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Private Equity In Healthcare: What’s the Attraction?. PRIVATE EQUITY IN HEALTHCARE: WHAT'S THE ATTRACTION?. MODERATOR: James J. Kennedy, III, Esq., Shareholder, Carlton Fields PANELISTS : Todd Rudsenske , MBA, CPA , Managing Director, Cain Brothers & Company, LLC - PowerPoint PPT Presentation
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Chicago - March 29-30, 2012
2012 PLUS Medical PL Symposium
Private Equity In Healthcare:
What’s the Attraction?
PRIVATE EQUITY IN HEALTHCARE: WHAT'S THE ATTRACTION?
MODERATOR: James J. Kennedy, III, Esq., Shareholder, Carlton Fields
PANELISTS: Todd Rudsenske, MBA, CPA, Managing Director, Cain Brothers & Company, LLC John Telenko, Vice President, Healthcare, Allied World Assurance Company, Ltd.
Private Equity in Healthcare: What’s the Attraction?
MODERATOR: • James J. Kennedy, Esq., Shareholder, Carlton Fields, PA
PANELISTS: • Carrie Cope, Esq., Shareholder, Schuyler, Roche & Crisham, P.C.• James Fasone, ARM, RPLU, SVP, Alliant Healthcare Solutions, Inc.• Ciara Frost, Esq., Partner, Kerns, Frost & Pearlman, LLC• Douglass Hewitt, Esq., Partner, Kubasiak, Fylstra, Thorpe & Rotunno, P.C.• John O’Byrne, Esq., Partner, Mendes & Mount, LLP
Current Situation
____________________
Source: Wall Street research.
Trends Commentary
Lower patient volumes as patients defer elective services
Increased charity care/bad debt expense due to high unemployment and the loss/reduction of insurance Unfavorable changes in payer mix away from commercial payers due to elevated levels of
unemployment
Medicare/Medicaid rates reductions going forward Challenged State budgets further affecting Medicaid rates
Commercial insurer leverage pressuring reimbursement rates State insurance exchanges likely driving reimbursement below commercial payers
Reduced ability to cost shift
Higher interest expense due to credit deterioration Costs of implementing physician alignment initiatives
IT investments Unfunded pension liabilities
Deferred maintenance - need to revitalize aging plants
Increased volume shift from inpatient to outpatient Increased competition from specialty hospitals/providers
Position for healthcare reform – clinical integration Synergies and operational efficiencies, rationalization of services
Increased negotiating leverage Access to quality infrastructure, care management capabilities, and sophisticated IT platforms
Private and Health Care
Factors Driving ConsolidationUnprecedented combination of macro-economic influences, industry pressures and market dynamics driving consolidation.
CONSOLIDATION
Private Equity and Health Care
Hospital and Health Care System Strategic Response Hospitals and healthcare systems across the U.S. are evaluating their
strategic options.
Approaching systems viewed as most favorable partner with skill, scale, share and resources
Develop new regional systems with other independent hospitals Leveraging a competitive partnering process to maximize value of assets and ensure
most attractive terms including purchase price, capital commitments, continuity of services
Developing specialty service provider in the market – “carving out a niche”
Market by market strategic assessment; portfolio analysis - invest, partner, divest or swap
Take advantage of opportunities to grow in existing markets where viewed as favorable partner
Clinical integration through physician acquisitions Monetize non-core assets and re-deploy capital in markets with greater chance of
success Own across continue of care or partner to provide ancillary services (home health,
post-acute, etc.) Conversion to investor-owned
Assess wherewithal to be a consolidator or proactively approach most favorable partner(s)
Formation of “super regional” systems JV strategies to pursue growth, defend market share, build networks (acute &
ambulatory surgery) Clinical integration through physician acquisitions Conversion to investor-owned
Private Equity and Health Care
Quarterly Deal Volume by Healthcare ServiceHospitals Labs, MRI,
Dialysis
Long Term Care Managed Care Physician Groups
Rehabilitation
____________________
Source: Irving Levin.
383635
2827
20
0
5
10
15
20
25
30
35
40
Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11
7
11
7
3
2
0
1
2
3
4
5
6
7
8
Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11
27
18
29
13
912
0
5
10
15
20
25
30
35
Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11
2
3
5
1
4
2
0
1
2
3
4
5
6
Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11
32
242424
18
9
0
5
10
15
20
25
30
35
Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11
4
11
89
16
8
0
2
4
6
8
10
12
14
16
18
Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11
Private Equity and Health Care
Year Number of Deals Dollars Committed
2002 56 $ 3,403,681,000
2003 37 $ 2,341,550,000
2004 59 $ 9,706,390,000
2005 50 $ 2,905,729,000
2006 55 $35,533,500,000
2007 61 $ 9,257,130,000
2008 60 $ 2,580,600,000
2009 51 $ 1,813,600,000
2010 75 $10,792,632,000
2011 86 $ 7,938,260,000
Total 590 $86,273,072,000
Hospital Mergers & Acquisitions 2002 - 2011
____________________
Source: DealSearchOnline.com.
Private Equity and Health Care
Deal Value QuarterHighmark acquired West Penn Allegheny $1.475 billion Q2:11
HCA acquired the remaining interest in HealthONE
$1.45 billion Q2:11
Ascension Health acquired Alexian Brothers $645 million Q2:11
Health Management Associates acquired Mercy Health Partners
$525 million Q3:11
Trinity Health acquired Loyola University Health System
$475 million Q1:11
Five Largest Hospital Deals of the Past 12 Months
____________________
Source: DealSearchOnline.com.
Private Equity and Health Care
For-Profit Hospital Management CompaniesThe universe of for-profit hospital management companies is shifting.
Financial sponsors are changing their view of hospital management companies in response to
the pressures of health care reform. New players are emerging while others are exiting the industry.
Private Equity and Health Care
Significant P/E Investments in the Hospital Sector
($ in Millions)____________________(1) Formerly Behavioral Healthcare Corp.(2) Date on which Merit, set up as an investment vehicle, bought its first hospital(3) TPG acquired IASIS from JLL in a transaction that valued IASIS at $1.3 billion. TPG owned 74.4% of IASIS post transaction.(4) Blackstone acquired Vanguard in a transaction valued at $1.75 billion. Blackstone owned 66% of Vanguard post transaction.(5) Commitment equals amount of equity invested at transaction.
Private Equity and Health Care
P/E Firms Highly Interested in Hospital Sector
General/Macroeconomic Favorable demographics
Stable, predictable, growing population
Weak economy
Low interest rates
Industry Specific Highly fragmented industry Non-cyclical Large component of GDP Capital intensive Public market valuations low Availability of seasoned mgmt talent Precedent successes (HCA, Triad, etc)
Factors Driving
Private Equity Investments
Health Care Reform
Efficient debt markets Low-cost of capital Available cash for acquisitions Strong fundraising environment
as investors search for alternative to stock market
Financing Reduces uncompensated care Demands efficient delivery model Opportunity to effectively assume risk
and capture more total healthcare dollars spent
Ability to turnaround operations and make acquisitions accretive
Private Equity and Health Care
Deterrents to Private Equity
Private Equity and Health Care
• Highly regulated industry
• Reimbursement cuts
• Decreases in inpatient surgery volumes
• Uncertainty of Healthcare Reform
Evolving Policies at State Governments
New Jersey
Florida
Massachusetts
Committee appointed to study a plan to dismantle the University of Medicine and Dentistry of New Jersey and replace it with an enhanced delivery system in Newark
Commission on Taxpayer Funded Hospital Districts established in March 2011
Created to assess and make recommendations on the role of hospitals districts and whether it is in the public’s best interest to have government entities operating hospitals
For-profit hospital companies have been actively acquiring stand-alone not-for-profits, a trend that is not expected to cease anytime soon, nor one that is necessarily unwelcome by the State government
Massachusetts’ unique health insurance model (e.g. RomneyCare) positions it as a testing ground for health care reform readiness strategies
____________________Sources: Industry publications and periodicals.
State and local governments are beginning to view for-profit hospitals as a welcome new source of tax revenue.
Illinois Illinois’s Department of Revenue is scrutinizing, and in some instances revoking, hospitals’
property tax exemption due to alleged inadequate charitable care levels
Private Equity and Health Care
• Leverage is a common way to fund acquisitions
• Healthcare companies issued over 7% of all high yield debt in 2010
Hospitals tend to move through cycles of levering up to make acquisitions, then spend the next few years using their free cash flow to de-lever and create balance sheet capacity for
the next round of acquisition growth.
Private Equity and Health CareLeverage
Private Equity and Health CareRisk: Private vs. Not-for-Profit
For-Profits
•Liability of Officers & Directors
•Freedom from labor agreements
Not-for-Profits•Sources of Funds•Intermediate Sanctions•Unrelated Business Income Tax (UBIT)
•Liability-Limiting StatutesBoth FP and NFP
•Employment Practices Liability (EPL)•Anti-trust risk•Government Regulations & Compliance
Private Equity in Healthcare: What’s the Attraction?
Questions?
