Increased charity care/ bad debt expense due to high unemployment and the loss/ reduction of insurance

Unfavorable changes in payer mix away from commercial payers due to elevated levels of unemployment

Medicare/ Medicaid rates reductions going forward

Challenged State budgets further affecting Medicaid rates

Commercial insurer leverage pressuring reimbursement rates

State insurance exchanges likely driving reimbursement below commercial payers

Reduced ability to cost shift

Higher interest expense due to credit deterioration

Costs of implementing physician alignment initiatives

IT investments

Unfunded pension liabilities

Deferred maintenance - need to revitalize aging plants

Increased volume shift from inpatient to outpatient

Increased competition from specialty hospitals/ providers

Position for healthcare reform – clinical integration

Economies of scale and greater access to capital for larger organizations

Synergies and operational efficiencies, rationalization of services

Increased negotiating leverage

Access to quality infrastructure, care management capabilities, and sophisticated IT platforms

Weak Economy

Rate Reductions

Higher Expenses

Increased M&A Activity

Competitive Environment

2

Healthcare M&A Trends & ActivityHealthcare Reform – “Volume to Value”

New Delivery Model Reform Readiness Strategies

____________________Sources: Wall Street research.

Fee-for-service model replaced with single payment for all services related to treatment

Driver of clinical integration & volume reduction

Begins in 2013 for Medicare

Bundled Payments/Risk-based Compensation

New payment models based on cost savings and quality improvements

Reduced reimbursement rates for readmissions and hospital acquired infections

Pay-for-Performance

Predicated on theory that costs decrease through increased coordination across continuum of care

Shared savings incentives

Begins in 2012

Accountable Care Organizations

Reduce preventable readmissions and hospital acquired infections

Core measures, HCAHPS

Quality Improvements

Sector-wide shift towards consolidation accelerated by reform

Spread fixed costs over larger revenue base

Improve access to capital

Consolidation

Physician and medical group acquisitions

Physician Integration

Efficiency and savings initiatives

Commercial payer rates have likely peaked and government rates are set to decline

Cost Controls

Meaningful use standards

Potential for long-term cost savings

Investments in Technology

3

Healthcare M&A Trends & ActivityImpact of Debt Ceiling Agreement on Providers

Timeline

9/16: First Committee meeting

10/1: Discretionary cuts take effect

11/23: Committee votes

Jan. ’13: Automatic cuts take effect

Phase Commentary

Immediate discretionary cuts of $917 billion over ten years

Medicare and Medicaid are exempt

Committee to identify $1.2 - $1.5 trillion in additional cuts

$130 - $160 billion in Medicare cuts estimated

$50 - $100 billion in Medicaid cuts estimated

Automatic cuts kick-in if no agreement is reached

Medicare cuts limited to 2% across the board; Medicaid exempt

Excludes ~$500 billion of cuts from health care reform

Reform subsidies/ implementation funding may be targeted

Medicare payments to teaching hospitals may be targeted

Immediate Discretionary

Cuts

Deficit Reduction Committee

Automatic Cuts if No

Agreement

Providers face significant reimbursement cuts during the second or potential third phase of the $2.1 - $2.4 trillion

deficit reduction deal.____________________Sources: Wall Street research and industry publications.

97%

87%

76%

70%

50%

60%

70%

80%

90%

100%

$250M - $500M $500M - $1BN $1BN - $2BN $2BN+

4

Healthcare M&A Trends & ActivityRelationship Between Scale and Credit

Distribution of Credit Ratings(2)

Volume & Profitability(4)

Number of Hospitals in Systems(1)

Scale & Credit Ratings(3)

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35%0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35%

Pro

fits

Admissions

97%

87%

76%

70%

50%

60%

70%

80%

90%

100%

$250MM-$500MM $500MM-$1BN $1BN-$2BN $2BN+

Operating Revenues% o

f S

yste

ms R

ate

d “

A” o

r H

igh

er

____________________(1) Source: American Hospital Association. (2) Source: Standard & Poor’s 2010 Not-for-Profit Healthcare Medians.(3) Source: Moody’s Investor Services.(4) Source: The New England Journal of Medicine. “The Next Wave of Corporate Medicine – How We All Might Benefit.” David M. Cutler. August 2009.

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

211

6

12

17

2121

18

101213

15151414

43

0

5

10

15

20

25

Systems Stand-Alones

AA+/ AA AA- A+ A A- BBB+ BBB BBB- SG

Access to Capital

Economies of Scale

Private EquityWeak Economy

Physician Integration

Access to Full Continuum of

Care

5

Healthcare M&A Trends & ActivityFactors Driving Consolidation

Unprecedented combination of macro-economic influences, industry pressures and market dynamics driving consolidation.

CONSOLIDATION

Management Expertise

Physician Recruitment &

Retention

Investments in Technology

Purchasing Leverage

Low Interest Rate Environment

Risk Bearing Capabilities

Operating Efficiencies

Managed Care Expertise

6

Hospital and Health Care System Strategic Response

Hospitals and healthcare systems across the U.S. are evaluating their strategic options.

Healthcare M&A Trends & Activity

Approaching systems viewed as most favorable partner with skill, scale, share and resources

Develop new regional systems with other independent hospitals Leveraging a competitive partnering process to maximize value of assets and ensure

most attractive terms including purchase price, capital commitments, continuity of services

Developing specialty service provider in the market – “carving out a niche”

Multi-State Systems

Market by market strategic assessment; portfolio analysis - invest, partner, divest or swap

Take advantage of opportunities to grow in existing markets where viewed as favorable partner

Growth in contiguous as well as new markets Clinical integration through physician acquisitions Monetize non-core assets and re-deploy capital in markets with greater chance of

success Own across continue of care or partner to provide ancillary services (home health,

post-acute, etc.) Conversion to investor-owned

Assess wherewithal to be a consolidator or proactively approach most favorable partner(s)

Formation of “super regional” systems JV strategies to pursue growth, defend market share, build networks (acute &

ambulatory surgery) Sale of assets to raise capital for strategic investments in core market(s) Clinical integration through physician acquisitions Conversion to investor-owned

Regional Systems

Independent Standalone Hospitals

7

Healthcare M&A Trends & ActivityQuarterly Deal Volume by Healthcare Service

Behavioral Health

Home Health Hospitals Labs, MRI, Dialysis

Long Term Care Managed Care Physician Groups Rehabilitation

____________________Source: Irving Levin.

Transaction volume has accelerated significantly in the Hospital and Long Term Care sectors since the passage of health care reform in early 2010.

3

4

22

4

00

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

76

99

11

14

0

2

4

6

8

10

12

14

16

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

32

242424

18

9

0

5

10

15

20

25

30

35

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

4

11

89

16

8

0

2

4

6

8

10

12

14

16

18

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

383635

2827

20

0

5

10

15

20

25

30

35

40

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

7

11

7

3

2

0

1

2

3

4

5

6

7

8

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

27

18

29

13

912

0

5

10

15

20

25

30

35

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

2

3

5

1

4

2

0

1

2

3

4

5

6

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

256% Increase Since Q1 ’10

90% Increase Since Q1 ’10

8

Healthcare M&A Trends & ActivityHistorical Perspective

____________________Source: Irving Levin.

Announced Hospital Transactions

Mergers between 1994 and 2000 structured to enhance leverage with payors

In 2008/2009 financial crisis, hospitals internally focused on surviving short term

Healthcare reform has been an additional catalyst for hospital M&A in 2010 and 2011

Today, there is a general perception that benefits of scale include more than just increased negotiating leverage with key vendors

Scale and skill are necessary to achieve the efficiencies required for success in the new era of health care reform

112

73

52605857

5159

38

58

8386

110

139

183

0

20

40

60

80

100

120

140

160

180

200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2Q '11 Annualized

2012

?

Historical Hospital Sector Valuations (EV/EBITDA)

2012E EV/EBITDA(1)

9

Healthcare M&A Trends & ActivityValuation Perspectives

Hospital Acquisition Multiples

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

2003 2004 2005 2006 2007 2008 2009 2010

Pri

ce/R

even

ue

____________________Source: Wall Street Research.(1) As of September 30, 2011; Enterprise Value = MV of Equity + Short-term Debt + Long-term Debt + Preferred Equity + Minority Interest - Cash & Marketable Securities.

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

12

/00

3/0

1

6/0

1

9/0

1

12

/01

3/0

2

6/0

2

9/0

2

3/0

3

6/0

3

9/0

3

12

/03

3/0

4

6/0

4

9/0

4

12

/04

3/0

5

6/0

5

9/0

5

12

/05

3/0

6

6/0

6

9/0

6

12

/06

3/0

7

6/0

7

9/0

7

12

/07

3/0

8

6/0

8

9/0

8

12

/08

3/0

9

6/0

9

9/0

9

12

/09

3/1

0

6/1

0

9/1

0

12

/10

3/1

1

Median1 Year 6.7x5 Year 7.1x10 Year 7.3x

5.0x

6.0x

5.0x

5.8x

5.4x5.6x

4.4x4.6x4.8x5.0x5.2x5.4x5.6x5.8x6.0x6.2x

CYH HMA LPNT THC HCA VHS

Average: 5.5x

Below average trading multiples encouraging growth through acquisitions while assets are “under-valued”.

10

Healthcare M&A Trends & ActivityNot-for-Profit vs. For-Profit Buyers & Sellers

Buyers Sellers

70%

83%

58%

44%

60%

30%17%42%56%40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Non-Profit For-Profit

2006 2007 2008 2009 2010

____________________Sources: Irving Levin.

42%45%

63%67%

40%

58% 55% 37% 33% 60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Non-Profit For-Profit

2006 2007 2008 2009 2010

11

Healthcare M&A Trends & ActivityFor-Profit Hospital Management Companies

The universe of for-profit hospital management companies is shifting.

Financial sponsors are changing their view of hospital management companies in response to the pressures of health care reform. New players are emerging while

others are exiting the industry.

12

Healthcare M&A Trends & ActivitySignificant Private Equity Investments in the Hospital Sector($ in Millions)

____________________(1) Formerly Behavioral Healthcare Corp.(2) Date on which Merit, set up as an investment vehicle, bought its first hospital.(3) TPG acquired IASIS from JLL in a transaction that valued IASIS at $1.3 billion. TPG owned 74.4% of IASIS post transaction.(4) Blackstone acquired Vanguard in a transaction valued at $1.75 billion. Blackstone owned 66% of Vanguard post transaction.(5) Commitment equals amount of equity invested at transaction.

13

Healthcare M&A Trends & ActivityPrivate Equity Firms Highly Interested in Hospital Sector

General/Macroeconomic Favorable demographics

Stable, predictable, growing population

Weak economy

Low interest rates

Industry Specific Highly fragmented industry Non-cyclical Large component of GDP Capital intensive Public market valuations low Availability of seasoned mgmt

talent Precedent successes (HCA, Triad,

etc)

Factors Driving

Private Equity Investments

Health Care Reform Efficient debt markets Low-cost of capital Available cash for acquisitions Strong fundraising environment

as investors search for alternative to stock market

Financing Reduces uncompensated care

Demands efficient delivery model

Opportunity to effectively assume risk and capture more total healthcare dollars spent

Ability to turnaround operations and make acquisitions accretive

14

Public Hospital Management Companies - Leverage

Leverage is a Common Way to Fund Acquisitions(1)

The cost of borrowing in the high yield debt market has been near all-time lows.

Healthcare companies issued over 7% of all high yield debt in 2010

Vanguard - $1,990 million in three sales since 2010 UHS - $1,600 million in 2010 Tenet - $1,525 million in two sales since 2009

____________________(1) Source: Bank of America Merrill Lynch research.

Capella - $500 million in 2010 HCA - $4,460 million in four sales since 2009 Ardent - $325 million in 2010

Hospitals tend to move through cycles of levering up to make acquisitions, then spend the next few years using their free cash flow to de-lever and create balance sheet capacity for the next

round of acquisition growth.


0%

5%

10%

15%

20%

25%

US High Yield Master II Index BB B Healthcare

12/ 31/ 99 12/ 20/ 00 12/ 13/ 01 12/ 3/ 02 11/ 25/ 03 11/ 11/ 04 11/ 2/ 05 10/ 24/ 06 10/ 15/ 07 10/ 7/ 08 9/ 25/ 09 9/ 15/ 10 8/ 23/ 11

Current AverageHY Master II Index 8.63% 10.24%

"BB" 6.96% 8.11%"B" 8.92% 10.03%

Healthcare 8.19% 8.49%

15

Healthcare M&A Trends & ActivityFor-Profit/Not-For-Profit Transactions

Considerations For-Profit Hospital Companies are Expanding into New States

Investor-owned partnerships offer: Access to alternative sources of capital Purchase price often sufficient to

establish substantial community foundations

Capital commitments for capital projects

Commitment to maintain services Shared governance Sophisticated management IT services and capabilities Acceptance of existing charity care

policies Willingness to comply with Catholic

ERD’s Quality data indicates comparable

outcomes For-profits entering new markets

Formerly focused on select markets such as Sunbelt States, but now expanding into new regions, including Northeast

Investor-owned companies showing increased flexibility in partnership arrangements with not-for-profits. Increasing willingness of NFP’s to partner with

investor-owned companies.

Recent Transactions

ConnecticutConnecticut

Massachusetts

New Jersey

Rhode Island

Acquirer Target State Purchase Price

RI $77M

CT $200M

MA $103M

Date For-Profit Not-for-Profit State Structure Overview

9/ 1/ 2011 TX Vanguard acquired 51% interest in Valley Baptist for $210 million

2/ 20/ 2011 Multi 80%/ 20%; Ascension manages day-to-day operations

1/ 31/ 2011 NC 97%/ 3%; Lifepoint manages day-to-day operations

Duke benefits from referrals

5/ 27/ 2010 FL HMA acquired 60% interest in three Shands hospitals in Florida

4/ 15/ 2010 TX LHP and THR partnered to acquire Wilson N. Jones Memorial Governance is split 50%/ 50%

16


The blurring lines between not-for-profits and investor-owned companies…

For-Profit/Not-for-Profit Joint Ventures


Year Acquirer Target

Purchase Price

Number of Hospitals

2006 $33bn 176

2007 $6.8bn 51

2010 $3.3bn 16

2010 $1.7bn 44

2010 $1.3bn 8

2010 $830m 6

2009 $570m 20

2011 $475m 2

2010 $363m 5

2010 $355m 3

17

Healthcare M&A Trends & ActivityTen Largest Hospital Transactions, 2006-2011Q2


Seven of the ten largest hospital transactions have occurred in the last 18 months.

18

Healthcare M&A Trends & ActivityPayor/Provider Partnerships

Highmark Acquires West Penn Allegheny

UnitedHealth Acquires 2,300 Doctors in CA

Increased collaboration between insurance companies, hospitals and physicians is redefining the approach to healthcare delivery and population

health management.____________________Source: Company filings.

Highmark acquiring West Penn for a total consideration of approximately $500 million

Defensive maneuver

Attempt by Highmark to prop up the only competition to rival UPMC, the region’s largest provider in a two hospital town

West Penn is a five hospital system that has operated at a loss for the past five years

UnitedHealth Group acquired Irvine, CA-based Monarch HealthCare in September 2011

2,300 physicians in a range of specialties

Strengthens presence of United’s Optum health services business line in southern California

Other similar transactions include Humana’s acquisition of Concentra and WellPoint’s acquisition of CareMore Health Group

Trinity Health + Loyola University Health System

Transaction Highlights Overview of the Organizations

Announcement Date: March 4, 2011

Closing Date: June 30, 2011

Offer Price: $475m(1)

Price/revenue multiple: 0.43x. This compares to an average price/revenue multiple of 0.70x for Q1 ’11(1)

Structure: Membership Substitution

Transaction Summary: Trinity Health (“Trinity”) acquired Loyola University Health System (“LUHS”) from Loyola University of Chicago (“LUC”)

Largest hospital transaction closed in 2011 YTD

Example of unique transaction involving a community hospital system acquiring an academic medical center

Business4th largest Catholic health system in US

Only Catholic AMC in Illinois

Bond Rating Aa2/ AA/ AA Baa3

Revenue $7.1 bn $1.1 bn

Discharges 331,587 39,938

Licensed Beds 7,833 820

Physicians 8,000+ 1,000

Students 800 1,824


____________________(1) Source: Irving Levin.

19

Universities are increasingly questioning the need to own academic medical centers given uncertainty of healthcare reform and significant capital demands.

20

Healthcare M&A Trends & ActivityEvolving Policies at State Governments

New Jersey

Florida

Massachusetts

Committee appointed to study a plan to dismantle the University of Medicine and Dentistry of New Jersey and replace it with an enhanced delivery system in Newark

Committee will report its findings to the Governor in September 2011

Commission on Taxpayer Funded Hospital Districts established in March 2011

Created to assess and make recommendations on the role of hospitals districts and whether it is in the public’s best interest to have government entities operating hospitals

For-profit hospital companies have been actively acquiring stand-alone not-for-profits, a trend that is not expected to cease anytime soon, nor one that is necessarily unwelcome by the State government

Massachusetts’ unique health insurance model (e.g. RomneyCare) positions it as a testing ground for health care reform readiness strategies

____________________Sources: Industry publications and periodicals.

State and local governments are beginning to view for-profit hospitals as a welcome new source of tax revenue.

Illinois

Illinois’s Department of Revenue is scrutinizing, and in some instances revoking, hospitals’ property tax exemption due to alleged inadequate charitable care levels

21

Healthcare M&A Trends & ActivityStrategies for Growth and/or Repositioning

Ancillary and Other Services

2010

Skilled Nursing Facilities

Ambulatory Surgery Centers

Imaging Centers

Sole Provider

Academic

LTACHs

Home Health

Hospice

Rationalize Portfolio

Divest

Joint VentureSuburban

Urban

Acute Care

Rural Children’s

Clinical Labs

Examples Include:

100% Sale

Sale of majority equity interest

Convert selected assets into new for-profit venture

Physician Services

Nurse Staffing

HCITRadiation Therapy

Dialysis

In the current period of rapid transition there are new and innovative solutions to support and fund growth and/or reposition ancillary services and non-core business lines.

Non-Traditional

Outsourcing & Infrastructure

Behavioral Health

In Market Acquisition

New Market Acquisition

JV’s w/ NFP Consortium

JV’s w/ For-Profit

National For-Profit

Affiliation

JV’s w/ Private Equity

Consortium JV’s w/ Private

Equity

For-Profit Conversion

Strategies

Traditional

JV’s w/NFP

22

Healthcare M&A Trends & ActivityASCs - Select Partnerships with Not-For-Profits

Health systems can attract external capital while enhancing

and implementing their outpatient surgery strategies through joint

ventures and/or affiliation agreements.____________________

Source: Company filings.

Health System/Hospital Geographic FocusSutter Health Multiple CA MarketsCA Pacific Medical Center San Francisco, CAUniversity of CA San Diego San Diego, CARedlands Comm Hosp Redlands, CALoyola Univ Hlth Systm Oakbrook Terrace, ILBaylor College of Medicine Houston, TXHoly Spirit Camp Hill, PAMainline Health Paoli, PABaptist Health System Memphis, TNVanderbilt University Nashville, TNShands Hospital Jacksonville, FLFlorida Hospital Winter Park, FLOwensboro Health System Owensboro, KYNortheast GA Medical Ctr Gainesville, GAMuskogee Reg Med Ctr Muskogee, OKNorman Reg Hospital Norman, OK

Health System/Hospital Geographic FocusAdventist Health 12 StatesAscension Health 19 States and D.C.Baylor Mutliple TX MarketsBon Secours Seven statesCatholic Health Partners Four StatesCatholic Healthcare West Three StatesCentura Health Colorado CHRISTUS Health Eight statesCookeville Reg Med Cntr Middle TennesseeCovenant Health Eastern TennesseeINTEGRIS Health OklahomaKennedy Health New Jersey Legacy Health Portland, OregonMcLaren Health MichiganMemorial Hermann Houston, Texas Meridian Health New Jersey Mountain States Hlth Allnc Northeast TennesseeNorth KS City Hospital Kansas City, MONorthShore Univ Hlth Chicago, ILProvidence Health System Five statesScripps Health San Diego, CASSM Healthcare Four statesSt. John Health System OklahomaSt. John's Mercy MissouriChrist Hospital Cincinnati, OHWilliamson Med Cntr Franklin, TN

23

Healthcare M&A Trends & ActivityClosing Remarks

Take a proactive approach to determining the fate of your organization in the new era of healthcare reform

Analyze operational performance based on Medicare only reimbursement and ability to bring costs in line

Critically assess your strategic position in the market

Ascertain what you believe will be the end game in your market and how your organization fits in

Evaluate all strategic alternatives for all assets and services across the continuum of care

Think outside the box

Be open to discussions with all parties

Develop a comprehensive strategic plan as soon as possible

We encourage you to….

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Copyright 2008 Bank of America Corporation.

Notice to RecipientConfidential

Tax Policy DiscussionTax Policy Discussion

•Introduction & Overview

•Community Specific Examples

•Implications of Tax Policy

•Not-for-Profit Mission

•Not-for-Profit Value

•Community Benefit Standards

Caring Caring for for

PatientsPatientsPaymentsPayments


PatientsPatientsPaymentsPayments

DividendsDividends


PatientsPatients

PaymentPaymentss

ReinvestmeReinvestmentnt

Serving Serving Our Our

CommunitiCommunitieses

Tax Tax ExemptioExemptio

nn

ReinvestmenReinvestmentt

Community Benefit Studies

•Pershing Yoakley Associates

•Cleverly & Associates

•Medlytix

Study Parameters•Used FY '09 data from hospital financial surveys (HFS), audited financial statements and community benefit reports

•Only 990 allowable costs

•Only 1/3 of bad debt based on Medlytix study of federal charity standards

•No uncompensated Medicare costs included

•No costs attributable to essential services

•Taxes estimations for sales & use, property and income taxes

Value Versus Exemptions

•$1.15 Billion in Community Benefits

•$288 Million in Estimated Tax Exemptions

•$862 Million Return on Investment

$1 state & local exemptions = $4 community benefit

Reinvestment

•2 year growth in net fixed assets

•Revenue to net fixed assets

Georgia NFP hospitals reinvest a substantial portion of their earnings back into community-based facilities and services as compared to national norms and

investor-owned hospitals.

Reserves

•Cash & reserves available $5.38 Billion

•Cash & reserve needs $7.68 Billion

•Shortage of $2.30 Billion

NFP hospitals do not have excess reserves; in fact, current reserves are not sufficient to meet established working capital and replacement needs.

Economic Impact

•Over 100,000 jobs

•Almost $6 Billion in salaries and benefits annually

•Healthcare access is an important concern for relocating businesses

•Healthcare is one of only two industries with job growth during the recession

Economically viable hospitals are good for the economic development of Georgia

Essential Services

•15 of the state’s 16 trauma centers

•State’s busiest emergency departments

•95% of residency slots

•Majority of NICU beds

NFP hospitals provide the bulk of the state’s essential but unprofitable services.

Studies Conclusions

•$1 state & local exemptions = $4 community benefit

•Georgia NFP hospitals reinvest a substantial portion of their earnings back into community-based facilities and services

•NFP hospitals do not have excess reserves

•Economically viable hospitals are good for the economic development of Georgia

•NFP hospitals provide the bulk of the state’s essential but unprofitable services.

•State & Federal Minimums

•Illinois Experience

•Local Control

One Size Does NOT Fit All

•Gainesville

•Jesup

•Savannah

• NGHS is a not-for-profit community health system dedicated to improving the health and quality of life of the people of northeast Georgia and receives no tax support from local government for indigent care.

Northeast Georgia Health System

• NGHS is the largest employer in Hall County• Hall County is home to 47 Fortune 500 companies and the overall

economic health is strong• 9.6% of families live below the poverty level • 19% are uninsured (www.healthyhall.com)

Northeast Georgia Health System

Healthy Hall Community Partnership

• To better understand the healthcare needs of the community, the Healthy Hall Partnership was convened by NGMC in 1998 to oversee a comprehensive local health needs assessment process.

• The assessment identified as a critical issue in Hall County the impact that access to the healthcare system had on the health status of county residents.

• Some of the resounding priories identified were:– The need for expanded access to effective disease

prevention services, health screening and disease management strategies for all in Hall County, including those with low incomes and no insurance;

– Expanded access to dental services, especially for uninsured, low income children;

– The need to decrease utilization of the emergency department for non-emergenthealth care.

Community Health Needs Assessment

HALL COUNTY MODEL FOR SERVING MEDICALLY INDIGENT

Good News Clinics

Hall County Health Department

Health Access Initiative

Northeast Georgia Health System, Inc.

Inpatient &Outpatient Care

Primary &Prenatal Care

Specialty Care

Primary &Dental Care

The Longstreet Clinic

Volunteer Physicians and Professionals

Good News Clinics

• NGMC helps support Good News Clinics (GNC), a non-profit, faith-based charitable clinic that provides free healthcare services to indigent people in Hall County who do not have insurance or cannot qualify for government-sponsored programs.

• NGMC has been a partner with Good News Clinics since it was founded by private physicians in 1992.

• GNC receives no State or federal funding.• GNC is the largest free clinic in the State.

Good News Clinics

Impact• During the past 3 years, Good News Clinics has

had:– 28,806 medical visits– 22,041 dental visits– 30,723 lab visits

• Additionally, the GNC dispensary has filled 202,596 prescriptions valued at $11.9 million.

Good News Clinics

• A study conducted by Phaedra Corso, PhD and Angela Fertig, PhD, researchers at the Department of Health Policy and Management at the University of Georgia, researched the economic benefits associated with two free clinics in Georgia, one of which was the Good News Clinics.

• According to the study in both communities and clinics,– The costs associated with non-urgent ED care decreased

14% to 20% for a sample of patients in the year after they enrolled in the free healthcare clinic compared to the year before enrollment in the clinic

– In-patient related costs declined by 20% to 34% in both clinics

Good News Clinics and Health Access Initiative

• Hall County residents rank 10th best for overall “Health Outcomes” according to data reported in February 2010 by the Robert Wood Johnson Foundation and the University of Wisconsin Population Health Institute. – This ranking can reasonably be attributed to non-

traditional collaborative initiatives with community partners that NGMC has long engaged in and supported to remove barriers to healthcare services for low-income populations.

Total Contributions to Good News Clinics Since 2006

Payouts AmountFebruary 2007 12,000.01

February 2007 187,999.99

FY08, 1st contribution 131,731.00

FY08, 2nd contribution 102,530.00

FY08, year-end contribution 95,854.00








$1,490,473.00


• HAI, a partnership of the Hall County Medical Society, private physicians, and NGMC, grew out of the efforts and findings of the Healthy Hall Partnership.

• HAI was founded in 2002 to provide a more efficient model of specialty care delivery. In January 2003, HAI’s first executive director was hired and HAI became incorporated shortly thereafter.


• With the leadership of physicians and the involvement of NGMC, HAI has successfully developed a sustainable, comprehensive, well coordinated health delivery system that manages care, promotes early intervention and integrates primary specialty, ancillary and hospital services for the uninsured.

• A network of more than 200 physicians provides care for HAI enrollees at no charge.

• HAI enrolls adult (18-64 years old) residents of Hall County who are uninsured, at or below 150% of federal poverty level and not eligible for other public programs.


Operating Costs and Funding Sources• HAI’s operating budget for 2009 was $264,425; The

Medical Center Foundation provided 90% of funds. NGMC also provides HAI with office space and covers the cost of utilities.– Emergency Department utilization October ’09 - July ’10 –

Non HAI patients (self-pay and all payers) used the ED 25 times more frequently than HAI patients and self-pay patients were hospitalized twice as often as HAI patients.

– Inpatient admits – Self-pay patients were hospitalized twice as often as HAI patients. All payers (non HAI) were hospitalized 3.4 times the rate of HAI patients.

– Outpatient services utilization – HAI patients obtained needed healthcare services via outpatient (95.2%) for most of their encounters at NGMC.

Provider Tax $3,000,000

Indigent/Charity Care (at cost) $28,000,000

Bad Debt (High deductible/copays) (at cost) $18,600,000

Partnership for Medically Indigent $1,700,000

Loss on Medicaid Patients $16,500,000

Property Tax on non-exempt Holding $650,000

Sales Tax on non-24 hour Services $160,000

Other Defined Community Benefit $3,100,000

$71,710,000

NGHS Projections for Fiscal Year 2012

Wayne Memorial HospitalWayne Memorial Hospital

Interesting FactsInteresting Facts

•84 Beds84 Beds•400 Employees400 Employees•$100,000,000 Community $100,000,000 Community

BenefitBenefit•55thth Largest Employer in Largest Employer in

CountyCounty

Sales Tax ExemptionSales Tax Exemption

If we lost the sales tax If we lost the sales tax exemption,exemption,

it would cost us it would cost us $900,000$900,000..

Making Up the Making Up the DifferenceDifference

Examples of what would have to be Examples of what would have to be eliminated:eliminated:

– Certified Athletic TrainerCertified Athletic Trainer– Local SponsorshipsLocal Sponsorships– Community Wide Health FairsCommunity Wide Health Fairs– Health Related Community EducationHealth Related Community Education– Rural Health Clinic in Long County Rural Health Clinic in Long County

(Only place to go in county to access (Only place to go in county to access health care services)health care services)

87

Mission Driven Community Impact

An Overview

GA Alliance of Community HospitalsOctober 2011

88

St. Joseph’s/CandlerWho We Are

– St. Joseph’s Hospital• Founded in 1875 by 5 Sisters of Mercy to care for sick

mariners and the poor• The Sisters were and are known as the caregivers for

poorest of the poor• Sponsored by the Sisters of Mercy

– Candler Hospital• Candler Hospital is Georgia's first hospital (chartered in

1804) and the second oldest continuously operating hospital in the United States.

– Founded by Bishop Warren Candler• Affiliated with the Methodist Church

– Merged on April 1, 1997

89

Our Approach to Community Benefits

Rooted in God’s Love, we treat illness and promote wellness for all people

• Our community benefit activities are an extension of our mission

• We have a responsibility to the community we serve

90

Our Approach to Community Benefits

Rooted in God’s Love, we treat illness and promote wellness for all people

• Extensive outreach to fulfill our responsibility– We provide and report charity care, government payor

shortfalls, etc., but these numbers alone do not adequately reflect what we do in the community

• Holistic approach– More than the freedom from disease– Health is also defined by social determinants

(housing, education, nutrition and employment)

91

Mission Governance Structure

• St. Joseph’s/Candler Board of Trustees

• CEO and Leadership Team

• Mission/Ethics Committee of the Board

• Community Benefit Coordinator

• Culture of Service Among Co-workers

• Co-worker Involvement– Reporting community benefits is on-going– Helping with outreach efforts

92

Outreach Examples

• African American Health Information and Resource Center– Started in 1999, this center is part of St.

Joseph’s/Candler’s ongoing commitment to improve the health of the African-American community and to correct health disparities. Originally opened to bridge the digital divide.

• Computer Classes, Technology Camp, Job Search Assistance, Health Education and Seminars, Weight Loss/Exercise Program, Math & Reading Tutorial, Blood Sugar & Pressure Screenings and Case Management Program and Summer Cooking Camp for Middle School Students.

93

Outreach Examples

• St. Mary’s Community Center – This center was established in 2000 in the Cuyler-

Brownsville neighborhood to provide a variety of services addressing basic needs as well as opportunities for advancement.

• Food Pantry, Food Stamp Assistance, Life & Financial Coaching, Health Education, Eye Exam and Eye Glass Assistance, Pre-school, Senior Services, General Education Diploma (GED) Courses, Job Search Assistance, Computer Classes, Free Tax Preparation and Membership in Local Advocacy Groups.

94

Outreach Examples

• St. Mary’s Health Center– Once housed in the St. Mary’s Community

Center, the Health Center is now in a free standing building one mile away, open 5 days a week to serve the uninsured.

• Primary Care Ages 19-64, Mammograms, Pap Smears, HIV Testing, Diagnostic/Imaging, Routine Pathology, Medication Assistance, Diabetic Counseling, Medical Supply Assistance and Hospitalization.

95

Outreach Examples

• Good Samaritan Clinic– Located in Garden City, the Good Samaritan clinic

opened in October 2007 to provide medical care to Hispanic patients on Savannah’s west side. Since opening, the GSC has seen a shift in ethnic demographics, but remains a trusted medical home for all their patients. SJ/C staff manages a dynamic group of about 100 volunteer physicians, nurses and interpreters.

• Services: Primary Care Ages 19-64, Diagnostic/Imaging, Routine Pathology, Medication Assistance, Diabetic Counseling, Nutrition Education, Personal Counseling and Hospitalization..

October 13, 2011

GACH 2011 Annual MeetingPresented by: Wendy Stewart & Darrel Flanel

Cover Slide

Elimination of State Tax ExemptionAssumptions were based on the Pershing Yoakley & Associates study “Comparative Analysis of Uncompensated Community Benefits Provided by NFP Hospitals with the Estimated Value of Georgia Tax Exemptions” by: W. Edward Phillips and Susan P. Clark.

Income Tax •Income Tax= {(Excess Revs & Gains over Exp. & Losses – (SUM of Sales Tax Exp. + Property Tax Exp. + FUTA Exp.) – Grants/Contributions/Donations)} x 6%

Sales Tax•Sales Tax= Supplies x 7% (excludes drugs; assumes drug exclusion remains in tact)

Property Tax•Property Tax= PP&E x 40% x 4% (the average rate for metro Atlanta counties)

FUTA (Federal Unemployment Tax Act)•FUTA (Federal Unemployment Tax Act)= # of Employees x $7,000 x .06

Other External Factors Include: Medicaid cutsMedicare cutsThreat to tax exemption for municipal bond holders

Potential Challenges Facing NFP Hospitals

Potential Loss of State Tax Exemption

(Dollars in thousands, except per share amounts) Sample AA rated Adjusted AA Sample BBB Rated Adjusted BBBUNRESTRICTED REVENUE

In Patient Revenue 3,019,503 3,016,913 448,591 448,591 Disproportionate Share Payment Rev 16,570 16,570 1,366 1,366

State Add-On Payment 0 0 11,775 11,775 Less: Contractual Adjustments (1,618,527) (1,618,527) (54,762) (54,762)

Net Patient Revenue 1,417,546 1,414,956 406,970 406,970 Other Operating Revenue 81,837 81,837 9,521 9,521

Net Revenue 1,499,383 1,496,793 416,490 416,490

OPERATING EXPENSES Salaries and Wages 788,622 791,562 201,961 203,221

Supplies & Drugs 227,170 237,506 76,925 80,425 Rental and Lease Expense 6,388 31,168 4,760 10,337

Depreciation & Amortization 77,249 77,249 20,431 20,431 Bad Debt 124,546 124,546 35,191 35,191

Other Operating Expenses 200,873 200,873 59,052 59,052 Interest expense 19,646 19,646 6,558 6,558

Total Operating Expense 1,444,493 1,482,549 404,878 415,215

Operating Income 54,890 14,243 11,612 1,275

NON-OPERATING INCOME (EXPENSE) Investment Income 27,671 27,671 1,403 1,403

Income from Affiliates/Joint ventures 19 19 203 203 Misc Non-Operating Income (863) (863) (1,137) (1,137)

Grants/Contributions/Donations 4,249 4,249 911 911 Total Non-operating Revenue/(Expense) 31,076 31,076 1,380 1,380

Additional gain/loss (486) (486) (2,431) (2,431)

Excess Revs & Gains over Exps & Losses 85,480 44,833 10,561 224

REMOVAL OF STATE TAX EXEMPTIONS Sales Tax Expense 10,336 3,500

Property Tax Expense 24,780 5,577FUTA Expense 2,940 1,260

Income Tax Expense 2,590 0Total impact of state tax exemptions 40,646 10,337

Adjusted Excess Revs & Gains over Exps & Losses 44,833 224

AA Rated Hospitals Fiscal Year Ending FY10 Before FY10 AfterLiquidityDays Cash On Hand 223.54 209Days Acounts Receivable 47.73 No Change ProfitabilityOperating Margin (%) 3.60% 0.95%

BBB Rated HospitalsFiscal Year Ending

FY10 Before FY10 After

LiquidityDays Cash On Hand 112.93 103Days Accounts Receivable 46.96 No Change ProfitabilityOperating Margin (%) 2.72% 0.32%

MEDIAN Data Table 2010 Moody's Medians 2010 S&P Medians 2010 Fitch Medians Aa A Baa AA A BBB *NIG AA A BBBLiquidity Ratios

Days Cash on Hand (DCOH) 228.5 179.7 116.6 320.6 201.9 133.6 73.9 240.0 194.1 128.6Cushion Ratio (x) 25.7 16.7 9.6 29.3 17.7 9.6 5.6 22.4 15.4 8.8

Cash and Unrestricted Investments ($000)$1,043,979 $251,690 $120,433 - - - - - - -

Cash-to-Debt 180.3% 127.3% 74.2% 232.7% 145.2% 97.0% 60.8% 159.0% 113.8% 79.8%Net Days in Account Receivable 46.4 44.4 43.8 44.9 44.2 44.7 42.0 43.9 43.8 43.8

Profitability Ratios

Operating Margin 4.50% 2.60% 1.00% 5.10% 2.80% 1.60% 0.00% 4.30% 2.60% 1.70%Excess Margin 7.60% 5.30% 3.30% 7.20% 4.60% 3.00% 0.50% 6.00% 4.10% 3.00%

Capital and Cash Flow Ratios

Operating Cash Flow Margin 10.80% 10.00% 7.50% 12.90% 10.10% 8.80% 5.80% 9.00% 8.90% 7.70%Net Patient Revenues ($000)$1,443,658 $492,141 $339,817 $757,207 $327,003 $173,078 $126,057 - - -

MADS Debt Service Coverage (x) 6.30 4.60 3.10 5.80 4.20 2.90 1.90 5.00 3.70 2.60Debt to Cash-Flow 2.40 3.30 4.80 - - - - 3.00 3.40 4.00

LT Debt to Capitalization 31.10% 38.60% 51.40% 26.50% 32.60% 41.00% 52.60% 34.40% 41.90% 48.40%

Age of Plant 9.4 10.1 11.0 9.1 9.9 10.2 12.1 9.6 10.2 10.5

Impact to the Ratios

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