Value: An Introduction to Alternative Structures and Transactions Involving MHS Presentation to the City Assets & Enterprises Sub- Committee of the Committee on Sustainable Funding October 9, 2008 Presenter: Larry McEvoy, M.D., CEO

2 Deconstructing Value Financial –Face-value of asset –Economic engine of impact (~5,000 jobs) Access to health care –Long term benefit of mission-driven access vs. profit-driven access Community health status –Economic –Cultural –Population Interests –Local vs. Corporate –Mission vs. Margin –Safety net vs. highest quality Control –Local? Franchised non-local? One-time Windfall vs. Sustainable Value Distribution Requirements

3 Options + Attributes OptionsCash Value & Distribution Requirements Taxpayer Risk K-Access & Borrowing Flexibility Local Interests & Control Access to Care; Comm. Health Full Integration Opportunity Competitive Nimbleness Status Quo Public Hospital Authority Privatize (501-c-3) Sale to a Not-for-Profit Sale to For- Profit To be filled in…

4 How do we create the highest community value with regard to healthcare and its impact in Colorado Springs? The Question We’re All Asking….

5 Minimize risk Optimize value & community impact Increase flexibility and competitive strength The Answer… Ensure care Protect the public Drive community value

6 How have other communities explored and answered this question? For example, –Hennepin County, Minnesota –Carson City, Nevada –Tampa, Florida What are the legal possibilities and implications regarding privatization, sale or other ownership options? What is the value of this asset? –This is a very complex calculation. Please see appendix for more information on approach and methodology. Key Questions and Resources

7 Appendix: - Valuation Analysis of a Health Care Organization- Approach and Methodology - Assets & Cash Flow as of August 2008

8 Valuation Approach A valuation analysis provides an indication of the fair market value, which is equivalent to the Business Enterprise Value ("BEV"), of a healthcare organization. BEV is defined as the most probable price that the net tangible and intangible operating assets (or business enterprise) of a business may bring, in a competitive and open market under all conditions requisite to a fair sale, with buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimuli. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: –The buyer and seller are typically motivated; –Both parties are well-informed or well-advised, and each is acting in its own best interest; –A reasonable time is allowed for exposure in the open market; –Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and –The price represents the normal condition for the enterprise sold unaffected by special or creative financing or sales concessions granted in connection with the sale or if so granted, the value of which is included. BEV generally includes a level of working capital sufficient to operate the business. However, it is not influenced by the capital structure or method of acquisition financing, although each will affect the net proceeds available to the seller. Equity Value is calculated by subtracting from BEV all long-term liabilities and adding / subtracting excess or deficient working capital amounts. (Equity Value represents the proceeds the sellers would expect to receive from a sale if the seller retained none of the liabilities associated with the enterprise, or the net proceeds to the seller after the repayment of liabilities.) Source: Kaufman Hall

9 Valuation Methodology There are three generally accepted methodologies used to estimate the value of healthcare organizations. Specifically, these methodologies include: –Market approach  Public market valuation of hospital management companies  Comparison of acquisitions of comparable hospitals and health systems –Income approach  Discounted cash flow analysis No single valuation approach can fully express the value of the healthcare organization. In addition, adjustments must be made to each approach in order to reflect the valuation considerations that are specific to your healthcare organization. A combination of results will provide the most reliable estimate of fair market value of the enterprise. While our valuation analysis relies upon the valuation methodologies outlined above, we also consider the marketing process of your organization conducted in selecting a buyer and the final offers that may be received. Finally, the analysis assumes that the businesses and operations of the MHS organization shall be ongoing. Therefore, it does not evaluate or appraise the current physical assets used in these operations. This type of “cost” approach to valuation is of limited use when valuing healthcare operations, since these entities acquire value not from assets, but only when operated as businesses. Source: Kaufman Hall

10 Assets

11 Cash Flow