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Chicago - March 29-30, 2012 2012 PLUS Medical PL Symposium Private Equity In Healthcare: Whats the Attraction?

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Presentation on theme: "Chicago - March 29-30, 2012 2012 PLUS Medical PL Symposium Private Equity In Healthcare: Whats the Attraction?"— Presentation transcript:

1 Chicago - March 29-30, 2012 2012 PLUS Medical PL Symposium Private Equity In Healthcare: Whats the Attraction?

2 PRIVATE EQUITY IN HEALTHCARE: WHAT'S THE ATTRACTION? MODERATOR: James J. Kennedy, III, Esq., Shareholder, Carlton Fields PANELISTS: Todd Rudsenske, MBA, CPA, Managing Director, Cain Brothers & Company, LLC John Telenko, Vice President, Healthcare, Allied World Assurance Company, Ltd.

3 Private Equity in Healthcare: Whats the Attraction? MODERATOR: James J. Kennedy, Esq., Shareholder, Carlton Fields, PA PANELISTS: Carrie Cope, Esq., Shareholder, Schuyler, Roche & Crisham, P.C. James Fasone, ARM, RPLU, SVP, Alliant Healthcare Solutions, Inc. Ciara Frost, Esq., Partner, Kerns, Frost & Pearlman, LLC Douglass Hewitt, Esq., Partner, Kubasiak, Fylstra, Thorpe & Rotunno, P.C. John OByrne, Esq., Partner, Mendes & Mount, LLP

4 Current Situation ____________________ Source: Wall Street research. Private and Health Care

5 Factors Driving Consolidation Unprecedented combination of macro-economic influences, industry pressures and market dynamics driving consolidation. CONSOLIDATION Private Equity and Health Care

6 Hospital and Health Care System Strategic Response Hospitals and healthcare systems across the U.S. are evaluating their strategic options. 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 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 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) Clinical integration through physician acquisitions Conversion to investor-owned Private Equity and Health Care

7 Quarterly Deal Volume by Healthcare Service HospitalsLabs, MRI, Dialysis Long Term Care Managed Care Physician Groups Rehabilitation ____________________ Source: Irving Levin. Private Equity and Health Care

8 YearNumber of DealsDollars Committed 200256$ 3,403,681,000 200337$ 2,341,550,000 200459$ 9,706,390,000 200550$ 2,905,729,000 200655$35,533,500,000 200761$ 9,257,130,000 200860$ 2,580,600,000 200951$ 1,813,600,000 201075$10,792,632,000 201186$ 7,938,260,000 Total590$86,273,072,000 Hospital Mergers & Acquisitions 2002 - 2011 ____________________ Source: Private Equity and Health Care

9 DealValueQuarter Highmark acquired West Penn Allegheny$1.475 billionQ2:11 HCA acquired the remaining interest in HealthONE $1.45 billionQ2:11 Ascension Health acquired Alexian Brothers$645 millionQ2:11 Health Management Associates acquired Mercy Health Partners $525 millionQ3:11 Trinity Health acquired Loyola University Health System $475 millionQ1:11 Five Largest Hospital Deals of the Past 12 Months ____________________ Source: Private Equity and Health Care

10 For-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. Private Equity and Health Care

11 Significant P/E 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. Private Equity and Health Care

12 P/E Firms Highly Interested in Hospital Sector General/Macroeconomic nFavorable demographics nStable, predictable, growing population nWeak economy nLow interest rates Industry Specific nHighly fragmented industry nNon-cyclical nLarge component of GDP nCapital intensive nPublic market valuations low nAvailability of seasoned mgmt talent nPrecedent successes (HCA, Triad, etc) Factors Driving Private Equity Investments Health Care Reform n Efficient debt markets n Low-cost of capital n Available cash for acquisitions n Strong fundraising environment as investors search for alternative to stock market Financing nReduces uncompensated care nDemands efficient delivery model nOpportunity to effectively assume risk and capture more total healthcare dollars spent nAbility to turnaround operations and make acquisitions accretive Private Equity and Health Care

13 Deterrents to Private Equity Private Equity and Health Care Highly regulated industry Reimbursement cuts Decreases in inpatient surgery volumes Uncertainty of Healthcare Reform

14 Evolving 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 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 publics 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 Illinoiss Department of Revenue is scrutinizing, and in some instances revoking, hospitals property tax exemption due to alleged inadequate charitable care levels Private Equity and Health Care

15 Leverage is a common way to fund acquisitions 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 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. Private Equity and Health Care Leverage

16 Private Equity and Health Care Risk: Private vs. Not-for-Profit For-Profits Liability of Officers & Directors Freedom from labor agreements Not-for-Profits Sources of Funds Intermediate Sanctions Unrelated Business Income Tax (UBIT) Liability-Limiting Statutes Both FP and NFP Employment Practices Liability (EPL) Anti-trust risk Government Regulations & Compliance

17 Private Equity in Healthcare: Whats the Attraction? Questions?

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