Changes of Ownership by Northwest Community Day Surgery

Transcription

1 STATE OF ILLINOIS HEALTH FACILITIES AND SERVICES REVIEW BOARD WEST JEFFERSON ST. SPRINGFIELD, ILLINOIS (217) FAX: 217) DOCKET ITEM: BOARD MEETING: EXEMPTION NUMBER: C-01 November 5, 2013 E EXEMPTION APPLICANT(S): Northwest Community Healthcare, Northwest Community Day Surgery Center Inc., and Northwest Community Day Surgery Center II LLC FACILITY NAME and LOCATION: Northwest Community Day Surgery Center, Arlington Heights, Illinois I. The Exemption Application STATE BOARD STAFF REPORT CHANGE OF OWNERSHIP EXEMPTION Northwest Community Healthcare ( NCH ), Northwest Community Day Surgery Center Inc. (DSC, Inc) and Northwest Community Day Surgery Center II LLC (DSC LLC) are requesting a change of ownership of Northwest Community Day Surgery Center, a multi-specialty ambulatory surgical treatment center located at 675 West Kirchoff Road, Arlington Heights, Illinois. Northwest Community Day Surgery Center II LLC will be the operating entity/licensee. The owner of the site is Northwest Community Day Surgery Center Inc. The transaction is expected to close on November 6, 2013 upon State Board approval. The Illinois Health Facilities Planning Act defines a change of ownership as... a change in the person who has ownership or control of a health care facility s physical plant and capital assets. A change in ownership is indicated by the following transactions: sale, transfer, acquisition, lease, and change of sponsorship or other means of transferring control. The applicants are before the State Board because the proposed transaction transfers assets of an existing health care facility that results in the issuance of a license to an entity different from the current licensee. The applicants state Because this Transaction is merely transferring assets (and liabilities) between two wholly owned affiliates of NCH, there will be no impact on the Day Surgery Center (and thus, no impact on the cost structure or communities served, or the quality of care). Because this Transaction is merely transferring assets (and liabilities) between two wholly owned affiliates of NCH, the charity care policies for the Day Surgery Center will not change following the Transaction, and for no less than two years thereafter. Following the Syndication, the Applicants believe that the Syndication will generate short and long term benefits because "physician alignment" is a key feature of the Patient Protection and Affordable Care Act. With proper physician alignment, the Applicants believe that the Day

2 Exemption E Page 2 of 3 Surgery Center will be able to address the rapidly changing health care environment that requires more focus on quality outcomes, cost savings, efficiency enhancements, population health, and the delivery of more coordinated and integrated care. The applicants have met all of the requirements of 77 IAC Requirements for Exemptions Involving a Change of Ownership of a Health Care Facility. II. The Facility Northwest Community Day Surgery Center is a multi-specialty ambulatory surgical treatment center performing the following surgical specialties: General Surgery, Laser Eye Surgery, OB/Gynecology, Ophthalmology, Oral/Maxillofacial, Orthopedic, Otolaryngology, Pain Management, Plastic, Podiatry, and Urology. The facility has 10 operating rooms and 21 recovery stations. At the conclusion of this report is the 2012 ASTC Profile Information. III. The Proposed Transaction Northwest Community Healthcare is the sole corporate member of Northwest Day Surgery Center Inc. which operates Northwest Community Day Surgery Center. Northwest Day Surgery Center Inc. also owns the physical plant (and the improvements located therein) that houses the Day Surgery Center. The applicants are proposing a corporate conversion and syndication of Northwest Day Surgery Center, Inc. which would ultimately enable the medical staff of Northwest Day Surgery Center Inc. and other physicians in the community to purchase a minority interest in the operations of the Day Surgery Center (the "Day Surgery Business"), excluding the Day Surgery Facility. In 2013, an independent valuation firm, experienced in the valuation of licensed ambulatory surgical treatment centers, previously engaged by NCH and DSC Inc., valued the Day Surgery Business, excluding the Day Surgery Facility, as being worth approximately $4,600,000. On September 18, 2013, Northwest Community Healthcare organized Northwest Community Day Surgery Center II LLC. Northwest Community Healthcare owns one hundred percent (100%) of the membership units of Northwest Community Day Surgery Center II LLC. On this same date an asset transfer agreement was entered into that transferred all of the asset and liabilities from Northwest Day Surgery Center Inc. to Northwest Community Day Surgery Center II LLC Upon the approval of this change of ownership, Northwest Community Healthcare and Northwest Community Day Surgery Center II LLC intend to sell no less than forty percent (40%), but no more than a forty nine percent (49%), of the membership units in DSC LLC to the Day Surgery Physicians (the "Syndication"). The Syndication will value the Day Surgery Business, excluding the Day Surgery Facility, at $4,600,000. No Day Surgery Physician will be allowed to purchase more than a two and one-half percent (2.5%) interest in DSC LLC. After the Transaction and prior to the Syndication, Day Surgery LLC and Day Surgery Inc. will also enter into a fair market value lease for the Day Surgery Facility.

3 Exemption E Page 3 of 3 IV. At the conclusion of this report is an Executive Summary of the valuation method us to value the transaction.

4 E Northwest Community Day Surgery Center - Arlington Heights 0 mi Copyright and (P) Microsoft Corporation and/or its suppliers. All rights reserved. Portions InstallShield Software Corporation. All rights reserved. Certain mapping and direction data 2005 NAVTEQ. All rights reserved. The Data for areas of Canada includes information taken with permission from Canadian authorities, including: Her Majesty the Queen in Right of Canada, Queen's Printer for Ontario. NAVTEQ and NAVTEQ ON BOARD are trademarks of NAVTEQ Tele Atlas North America, Inc. All rights reserved. Tele Atlas and Tele Atlas North America are trademarks of Tele Atlas, Inc.

5 AMBULATORY SURGICAL TREATMENT CENTER PROFILE-2012 NORTHWEST COMMUNITY DAY SURGERY CENT ARLINGTON HEIGHTS Reference Numbers Health Service Area NORTHWEST COMMUNITY DAY SURGERY CENTER 675 W. KIRCHOFF ROAD ARLINGTON HEIGHTS, IL Administrator Roxanne Matias Registered Agent Bruce Crowther Property Owner N/A Legal Owner(s) Northwest Community Healthcare Facility Id Planning Service Area 031 Date Complete 2/22/2013 Number of Operating Rooms 10 Procedure Rooms 0 Exam Rooms 0 Number of Recovery Stations Stage 1 11 Number of Recovery Stations Stage 2 10 Type of Ownership Corporation (RA required) HOSPITAL NAME PERSONNEL HOSPITAL TRANSFER RELATIONSHIPS STAFFING PATTERNS NUMBER OF PATIENTS FULL-TIME EQUIVALENTS Administrator 1.00 Physicians Nurse Anesthetists Director of Nurses Registered Nurses Certified Aides 3.00 Other Health Profs Other Non-Health Profs 9.50 TOTAL DAYS AND HOURS OF OPERATION Monday 12 Tuesday 12 Wednesday 12 Thursday 12 Friday 12 Saturday 0 Sunday 0 NUMBER OF PATIENTS BY AGE GROUP AGE MALE FEMALE TOTAL 0-14 years years years 1, years years 522 TOTAL 2, ,304 1, , ,008 2,677 1,371 1,252 7,606 NUMBER OF PATIENTS BY PRIMARY PAYMENT SOURCE PAYMENT SOURCE MALE FEMALE TOTAL Medicaid 67 Medicare 999 Other Public 2 Insurance 1,841 Private Pay 6 Charity Care 32 TOTAL 2, , , , , , ,606 NET REVENUE BY PAYOR SOURCE FOR FISCAL YEAR Medicare Medicaid Other Public Private Insurance Private Pay TOTALS 19.5% 1.5% 0.2% 76.4% 2.3% 100.0% 2,814, ,365 31,146 11,021, ,488 14,422,153 Charity Care Expense 111,294 Charity Care Expense as % of Total Net Revenue 1% Source:Ambulatory Surgical Treatment Center Questionnaire for 2012, Illinois Department of Public Health, Health Systems Development Page 179 of 282 9/12/2013

6 AMBULATORY SURGICAL TREATMENT CENTER PROFILE-2012 NORTHWEST COMMUNITY DAY SURGERY CENT ARLINGTON HEIGHTS SURGERY AREA TOTAL SURGERIES OPERATING ROOM UTILIZATION FOR THE REPORTING YEAR SURGERY SURGERY PREP AND CLEAN-UP TOTAL SURGERY AVERAGE CASE TIME (HOURS) Cardiovascular 0 Dermatology 0 Gastroenterology 0 General Surgery , Laser Eye Surgery 0 Neurological 0 OB/Gynecology Ophthalmology Oral/Maxillofacial Orthopedic , , Otolaryngology Pain Management Plastic Podiatry Thoracic 0 Urology TOTAL , , SURGERY AREA PROCEDURE ROOMS PROCEDURE ROOM UTILIZATION FOR THE REPORTING YEAR TOTAL SURGERIES SURGERY PREP AND CLEAN-UP TOTAL SURGERY AVERAGE CASE TIME (HOURS) Cardiac Catheteriza 0 Gastro-Intestinal 0 Laser Eye 0 Pain Management 0 TOTALS 0 Source:Ambulatory Surgical Treatment Center Questionnaire for 2012, Illinois Department of Public Health, Health Systems Development Page 180 of 282 9/12/2013

7 FOLEY FOLEY & LARDNER LLP ATTORNEYS AT LAW 321 NORTH CLARK STREET, SUITE 2800 CHICAGO, IL TEL FAX October 21, 2013 WRITERS DIRECT LINE CLIENT/MATTER NUMBER VIA FEDERAL EXPRESS & Mr. Michael Constantino Supervisor, Project Review Section Illinois Health Facilities and Services Review Board 525 West Jefferson Street 2nd Floor Springfield, Illinois Re: Certificate of Exemption Application, Project E Northwest Community Day Surgery Center Dear Mike: Pursuant to your request, I am attaching the most recent executive summary and update of the valuations that Northwest Community Healthcare ("NCH") obtained from Coker Group Holdings LLC d/b/a Coker Group ("Coker"), an independent third party healthcare valuation firm, for purposes of converting NCH's wholly owned day surgery center from an Illinois notfor-profit corporation to an Illinois for-profit limited liability company. For your reference, NCH engaged Coker in July of 2013 to update and confirm Coker's own findings and conclusions. NCH also engaged Coker to review and confirm the findings and conclusions made by VMG Health, an independent third party healthcare valuation firm. Please feel free to contact me if you have any questions. Sincerely, EJG:sxc Enclosure Edward J. Green BOSTON LOS ANGELES SACRAMENTO TALLAHASSEE BRUSSELS MADISON SAN DIEGO TAMPA CHICAGO MILWAUKEE SAN DIEGO/DEL MAR TOKYO DETROIT NEW YORK SAN FRANCISCO WASHINGTON, D.C. JACKSONVILLE ORLANDO SILICON VALLEY

8 GROUP Business Advisors for the Healthcare Industry Updated Coker Findings and Opinion on MG Valuation Coker Group Holdings, LLC d.b.a. Coker Group ("Coker") was asked by Northwest Community Hospital ("NCH" and/or "Hospital") to conduct a limited review of the valuation ("Valuation") of Northwest Community Hospital Day Surgery Center ("Center" and/or "DSC") completed by VMG Health ("VMG") on March 5, Prior to the syndication of the Center to the potential purchasing physicians, NCH provided Coker with updated financial statements for the Center, through June 30, 2013, representative of nine months of their most recent fiscal year (FY). Coker was asked to analyze the financial statements and perform certain updated valuation analyses with respect to the updated financial data, in the context of VMG's initial Valuation. It is important to note that as Coker did not initially perform a full valuation of the Center, our analysis simply provides limited valuation calculations based on the initial VMG Valuation and the updated financial statements. Our calculations do not represent a formal valuation. Since the Valuation primarily relies on the income approach (using a discounted cash flow (DCF) model), we have focused our updated calculations on the pro forma projections and income approach calculations. We have made the following revenue and margin adjustments to VMG's original pro forma projections based on DSC performance for the first nine months of FY o o o Slight revenue decline of 6.8 percent in 2013 vs. original revenue increase of 1.9 percent. Flat revenue assumptions for the 2014 and beyond forecast period vs. original growth forecast of 2.0 percent to 3.0 percent. Reduction of operating income margin in 2013 to 11.1 percent from previously higher levels. As we have only been asked to conduct a limited review of the Valuation, we largely accept the assumptions made by VMG and have only made adjustments to those assumptions in key areas where we believe there is justification. We have not been asked to review, nor have we reviewed any source data as it relates to this analysis, but base all of our analysis on the underlying assumption that the Valuation assumptions are accurate. We have assumed that Day Surgery Center has no debt liabilities, in contrast to VMG's assumptions. We do assume that VMG has reflected the payment of all liabilities in their DCF model. l Coker performed an initial analysis dated April 4, 2013, which should be considered when reviewing our updated analysis dated July 29, Atlanta Charlotte Dallas Philadelphia N. Central Expressway, Suite 400, Dallas, TX 75231

9 NCH- DSC Valuation Review July 29, 2013 Page 2 of 2 Collections and Operating Margin Assumptions A key valuation driver is future revenue growth. In that we are performing a limited review of the Valuation, we focus largely on the revenue assumptions to ensure they are reasonable. Revenue growth declined in 2012 and again for 2013 based on performance for the first nine months. Growth assumptions for our base case valuation calculations reflect a stabilization in collections and assume flat trends over the forecast period. Based on the fiscal year-to-date performance, we have reduced estimated collections growth from the 2.0 percent to 3.0 percent per annum range to being flat for the entire pro forma period. We have also reduced projected operating cash flow margins to 11.1 percent for the entire forecast period. In their valuation calculations, VMG uses a 16 percent discount rate, which we believe is reasonable. Terminal growth rates assume zero percent growth in our base case. Valuation Summary Figure III - Comparison of Updated and VMG Original FMV NWC Day Surgery Center Updated VMG Variance FMV, Total Invested Capital $4,607,913 $6,524,563 ($1,916, Book Value of Debt $0 ($2,226,291) $2,226,291 FMV, 100% Equity Interest $4,607,913 $4,298,272 $309,641 FMV, 1.0% Equity Interest $46,079 $42,983 $3,096 Coker's analysis indicates a revised Total Invested Capital and Total Equity Value FMV of $4.6 million. This compares to VMG's original equity valuation of $4.3 million. A one percent equity interest is calculated to be $46,079, based on Coker's revised assumptions. The valuation amount does not include cash, accounts receivable, working capital, accounts payable or any other accrued assets or liabilities included on the balance sheet. Atlanta Charlotte Dallas Philadelphia N. Central Expressway, Suite 400, Dallas, TX 75231