1. Health System Partnerships
May 3, 2010

2. Changing Landscape: Health Systems
2006
Physician Challenges:
Waning out of network model
Poor reimbursement
Expense pressures
Reduced margins, distributions and valuations
Affiliation Goals:
Access to capital
Stability
Growth
Contracting leverage
Management effectiveness
Partial liquidity event
Hospital/ Corporate Partner
25%
Physicians Only
75%
2008
Hospital/ Corporate Partner
37%
Physicians Only
63%

3. Health System Perspective on ASCs
Build a leading network of ASC JVs
Recapture, grow ambulatory surgery volumes
Access efficient, convenient and high quality facilities
Free up hospital-based OR capacity
Align with high quality physicians
Leverage scarce capital across wide network
Expand brand name and market presence
Grow other IP, OP, and ancillary services
Earn strong financial returns
Prepare for Accountable Care Organization structure

4. Structuring Health System Partnerships
Build a scalable strategic plan
Know what you’re going after
Maximize physician ownership and commitment
Contract on behalf of your network
Control does not require 51%
Partner for the long term
Access partner capital
Negotiate effective non-competes
Negotiate effective buy-back provisions
Be flexible in approach to physician integration

5. Changing Landscape: ASC Industry
Past
Today + Future
“Flip This House” strategy – buy low, then sell to larger ASC company at high price
“Build It, And They Will Come” strategy
Out-of-network as corner- stone of strategy
Larger companies inhibited by accounting consolidation from making minority investments
Larger companies open to full range of deal structures – including minority investments
Sellers looking for long-term operating partner, who can bring sustained value
Economies of scale more important than ever
Reimbursement + cost pressure  consolidation accelerating

6. SCA Overview 126 facilities Strong clinical results 5,000 teammates
2,000 physician investors
$700 million revenue
Strong financial results
Significant capital
Flexible deal structures
Acquisitions
New builds
Hospital partnerships

7. SCA Operating Model How We Work Value To Our Centers
Focus on clinical quality and patient safety
Commitment to serving physicians and creating value
Investment in recruiting and developing leaders
Data driven processes and disciplined execution
Economies of scale
Best practice sharing
Clinical Excellence
Advocacy
Supply Savings
Volume Growth
Payer Contracting
Benchmarking
Training
Labor Management

8. SCA Performance
Prior Company
New Company

9. SCA Health System Experience
Health System/Hospital
Location
Sutter Health
Sacramento, Santa Rosa, & Auburn, CA
California Pacific Medical Center
San Francisco, CA
University of California San Diego
San Diego, CA
Redlands Community Hospital
Redlands, CA
Loyola University
Oakbrook Terrace, IL
Baylor University
Houston, TX
Holy Spirit
Camp Hill, PA
Mainline Health
Paoli, PA
Baptist Health System
Memphis, TN
Vanderbilt University
Nashville, TN
Shands Hospital
Jacksonville, FL
Florida Hospital
Winter Park, FL
Owensboro Health System
Owensboro, KY
Northeast Georgia Medical Ctr
Gainesville, GA
Muskogee Regional Med Ctr
Muskogee, OK
Norman Regional Hospital
Norman, OK

10. SCA Perspective Three areas of focus: Actively acquiring centers
Provide outstanding patient care + clinical outcomes
Create measurable value for physicians
Recruit + develop outstanding leaders
Actively acquiring centers
Private equity partner with interest to invest more capital
Make both majority and minority investments
Both physician/SCA and physician/hospital/SCA structures
Open to out-of-network centers, at appropriate price
Built to last – a stable partner for the long-term
Active corporate citizen for our teammates + communities

11. ASC Strategies for the Foreseeable Future: National Landscape as Viewed Through the ASC Prism Brent W. Lambert, MD, FACS Principal and Founder Luke M. Lambert, MBA, CFA, CASC Chief Executive Officer Ambulatory Surgical Centers of America

12. The ASC industry is no longer growing.
We will see as many closing ASCs this year as new openings.

13. The pool of surgeons is not growing, but rather contracting as a function of the population.

14. Maturation of ASCs where there are inadequate or no evergreen provisions in the documents.

15. Consolidation of payers.

16. Elimination of OON.

17. Private equity fervor for the ASC industry declining.

18. Minority model gaining acceptance with private equity investors.

19. ASC industry is weak politically vis-a-vis the hospital industry.
This is changing with the
ASC Association Advocacy Committee, comprised of corporate industry leaders and the ASC Association.

20. The Squeeze is On Now reaping the effects of dramatic cost inflation.
Reimbursement has been flat or down over the course of many years for most centers.
Large numbers of centers are not delivering positive returns.

21. Capital Driven Growth Will Disappoint
Capital is relatively abundant compared to good management.
Companies and capital providers that ignore accounting presentation in favor of business logic will prevail, others are handicapped.
Good operators don’t need capital.
You’d be surprised how often I hear: We have to own a majority, this works from a CF perspective but not for EPS, or our investors too trend oriented to be able to buy OON centers even at ridiculously low prices.

22. Keys to Future Success: Efficiency
Schedule consolidation delivers good old fashioned labor productivity and margin improvement.
Surgeon preference drives supply cost.
With financial returns threatened surgeons willing to make hard decisions.

23. Payer Contracting
Accept what you’re offered and you’ll struggle financially.
Surgeon direction of surgical venue key to negotiating success.
Hospital partnerships can enable centers to maintain profits while going in network.

24. Physician Recruitment
Dwindling numbers of available physicians – musical chairs.
It’s becoming uncommon to find physicians that aren’t bound by non-competitive covenants.
Hospital employment is a significant limiting trend.

25. Minority Model will Continue to Deliver Superior Results
Level of surgeon participation impacts: schedule, supply costs, and recruitment.
Accounting driven business models compete with one arm tied behind their back.
Corporate partners do deliver value with expertise and assistance
As in the past, there will be many more happy minority model investors than majority.

26. THINK PROFITS www.ascoa.com Brent W. Lambert, MD, FACS
Principal & Founder
Luke M. Lambert, CFS, CASC
Chief Executive Officer
Ambulatory Surgical Centers of America

27. Question and Answer Session

28. Hospitals and Surgery Centers Key Thoughts on Strategic Planning
David Fleisch
Partner
Healthcare Practice
Bain & Company
Andrew Hayek
Chief Executive Oficer
Surgical Care Afiliates
Brent Lambert
President & Owner
Ambulatory Surgical Centers
of America
Luke Lambert
Chief Executive Officer
Ambulatory Surgical Centers
of America
Scott Becker, JD, CPA
Partner
McGuireWoods, LLP