Physician Medical Groups M&A: Buying, Selling and Valuing

Transcription

1 Physician Medical Groups M&A: Buying, Selling and Valuing June 20, 2013

2 Webcast Information: 1. The webcast can be accessed online and/or by phone. 2. A copy of the slide presentation is sent to each registered participant; it is also available by logging in to your online account at 3. If you are having trouble with the webcast please call for assistance. 4. You can ask questions at any time; use the online question box or fax them to The Health Care M&A Information Source at

3 Physician Medical Groups M&A: Buying, Selling and Valuing **************** The Health Care M&A Information Source Webcast June 20, 2013 AGENDA A)What drives this market? B) Who s buying what? C)What influences the valuation of physician medical groups? D)From the health-care systems perspective E) From the physician medical group perspective PLEASE NOTE: You will be given the opportunity to ask questions live during the call. If you prefer, you may fax your questions to any time before or during the call. Please address your fax to HEALTH CARE M&A INFORMATION SOURCE WEBCAST QUESTIONS. Or them to info@healthcaremanda.com. 3

4 Aaytan Dahukey Counsel Corporate Practice Group Sheppard Mullin Richter & Hampton Aytan Dahukey is Counsel at Sheppard Mullin Richter & Hampton LLP in the Corporate Practice Group in the firm's Century City Office and is a member of the firm s Healthcare Industry Team. Aytan s healthcare practice focuses on public and private mergers and acquisitions and general corporate counsel representing a wide variety of healthcare-related clients in California and nationally. His clients include independent physician associations, large physician groups, hospitals and hospital-affiliated foundations and other integrated multi-specialty medical clinics, provider management services organizations, accountable care organizations (ACOs) and other healthcare entities, as well as those private equity funds and strategic investors that participate in the healthcare sector. 4

5 Bill Gil CEO Medical Foundations Providence Health & Services- Southern California Bill Gil is Vice President and Chief Executive Officer, Providence Southern California Medical Foundations, leading the two Providence medical foundations: Facey Medical Foundation and Providence Medical Institute. He is the former CEO of Facey Medical Foundation, a nonprofit medical foundation that manages Facey Medical Group, a 160-physician medical group. Providence and Facey formed an affiliation in With his extensive experience and leadership skills, he is focused on growing both physician foundations while enhancing a commitment to clinical excellence through shared records and expert-to-expert collaboration. 5

6 Kenneth Hawkins Senior VP Acquisitions & Development Community Health Systems Kenneth Hawkins joined Community Health Systems (CHS) in January 1997 as Vice President, Acquisitions and Development, and was promoted to Senior Vice President in January Prior to joining CHS, he was Vice President of Development with Paracelsus Healthcare Corporate. Additionally, he is a past controller and CFO of public healthcare companies. Kenneth has more than 26 years of healthcare experience and more than 35 years of financial experience. He holds a bachelor's degree in Accounting from James Madison University in Harrisburg, Virginia, and a master s degree from Virginia Commonwealth University in Richmond. A CPA, Kenneth has a very extensive background in hospital acquisitions, development, and finance and is a member of HFMA, AICPA, Virginia and Tennessee Societies of CPAs, and ACHE. 6

7 Jonathan Morphett Managing Director Avondale Partners LLC Jonathan Morphett is Managing Director of Avondale Partners LLC, which provides merger, acquisition, and financial advisory services primarily to healthcare services and outsourcing companies, as well as to private equity firms. Prior to joining Avondale in 2004 to start its healthcare investment banking group, Jonathan managed Rosebrook Ventures, an Australian corporate finance advisory firm. He founded Rosebrook in 2002 after leaving his post as Chief Financial Officer and Company Secretary of Austar United Communications, Limited, Australia s second-largest pay television company. Jonathan began his career at Morgan Stanley in New York where he worked in the Investment Banking Division for 14 years. 7

8 Jason Ruchaber Partner HealthCare Appraisers, Inc. Jason Ruchaber is Head of Business Valuation Services at HealthCare Appraisers (HAI) and is a Partner in the firm s Colorado office. Jason has more than 16 years of finance and valuation experience, the last 12 of which have been spent exclusively in business valuation and litigation consulting. Prior to joining HAI, he was a Principal in Cogence Group, PC, a boutique business valuation and litigation support firm located in Portland, Oregon. Jason has also worked in Standard & Poor s Corporate Value Consulting practice, where he focused on intellectual property valuation and damages calculations. 8

9 Physician Medical Groups M&A: Buying, Selling and Valuing **************** The Health Care M&A Information Source Webcast Bill Gil Jonathan Morphett Aytan Dahukey (Moderator) Kenneth Hawkins Jason Ruchaber 9

10 Physician Medical Groups M&A: Buying, Selling and Valuing June 20, 2013 Avondale Partners

11 Physician Medical Group M&A Activity There has been a significant increase in the number and value of physician medical group transactions over the past five years Transaction volume in 2013 has fallen relative to high activity in first half of 2012 PHYSICIAN MEDICAL GROUP TRANSACTIONS (1) ($ in millions) $5,000 $4, $4, $3,000 $2,000 $1,000 $ $2, $1,096 $125 $262 $112 $275 $425 $467 $99 $ (2) May YTD 2012 May YTD 2013 Aggregate Transaction Value Transaction Volume Transaction Volume (1) Source: Irving Levin. (2) $4.4 billion aggregate transaction value includes the $4.2 billion DaVita / HealthCare Partners transaction. 11

12 Physician Medical Groups Who Are the Buyers? Similarly, the buyer universe has expanded in recent years Physician Practice Companies Insurance Companies Physician Medical Groups Hospitals & Health Systems Private Equity Firms Other Health Care Companies 12

13 Buyer Rationale Buyer Rationale Physician Practice Companies Expand network and geographic coverage Increase ability to analyze, assess and assume risk in value-based reimbursement world Larger voice in discussions with hospitals, health systems and payors Ability to leverage investments in IT systems and infrastructure Insurance Companies Offensive care strategy Provides greater leverage in discussions with hospitals and other large constituents in market Reduce medical loss ratio Improve overall wellness of population Diversify business mix Representative Transactions American Family Care, Inc. / Doctors Express, Inc. Team Health / Emergency Physicians, P.A. & Valley Emergency Physicians Medical Group Blue Cross Blue Shield of Florida / Diagnostic Clinic Medical Group Humana / Metropolitan Health Networks 13

14 Buyer Rationale Hospitals Private Equity Other Health Care Companies Buyer Rationale Expand network reach Increase referral control Purchase physician talent Increase outpatient services Provide greater leverage in discussions with payors and other large constituents in market Considerable interest in outpatient care providers Looking for transformative, replicable business models that might benefit under health care reform Geographic expansion opportunity Scalable model Expand access to patients and increase cross-referrals Provide infrastructure and resources to manage coordinated care programs Larger voice in discussions with other large constituents in market Representative Transactions Integrated Health Associates (St. Joseph Mercy Health Systems) / Michigan Multispecialty Physicians Community Health Systems / Diagnostic Clinic of Longview, P.A. Dignity Health / U.S. Healthworks Enhanced Equity / Primary Care Associates, White Glove Health Welsh, Carson, Anderson & Stowe / CareSpot Express Healthcare Clayton, Dubilier & Rice, Inc. / Emergency Medical Services (nka Envision Healthcare Holdings) DaVita / Healthcare Partners Walgreens / ACO joint ventures 14

15 What Makes a Target Attractive? Perceived strategic value of target to potential acquirors or investors Relative strength of hospitals and insurance companies in market area Attractiveness of patient, case and payor mix Scope of ancillary services provided, including Certificates of Need Community standing of physicians and the Company Ability to transform the business to increased cash flow and profitability under a risk-based reimbursement model Willingness of key physicians to continue working post transaction Capital requirements of business Need for new or enhanced IT systems and business infrastructure Caliber of management team Cohesive ownership structure 15

16 Reasons for Selling Recognize need for additional resources, infrastructure or expertise to manage business as health care sector reform takes place Retirement or succession issues Increased competition from larger players as other practice groups are acquired Price is Right 16

17 Financing Observations Many acquirors are large, well capitalized companies so financing acquisitions is often not a significant issue Nevertheless, there is significant interest from debt and equity providers to finance such deals High demand for health care services Businesses generally have good cash flow characteristics Attractiveness of sector reflected in stock price performance and valuation multiples of publicly traded physician practice companies INDEXED PRICE CHART EV / LTM EBITDA 150.0% 13.0x 130.0% 110.0% 12.0x 90.0% 11.0x 70.0% 50.0% 30.0% 10.0x 9.0x 10.0% (10.0%) (30.0%) 8.0x 7.0x (50.0%) 6.0x S&P 500 Index Physician Practice Index: TMH, MD, IPCM S&P 500 Index Physician Practice Index: TMH, MD, IPCM 17

18 Health Care M&A TRENDS AND VALUE DRIVERS 18

19 Practice Acquisition Overview Significant Consolidation / Acquisition Activity for Healthcare Providers These transactions began in 2009, shortly prior to the signing of PPACA (March 2010) Driven largely by changing reimbursement models and costs associated with PPACA compliance Formation of Accountable Care Organizations Buyers initially focused on cardiology, but now focused on acquiring primary care physicians and large multi-specialty physician practices 19

20 Total Practicing Physicians % if Independent Physicians History of Physician Practice Acquisitions The chart below illustrates the physician employment trend over the past decade, primarily driven by reimbursement pressure and PPACA 900,000 Independent vs. Non-Independent Physicians 60.0% 800, % 700, , , , , , % 45.0% 40.0% 35.0% 30.0% 25.0% Est. # of Non-Independent Physicians % of Independent Physicians Est. # of Independent Physicians 20

21 History of Physician Practice Acquisitions The chart below illustrates the physician practice acquisition trend over the past decade These two databases report only a small percentage of the total acquisition activity in the US, but the data confirms HAI s experience of heightened acquisition activity following the passage of PPACA 120 Announced Physician Practice Acquisitions * Irving Levin Associates, Inc. S&P Capital IQ *2013 data through April 29 21

22 Health Care M&A VALUATION CHALLENGES 22

23 Regulatory Framework Important to understand legal framework for Practice Acquisitions Often necessary to educate and set expectations regarding what can and cannot be considered Post acquisition compensation must be factored into purchase price Standard of value must be Fair Market Value 23

24 Standard of Value Fair Market Value [T]he price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms-length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. (emphasis added) 24

25 Standard of Value In the healthcare industry, fair market value is a specifically defined term in the Stark law and regulations as follows: [T]he value in arm s length transactions, consistent with the general market value. General market value means the price that an asset would bring, as the result of bona fide bargaining between wellinformed buyers and sellers who are not otherwise in a position to generate business for the other party; or the compensation that would be included in a service agreement, as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. (emphasis added) 25

26 Strategic Value The price paid for a Physician Practice must not consider any synergistic value or strategic assumption specific to a particular buyer These may include: Provider based billing rates or Favorable contracts Cost savings due to shared overhead Volume growth resulting from the transaction Risk reductions / adjustments to cost of capital 26

27 Health Care M&A VALUATION METHODOLOGIES 27

28 Valuation Methodologies Income Approach Value determined with reference to future earnings capacity (after physician comp) Market Approach Value determined with reference to transactions of similar entities Cost Approach Value determined with reference to underlying assets and or cost to replace/recreate those assets 28

29 Valuation Methodologies Typically Physician Practices are valued with the Income Approach and/or the Cost Approach The use of a Market Approach is typically not used due to: Lack of comparable transaction data Limited disclosure of deal structure/comp terms Absence of reported earnings precludes calculation of valuation multiples 29

30 Key Considerations Valuation model assumptions must be supportable: Productivity and Reimbursement Ancillary Utilization Use of Mid levels / Employed Physicians Cost structure Risk considerations 30

31 Value Drivers Location of Practice / Competition Quality and diversity of Physicians Specialty(ies) Age of Physicians Ancillary utilization Organic growth Prospects Profitability Risk Profile

32 Valuation Process Understand proposed deal terms Due Diligence / Data Requests Financial and operational analysis Constructing Valuation Models / Compensation Structure Site Visit Meeting with the Physicians Complete Draft Analysis Explaining Analysis to Hospital and/or Physicians 32

33 Health Care M&A VALUATION TRENDS 33

34 Payment Mechanism Valuation models will need to adapt as the payment mechanism evolves Fee for Service Pay for Quality/Outcomes Shared Savings Capitation High volume / heavy ancillary practices may no longer command the highest values 34

35 Physicians as Employees Not all physicians are good employees Can you buy only the ancillary business and allow the physicians to remain independent? Should we expect the pendulum to swing back towards independent practice? 35

36 PPACA & Valuation Volume to Valued based reimbursement Increased focus on the importance of PCPs Large PCP and Multi-Specialty Medical Groups are very desirable in establishing ACOs Quality-based payments become the focus over productivity based payments ACO s waivers to Stark and Anti-Kickback, FMV 36

37 OVERVIEW Community Health Systems 135 Hospitals in 29 States Strategy to Develop Networks of Hospitals in our Markets 16,000 Physicians Serving on our Medical Staffs Employ over 3,000 Physicians at 650 Clinic Locations Approach to Physician Practice Acquisition and Employment Varies by Region State Regulations (Texas, Washington) Physician Compensation Models Profit Model % of Collections WRVU s Variations to these Models Large Practices Participate in Joint Governance Model 37

38 TRANSACTIONS Completed more than 30 Transactions since Large Multi Specialty Transactions Acquire Physician-Owned Surgery Centers, Hospitals, Ambulatory Centers Asset Deals / Stock Deals Practice Purchase Price and Comp Plans are Subject to FMV Large Infrastructure in Place to Support Practices: IT HR Revenue Stream Accounting Marketing Legal / Risk Management Managed Care 38

39 MAIN DRIVERS OF TRANSACTIONS CHS Perspective: Offensive and defensive strategies of the local health system in the market Completes the continuum of care and positions for Health Care Reform Outpatient growth strategy Managed care strategy Physician Perspective: Declining reimbursement and lower incomes Preparing for retirement Growing uncertainty about the future Aligning with a larger system to create more leverage with payors, prepare for Health Care Reform and increase security for the future 39

40 HEALTH CARE REFORM Commitment to Quality Deliver Care More Efficiently Build Services and Infrastructures Clinical Integration and Collaboration Other Integration Strategies Cleveland Clinic Developed; Physician Quality Alliance 40

41 STILL WORKING AFTER ALL THESE YEARS: Bill Gil, CEO June 20, 2013

42 What is an ACO? An entity that is effective at Patient population management Ability to report data: Clinical Quality Financial Bearing/Assuming full financial risk Meet Triple Aim goals: Improved Quality Outcomes, Access, and Reduce Cost of Care = High quality for the lowest TOTAL cost

43 Medical Group Relevance PRICE SENSITIVITY Market intolerant of current pricing Have other choices NARROW NETWORKS Can you make it in the narrowing lanes? THREATS Loss of Physicians To Narrow Network Groups/IPAs Loss of Revenues 15% PMPM Cap reduction? Loss of Patients Narrow Network Benefits vs. Keeping PCP

44 Can Your Medical Group Succeed as an ACO? Yes, but Difficult to manage total cost of care without strategic alignment Health Plan Alignment Hospital Alignment Continuum of Care Strategy Integration and cost effectiveness vs. Market Power and Revenue Maximization Which one will survive?

45 ACO Models Fully integrated (i.e. KP) Health Plan Hospital Physician Group Semi-integrated (i.e. Scripps, Sutter) Hospital Physician Group Aligned (i.e. Facey) Financial relationship w/no shared governance

46 What s in our future? Door #1, Door #2, Door #3 Physician Strategy Group Which Group? Why? How many legs of the stool? IPA How Many? Why? Solo???? For how long? Hospital Strategy Heads in Beds (not for long ) Integration Driver Meet the Cost & Quality Lines Payor Strategy Per Diem Full Risk ACO Strategy Knox Keene?

47 Decisions, Decisions, Decisions Stand alone ACO alignment w/ hospital(s) Integration Merge into larger group Grow bigger Acquisitions New product lines (Medi-Cal)

48 Facey s Market Value PCP volume Patient volume Hospital efficiency MSO expertise Risk Bearing Capability Medical Group Culture / Trust / Quality

49 Market Expectations/Demands Success Factors Facey s position Comments Coordinated Care MEDIUM / HIGH Patient Centered Med Home/Continuum of Care Improved communication w/patients, Providers Health information exchange and reporting HIGH MEDIUM / HIGH Patient Portal/EMR/Meaningful Use Limited connectivity with Hospitals and outside providers w/o Integration Patient Access Patient Satisfaction MEDIUM Optimize use of MDs Optimize use of AHPs Patient centered Access Efficiency HIGH Bed days, Readmits, Churning Assumption of Risk MEDIUM / HIGH Professional Cap Global Cap / Bundled Pmts Ability to manage total cost of care HIGH Difficult to manage outside our four walls

50 Facey s Affiliation Strategy Partnership Capital Integration Recognition of expertise / market position Synergy Cultural Strategic Geographic Relationship Demonstrated trust / ability to work together Results Demonstrated understanding of Integrated Delivery