Home Health Care & Hospice: Buying, Selling and Valuing

Home Health Care & Hospice: Buying, Selling and Valuing March 21, 2013

Home Health Care & Hospice: Buying, Selling and Valuing **************** The Health Care M&A Information Source Webcast March 21, 2013 AGENDA A. What drives this market? What are the trends? B. Who s buying what? C. What influences the valuation of home health-care and hospice businesses? D. When should you buy or sell? PLEASE NOTE: You will be given the opportunity to ask questions live during the call. If you prefer, you may fax your questions to 203-846-8300 any time before or during the call. Please address your fax to HEALTH CARE M&A INFORMATION SOURCE WEBCAST QUESTIONS. Or email them to info@healthcaremanda.com. 2

www.levinassociates.com Leslie Levinson Partner Edwards Wildman Palmer LLP llevinson@edwardswildman.com http://www.edwardswildman.com Les Levinson is chair of Edwards Wildman Palmer s global healthcare practice. His practice concentrates on the transactional, regulatory and compliance representation of healthcare and life science clients, including homecare and hospice companies, other non-acute providers, physician practices, hospitals, IT and medical device companies, healthcare equipment providers and healthcare investors, lenders and related enterprises. During his more than 30 years representing public and private companies, Les has completed over 300 M&A and financing transactions. He provides representation in acquisitions and dispositions, public and private equity and debt offerings, securities and regulatory compliance matters, restructurings and reorganizations as well as counseling on many other types of business and financial transactions. Les is the author of numerous publications on corporate and healthcare topics and is an active lecturer before various groups in the healthcare industry. 3

www.levinassociates.com Dexter Braff President The Braff Group dbraff@thebraffgroup.com http://www.thebraffgroup.com Dexter Braff has more than 20 years of experience in health care mergers and acquisitions. Prior to forming The Braff Group, he was an associate and senior appraiser with Telesis Mergers & Acquisitions. He also served as regional Director of Finance for Foster Medical Corporation. Dexter has written numerous feature articles on merger and acquisitions and finance and has authored the chapter on Home Health Care Valuation in the Handbook of Business Valuation published by John Wiley & Sons. Additionally, Dexter is a frequent speaker at major industry conferences and state association meetings. 4

www.levinassociates.com Burk Lindsey Managing Director Health Care Investment Banking Raymond James burk.lindsey@raymondjames.com www.rjhealthcarebanking.com Burk Lindsey is a Managing Director in the Health Care Investment Banking Group of Raymond James & Associates and one of the firm s lead health-care services bankers. Burk has responsibility for the firm s efforts in the postacute health-care arena (encompassing the home health, hospice, skilled nursing, rehabilitation, and long-term acute care hospital sectors) as well as for the behavioral health and distribution sectors. He advises on mergers and acquisitions and public and private growth and acquisition financings for health-care services companies. He joined Raymond James in 2001; prior to joining the firm, he held investment banking and merchant banking positions with SunTrust Equitable Securities and ING Barings, respectively, focusing on health-care with both firms. He has an MBA in Finance and Taxation from Emory University. 5

www.levinassociates.com Gary Massey Partner - Home Care & Hospice CliftonLarsonAllen LLP Gary.Massey@cliftonlarsonallen.com http://www.cliftonlarsonallen.com/ Gary Massey is a partner with CliftonLarsonAllen, developing strategies for implementation of health-care reform focusing on home and communitybased providers (HCBP). HCBP are Thirdage services including Medicare home health, hospice, Medicaid waiver programs and private/self-pay services. Gary has nearly 35 years of experience working with acute care, long-term care facilities and home care providers. He brings a broad base of knowledge and experience to financial and operational improvement projects. A skilled financial analyst, Gary specializes in business system improvement, financial modeling, operational reviews and has an in-depth knowledge of Medicare and Medicaid rules and regulations. 6

www.levinassociates.com Daniel Walker President/CEO Cornerstone Healthcare, Inc. dwalker@ensigngroup.net www.ensigngroup.net Danny Walker currently serves as the President of Cornerstone Healthcare, Inc., a subsidiary of The Ensign Group, Inc., that operates home-health and hospice businesses throughout the Western United States. Danny previously worked as the Assistant Secretary and Deputy General Counsel for The Ensign Group, Inc. from 2007-2010. Over the course of his career Danny has been heavily involved in negotiating, valuing and successfully closing more than 100 healthcare transactions, including dozens of transactions in the home-health and hospice space. Prior to joining Ensign, Danny was an associate attorney with Lewis & Roca, LLP, based in Phoenix, Arizona. Danny is a graduate of the J. Reuben Clark Jr. Law School at Brigham Young University, cum laude, and is licensed to practice law in Arizona and 7 California.

Home Health Care & Hospice: Buying, Selling and Valuing **************** The Health Care M&A Information Source Webcast Dexter Braff Gary Massey Leslie Levinson (Moderator) Burk Lindsey Daniel Walker 8

Home Health Care & Hospice: Visiting Nurses Association of Boston and Affiliates Buying, Selling, and Valuing Overview: What Drives This Market? What Are the Trends? the braff group 9

Overview of The Braff Group The Braff Group is the leading merger and acquisition advisory firm specializing in health care services including home health care, hospice, infusion therapy, specialty pharmacy, behavioral health and social services, health care staffing, and home medical equipment. We provide an array of transaction advisory services including sell side representation, debt and equity recapitalizations, strategic planning, and valuation. Headquartered in Pittsburgh, PA, The Braff Group has satellite offices in Atlanta, Chicago, Ft. Lauderdale, and Palm Springs. Since being founded in 1998, The Braff Group has completed more than 200 health care service transactions, and has been ranked number one by Thomson Reuters for health care service M&A transaction volume for the three years ended 2010. In 2012, TBG completed 23 deals. the braff group 10

Multiple Segments in Home Health Care Multiple Segments Differing M&A environments Medicare Home Health Medicaid and State Funded Homecare Private Pay, Private Insurance (Private Duty) Hospice the braff group 11

M&A Market Drivers Opportunity: still highly fragmented markets Relationships: Faster, easier, to acquire than develop through traditional marketing Cross referral opportunities between hospice and home health care Perceived economic synergies ACOs, bundling, and other coordinated care delivery models the braff group 12

Reimbursement and Risk Overhang Medicare Home Health 2% Sequester for now Creep adjustments Re-basing Productivity Adjustments Medicare Managed Care Increasing traction of co-pays IPAB ACOs, bundling, and other coordinated care delivery models (M&A driver and risk) Medicaid and State Funded Homecare State funding Managed Medicaid Dual Eligible populations ACA fueled expansion the braff group 13

Reimbursement and Risk Overhang Private Pay, Private Insurance The economy and perceived wealth Price sensitivity Deep penetration of franchise model Hospice 2% sequestration Recommendations for payment adjustments for patients residing in SNFs Increasing traction of co-pays Average length of stay Annual cost caps Payment method overhaul the braff group 14

Segment Specific Trends and Expectations: Medicare Home Health 90 80 70 60 50 40 30 20 40 50 74 78 78 77 68 76 10-2005 2006 2007 2008 2009 2010 2011 2012 Source: The Braff Group the braff group 15

Segment Specific Trends and Expectations: Medicaid/State Funded 20 18 16 14 12 10 8 18 6 4 11 9 11 2 5 5 4 5-2005 2006 2007 2008 2009 2010 2011 2012 Source: The Braff Group the braff group 16

Segment Specific Trends and Expectations: Private Duty 35 30 25 20 15 29 c 26 30 10 5 16 12 20 11 13-2005 2006 2007 2008 2009 2010 2011 2012 Source: The Braff Group the braff group 17

Segment Specific Trends and Expectations: Hospice 50 45 40 35 30 25 20 15 32 37 45 37 10 5 16 15 11 19-2005 2006 2007 2008 2009 2010 2011 2012 Source: The Braff Group the braff group 18

Private Equity Investment in Home Health (MC, MD, PP) 40 35 30 25 16 25 20 15 23 23 22 17-10 5 18 11 15 10 6 6 7 3 4 2 2005 2006 2007 2008 2009 2010 2011 2012 Source: The Braff Group Platform Follow-on the braff group 19

Private Equity Investment in Hospice 14 12 10 8 11-6 4 2 9 5 3 4 1 2 2 3 2 3 1 - - 1 1 2005 2006 2007 2008 2009 2010 2011 2012 Source: The Braff Group Platform Follow on the braff group 20

HOME NURSING AND HOSPICE CURRENT M&A ENVIRONMENT March 2013

RAYMOND JAMES OVERVIEW Health Care Investment Banking In terms of domain expertise, dedicated resources, and transaction track record in the middle market, the Raymond James Health Care Investment Banking Group is one of the oldest, largest, and most successful health care advisory practices in the United States. Our practice is dedicated to advising health care companies and sponsors in merger and acquisition-related assignments and capital-raising activities. Twenty-three investment bankers and eleven equity research analysts in Nashville, Chicago, Denver, New York, and St. Petersburg Expertise: Mergers & Acquisitions (buy & sell side advisory); Public Equity and Debt Offerings; Private Placements of Equity and Debt; Corporate Divestitures Health Care M&A We have broad, deep, and longstanding relationships in the financial sponsor community and bring keen insight into the investment preferences and areas of interest of health care-focused firms. These connections allow us to offer tailored advice to clients marketing to financial sponsors. The overwhelming majority of our engagements involve marketing to, or on behalf of, financial sponsors. We follow the preferences and investment activity of health care focused firms very closely. We have advised on 75 M&A, advisory, and private equity transactions in health care over the past three years, with an average transaction value of over $100 million. Supported by financial sponsor coverage groups Home Health & Hospice Our banking practice has significant domain expertise and deal experience in home health, and we understand the business model, investor focus points, and competitive dynamics very well. Over the past ten years, the Raymond James Health Care Investment Banking Group has been the most active advisor and underwriter in the home health and hospice care sector. We have completed 26 transactions, including 22 advisory transactions. We served as lead underwriter on the largest two public equity offerings in the Medicare home nursing sector. We have a long-standing health care equity research commitment in home care, and were one of the first firms to initiate coverage following the implementation of PPS earlier this decade. -22-

MARKET OVERVIEW Market Size HOME NURSING Approximately $55 billion market Twelve million patients HOSPICE Approximately $19 billion market 1.5 million patients Market Growth Drivers Competitive Landscape Notes and Nuances Stable Expected to grow by 6% over the next ten years Growing elderly American population: 70% of patients are 65 and older Strong patient preference: 82% of American adults prefer in-home care over institutional care Cost effectiveness: Cost represents a fraction of comparable cost in a hospital or skilled nursing facility Fragmented Four largest, publically traded providers in the country account for 10% of the market Care provided by approximately 33,000 providers through over 12,000 free-standing or facility-based home health agencies in the U.S. Skilled Nursing Majority Medicare; complex PPS system Unskilled Nursing Majority Medicaid; per visit system, state specific Moderate Expected to grow by 7% to 10% over the next three to five years Growing elderly American population: 82% of patients are 65 and older Cost effectiveness: Significantly less than the cost of care for traditional end-of-life medical services Fragmented Two largest providers in the country account for approximately 15% of the market Approximately 5,300 hospice programs in the U.S., most of which have an ADC of less than 100 patients Medicare accounts for 80% to 90% of industry revenue Simple per diem system with Medicare Cap: Short average LOS offers optimal positioning -23-

RECENT ACTIVITY Reimbursement Regulatory Activity HOME NURSING Uncertain Skilled / Medicare Considerable pressure and uncertainty Unskilled / Medicaid / Private State specific Audit rate: High Level of scrutiny: High Primary focus: Coding for visits Acuity Therapy Stable HOSPICE Among the safest health care service sectors in terms of Medicare reimbursement Audit rate: High Increased activity Primary focus: Patient eligibility: Extended non-cancer LOS is scrutinized Potential Reforms Continued skepticism on PPS system, but will not be tested in near future Currently testing new system to better align payments with costs Competitive Landscape Wide range of buyers Interest in: Diversification Consolidation Wide range of buyers Abundance of platform builders Interest in: Diversification Consolidation -24-

M&A OVERVIEW HOME NURSING HOME NURSING Sellers Buyers Deal Appetite Private companies and private equity backed platforms of limited scale Public and distressed companies (Addus just sold its Medicare nursing business for scale reasons) Private equity backed companies deep into sponsor hold periods Established home care providers with scale and resources (Almost Family, Amedisys, Gentiva) Broader set of post acute players (Emeritus, HealthSouth, Kindred, National Healthcare, ManorCare) Private equity (Cressey, Health Evolution, Webster) Payors (Humana, United) Modest; rate pressure has larger entities focused internally and addressing cost structures; valuation challenging in rate cut environment Primary factors now: (i) scale to counter rate pressure; (ii) diversification; and (iii) positioning for ACO and potential of future bundled payment models Lender appetite is high but cautious in home health for sub-scale, pure-play players Valuation Very challenging, particularly with primarily Medicare providers 4x to 6x EBITDA, potentially slightly higher for well-run platforms with solid history managing rate pressure and for deals with meaningful synergy opportunities Notes and Nuances Interest in sizable Medicaid platforms now on par with Medicare Organic growth is key -25-

M&A OVERVIEW HOSPICE HOSPICE Sellers Private companies and private equity backed platforms Buyers Deal Appetite Established, public and private home nursing and hospice players (Amedisys, Gentiva) Hospice platform builders (Curo Health, Halcyon Home Health, Hospice Advantage) Home health companies (Almost Family, Encompass Home Health) Broader set of post acute players (Emeritus, HealthSouth, Kindred, National Healthcare, ManorCare) Private equity (GTCR, Sentinel, Kohlberg) Despite slowing growth, strategic and PE appetite for hospice is high Demand for platforms / management far outweighs supply Sector perceived as safe from rate pressure over near-to-intermediate term; increasing utilization viewed as integral to national effort to reign in health care spending Valuation 7x to 10x EBITDA for large, established platforms; smaller transactions trading in 4x to 7x range Competition for quality opportunities and favorable debt environment Notes and Nuances Heavy buyer focus on compliance and organic growth Lender interest is strong Industry less focused on attracting longer-term LOS nursing home patients given risk; less predictable disease trajectories for diagnoses such as Alzheimer's, dementia, debility, failure to thrive, etc. -26-

BUYER FOCUS AREAS Organic Growth Drivers Geographic Concentration and Competitive Dynamics Compliance History, Infrastructure, Professionals, and Culture Synergies Additional Areas HOME NURSING New admissions vs. increased recertifications Medicare vs. non Medicare Medicare: Focus on acuity and therapy Geographic Concentration and Competitive Dynamics CON vs. non CON Overlapping operations with buyer Compliance focus in Medicare home nursing on coding, therapy, acuity. LHC settled with DOJ on therapy threshold case for $65 million. Others still unresolved Revenue / referral sources Agency-level and corporate G&A Ability to manage future Medicare cuts given magnitude of cuts and experienced over past several years; view that most easy cuts have been made Agency size and location strategy Medicare Advantage strategy and exposure (in form of episodic business going per visit); private duty business strategy HOSPICE New admissions vs. increased LOS Geographic Concentration and Competitive Dynamics CON vs. non CON Overlapping operations with buyer Compliance focus on eligibility and certification SouthernCare was the defendant in the most notable Qui Tam case; charged with certifying patients that should have been ineligible; a ~$25 million settlement with DOJ. Revenue / referral sources Agency-level and corporate G&A Diagnosis mix (cancer vs. non cancer) Referral mix Cap exposure / cushion -27-

2013 CliftonLarsonAllen LLP 2013 CliftonLarsonAllen LLP Irving Levin Associates Health-Care M&A Webcast Home Health Care & Hospice: Buying, Selling and Valuing cliftonlarsonallen.com

2013 CliftonLarsonAllen LLP Speaker Gary R Massey, CPA Partner in the Charlotte office for CliftonLarsonAllen Nearly 35 years working with Home Health and Hospice providers Family members operate a Private Duty home care business in the Raleigh area Lead CLA s national practice in the home care and hospice industry

2013 CliftonLarsonAllen LLP Who Are We? CliftonLarsonAllen is one of the nation s top 10 certified public accounting and consulting firms. Structured to provide clients with highly specialized industry insight, the firm delivers assurance, tax and advisory capabilities. More than 90 locations across the country Deep capabilities in 10 industries Integrated service approach Focused on serving privately held enterprises, nonprofits and governmental entities 30

2013 CliftonLarsonAllen LLP What We Do For Health Care Providers Audit, accounting, reimbursement, and tax Strategy & Capital Planning Transaction Advisory Payment / Reimbursement Operations & Compliance 31

2013 CliftonLarsonAllen LLP Which way are we going??? 32

2013 CliftonLarsonAllen LLP Accountable Models of Care Service Organizations Delivery Post Acute Care Episode Bundling Acute Care Episode with PAC Bundling Primary Care Physicians Specialty Care Physicians Outpatient Hospital Care and ASCs Inpatient Hospital Acute Care Long Term Acute Hospital Care Inpatient Rehab Hospital Care Skilled Nursing Facility Care Home Health Care Acute Care Bundling Medical Home

2013 CliftonLarsonAllen LLP Traditional Valuation Indicators Based on averages EBITDA multiples Assume all companies have same historical and future earnings growth Assumes all companies have same EBITDA margins Revenue multiples Assume all companies have same historical and future earnings growth Assumes all companies equally profitable Future benefit principle The value of any asset is the present value of its economic benefits 34

2013 CliftonLarsonAllen LLP Regional or Other Impacts on Valuations Is the provider located in a non-con State? What is the provider s Payer mix? How much Advantaged Plans, Medicaid, Private Insurance? Are there multiple service lines? In-Home Aide services, Hospice Is this a captive (for example, hospital department) or diverse business enterprise? What are expected future volumes and reimbursement levels? What does future labor costs and supply look like? 35

2013 CliftonLarsonAllen LLP Future view For Home Health the short term view is bleak Medicare reimbursement is major driver of HH valuations Medicare rate reductions rebasing with up to 20% reductions in future reimbursement expected Medicare co-insurance Continued pressure on the regulatory (documentation and measuring quality) all costly Continued post payment review process Will integrate systems shut out providers Impact on referral sources will their choices be limited?? Cost of technology IS has to be able to communicate with other Health Care Delivery System Partners Hospice some of the same challenges not quite as severe Survival may mean integration?? 36

2013 CliftonLarsonAllen LLP Business Model of the Future ACO payment for services as if private pay what will be the regulator burden will all the documentation reporting be required of the current certified providers Integrated care delivery team Hospice has the advantage Providers able to accept risk have geographic abilities to provide to a population base Providers able to develop lower cost models and are focused on the Private Pay sector of the Home Care industry moving away from the traditional Medicare Providers may see less demand for therapy staff greater use of in-home aide reflect back on the Visiting Nurse model and the Independence at Home model the role of Doctors 37

2013 CliftonLarsonAllen LLP Disconnect?? Maybe too late for both Buyers Sellers 38

2013 CliftonLarsonAllen LLP 2013 CliftonLarsonAllen LLP Gary Massey, CPA Partner Gary.Massey@cliftonlarsonallen.com 704-998-5216 cliftonlarsonallen.com twitter.com/ CLA_CPAs facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 39 39

A Buyer s Perspective The Ensign Group, Inc. (NASAQ: ENSG) Founded in 1999 109 Facilities (SNF/ALF/ILF) 16 States

A Buyer s Perspective Cornerstone Healthcare, Inc. Founded in 2010 11 Agencies 19 Provider Numbers 9 States $16M Invested

Investment Considerations All Cash Transactions Average Multiple:.52 x Revenue Service Area & Service Lines Referral Base Lease Expense & Other Overhead CON ADRs; Hospice Cap Exposure; Surveys

Home Health Care & Hospice: Buying, Selling and Valuing **************** The Health Care M&A Information Source Webcast Dexter Braff Gary Massey Leslie Levinson (Moderator) Burk Lindsey Daniel Walker 45