Hospital ASC Acquisitions The Hospital s Perspective

Transcription

1 Hospital ASC Acquisitions The Hospital s Perspective Richard Freddo -- Tenet Healthcare Corporation Trip Pilgrim -- Vanguard Health Systems Gary B. Gertler, Esq. -- McDermott Will & Emery LLP FEBRUARY 24, 2012

2 What Are Hospitals/Health Systems Looking For? Increasing Market Share More Physician Loyalty Re: Inpatients Move Outpatient Surgeries Out of Hospitals Alignment with Certain Surgical Specialties Either Single Specialty or Multispecialty ASCs Either In-Market or Out-of-Market ASCs ASCs may be Profitable, Break-Even or Losing $ Looking to Convert Out-of-Network ASCs

3 Advantages of Hospitals/Health Systems Infrastructure / IT Systems Branding / Market Knowledge / Expertise Managed Care Contracts Refinancing Bank and Third Party Debt Potential Extinguishment of JV Partner Guarantees Experienced Personnel / Dedicated Teams Through-put Strategies Heightened Compliance Programs Supply Discounts Through GPO Purchasing

4 How Do Hospitals/Health Systems Differentiate Themselves From ASC Management Companies Greater Access to Capital Decreased Supply Costs Thru Volume Discounts Market Brand More Robust Regulatory Compliance Programs Often Results in More Conservative Arrangements 1/3 Test Compliance; Who are Potential Investors; Etc. Non-Use of Buybacks to Fix Physician Deadweight No Reshuffling of Ownership to Mirror Utilization Better Rates Thru their Managed Care Contracts Interoperability with Hospital IT System

5 Private Equity has Partnered with ASC Management Companies Irving Capital and National Surgical Hospitals 15 ASCs Silver Oak Partners and Physicians Endoscopy 17 ASCs Crestview Partners and Symbion 70+ ASCs TPG Capital and Surgical Care Affiliates 125+ ASCs Welsh Carson and USPI 190+ ASCs

6 ASC Management Companies Have Partnered with Not-For-Profit Health Systems Physicians Endoscopy LLC 4 JVs with Different Not-For-Profit Health Systems Symbion Operates 10+ JVs with Not-For-Profits 7 JVs w/ Baptist in Memphis Surgical Care Affiliates Operates 20+ Hospital JVs at least 3 JVs with Not-For-Profit Health Systems USPI Operates 130+ Hospital JVs, including 27 JVs w/ Baylor Health Care System 20 JVs w/ Memorial Hermann 19 JVs w/ Ascension Health 16 JVs w/ Catholic Healthcare West

7 Unique Not-For-Profit Investment Issues JVs that Include Investment by Not-For-Profit Health Systems Have Several Unique Issues Not-For-Profits Do Not Want ASC Profit Distributions to be Treated as Unrelated Business Income, and Therefore Often Require their JVs to Provide Services to Medicaid and Medically Indigent Patients Usually Have Robust Charity Care/Free Care Policies Religious Not-For-Profits Prohibit Certain Procedures (Abortion; Tubal Ligation; Vasectomy) Tax Exemption Issues, Including Intermediate Sanctions, Requires a More Vigorous FMV Analysis

8 Three Party ASC JVs Hospital/Health System and ASC Management Companies Can Jointly Invest in an ASC JV Form an Investment Vehicle Majority-Owned by Hospital Investment Vehicle is the Majority-Owner of ASC JV Health System Auditors Often Permits Consolidation Hospital/Health System Can Usually Still Extend their Managed Care Contracts Hospital/Health System Can Usually Extend their GPO Supply Discounts

9 Who Are Acquiring ASCs? Private Equity is Showing Significant Interest in ASCs Capital Markets are Starting to Become Less Restrictive Seeing a Return of Debt Financing ASC Management Companies Have Built-up Cash for ASC Acquisitions De Novo Development Resurgence After 2-Year Hiatus Managed Care Companies / Insurance Companies Looking at ASC Acquisitions as a Network Development (Cost Control) Option For the First Time Hospitals/Health Systems Making More ASC Acquisitions Both Not-For-Profit and Proprietary Hospital Systems

10 Tenet has a diversified portfolio of hospitals and OP centers Q Regions ASCs DICs California 6 14 Central States 8 18 Southern States 8 10 Florida 3 16 Other 0 5 TOTAL JVs 16 2 Ambulatory Surgery Centers (ASCs) Diagnostic Imaging Centers (DICs) Acute Care Hospitals DICs in development 10 10

11 Outpatient provides compelling investment opportunities and synergies with Tenet s existing business External sector-based factors Internal Tenet-specific factors 1 Outpatient service lines are attractive as standalone businesses Highly profitable, with high EBITDA margins Less capital intensive than the hospital business & generate strong FCF Not yet consolidated; therefore, attractive acquisition opportunities may exist in this space 2 Tenet is a natural owner for these businesses and can unlock substantial value in these service lines Hospital business provides long-term managed care contracting relationships Expanded in-market footprint may present opportunities to coordinate care between hospitals and OP facilities Clinical quality expertise would prepare for increased CMS quality reporting requirements and pay-forperformance reimbursement structures in outpatient service lines 3 Outpatient services offer tremendous growth potential as high historic growth rates accelerate as a result of health reform and other industry trends While IP admissions have remained flat over the last twenty years, OP visits have grown dramatically Payors, physicians and patients increasingly prefer OP settings over hospital setting Payors prefer care provided with comparable quality at a lower cost Physicians prefer higher efficiency, as well as opportunity for equity participation in some instances Patients prefer improved experience (e.g., retail feel, patient convenience) as well as lower cost

12 Tenet s Outpatient Development Strategy Tenet acquired 39 outpatient centers in 2010 & 2011 Acquired 6 joint venture ambulatory surgery centers in 2011 Plan to acquire outpatient centers in 2012 Targeting a minimum of joint venture surgery center acquisitions Pursuing both in and out of hospital market surgery center acquisitions Evaluating several de novo surgery center opportunities

13 VANGUARD -- OUR HISTORY Founded in 1997 by management and Morgan Stanley Capital Partners Recapitalized in 2004 with Blackstone as the lead investor Initial Public Offering completed on June 22, 2011 Strategy is to acquire multi-hospital, not-for-profit systems in urban and suburban markets to anchor the development of regional integrated health delivery networks Today Vanguard has: 28 hospitals in 5 states A large health plan in Arizona Strategically aligned outpatient facilities, physician organizations, and related businesses Pro forma annualized revenues of approximately $6.0 billion, including the pro forma impact of completed acquisitions A strong balance sheet and flexible access to additional capital to fund growth opportunities The management team has a strong track record in the healthcare delivery industry with multiple companies throughout the past four decades

14 THE VANGUARD GROWTH STORY 30 Growth Phase I Same Store Focus Growth $6,000 Phase II 25 $5,000 Number of Hospitals $4,000 $3,000 $2,000 Revenues ($ in '000s) 5 $1,000 0 $0 # of Hospitals

15 VANGUARD TODAY Detroit 8 hospitals 1,734 licensed beds Acquired effective January 1, 2011 Livingston County Washtenaw County Oakland County Huron Valley Sinai Hospital Sinai Grace Hospitals Wayne County DMC Surgery Hospital City of Detroit Macomb County DMC CENTRAL CAMPUS HOSPITALS Chicago 4 hospitals 1,121 licensed beds West Suburban and Westlake hospitals acquired on August 1, 2010 San Antonio Baptist Health System 5 hospitals 1,674 licensed beds 7 imaging centers Monroe County Massachusetts 3 hospitals 640 licensed beds Phoenix Abrazo Health Care 6 hospitals 1,029 licensed beds Phoenix Health Plan / Abrazo Advantage Health Plan Harlingen/Brownsville Valley Baptist Health System 2 hospitals, health plan, and related services 866 licensed beds

16 Vanguard Preparing for the Future: Strategic Focus Build and operate high-performance patient-centered integrated care networks Focus on safety, quality and value Clinically coordinated, integrated and evidenced-based care Establish the standard of care for positive experiences for our patients, their families and our physicians Fully engage in health and wellness Create an organization where our employees and their families are some of the healthiest and most productive in the markets we serve Lead efforts to measure and directly improve the health of our communities as payments move from fee for service to fee for health, including risk sharing platforms Strengthen our growth and reputation through local trust, national scale and access to capital markets Innovate and share best practices Find, invest in and retain talented people Create a great place to work and a most admired company

17 Vanguard -- Key Strategic Initiatives Position integrated networks in all markets as high value systems High quality Low cost Tier One status by major payers Develop partnerships with payers and self-insured employers to provide access to high value services on a preferred basis Aggressively seek opportunities to accelerate transition from fee-for-service to fee-for-value Pioneer ACO awarded in Detroit CMS Community-Based Care Transition Program grant awarded in Massachusetts Aggressively seeking CMS Innovation grants Bundled pricing initiatives with CMS and private payers. Leverage multi-year experience in the Acute Care Episode (ACE) demonstration project Develop strategies and tools to assist physicians to remain in the practice model of their choice while having access to new payment streams and opportunities Pioneer ACO in Michigan is partnered with predominantly independent physicians

18 ??? QUESTIONS