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Recent Healthcare Mergers & Acquisitions - Business and Legal Trends
John Callahan Partner and Head of International Healthcare M&A
MCDERMOTT WILL & EMERY LLP
312.984.7553
Michael A. Crabb, III (Trey) Managing Director and Hospital M&A Practice Leader
ZIEGLER INVESTMENT BANKING
312.705.7272
Twitter: healthbanker
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Discussion Topics
1. The Big Picture
2. Trends in Healthcare and Hospital M&A
3. Healthcare Reform
4. Bogies, Blunders and Bombs
5. Emerging Models
Appendix
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Learning Objectives
1. Increase members’ familiarity with mergers, acquisitions and joint ventures
2. Bring members’ knowledge current in healthcare M&A
3. Help members position their organizations to thrive in a changing marketplace
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Discussion Topics
1. The Big Picture
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Polling Question #1
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The Big Picture
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The Big Picture
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$2,500,000,000,000
The Big Picture
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The Big Picture
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The Big Picture
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Discussion Topics
2. Trends in Healthcare and Hospital M&A
Year-to-Date Performance
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Healthcare Investing
Buy – Hospitals – low valuations make this a great time to jump in and achieve great arbitrage
multiples in the next 5 years • Standalone NFP experiencing increased pressure
• NFP systems up for grabs if reimbursement pressure grows
– Senior Housing – private pay increases the strength of this sector in uncertainty
– PBMs – minimal government exposure
Hold – Hospice – uncertain reimbursement
– Skilled Nursing
– Home Health
– Diagnostic Imaging
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Increased M&A Activity
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• 51 hospital deals announced YTD 2012
*Source: Irving Levin Associates, Inc.
82
56
37
59
5055
61 60
52
77
86
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$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
0
10
20
30
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50
60
70
80
90
100
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD(Sept)
Transactions Dollars Committed (Billions)
Consolidation in Greater Chicago Market
Centegra Health and Mercy Alliance Filed for New Hospital CON
National Health Systems Enters Chicago Market Through Acquisitions
Merger of Two Large Catholic Health Systems
Merger of Two Hospitals in Western Suburbs
20 miles
More than 30%20% - 30%10% - 20%0% - 10%Less than 0%
Vanguard Acquires Additional Hospitals in Market
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2
++
Adventist MidwestNorthwestern MemorialAcademic Medical CenterAdvocateAlexian Brothers (Ascension)Loyola (Trinity)RHC - ProvenaCentegraCDH – DelnorVanguardOther
Population Growth 2000-2004
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Greater Chicago Market Recent M&A Activity
Centegra Health & Mercy Alliance each filed CONs for new hospitals in 12/2010, both were denied in 6/2011; revised applications submitted and denied in 12/2011; CON granted to Centrgra in 7/2012
Ascension (Alexian Brothers) & Trinity (Loyola and Mercy) enter Market through acquisitions • Ascension/Alexian signed a
letter of intent in 4/2011; approved by IHF 12/2011
• Trinity acquisition of Loyola closed in 6/2011
• Trinity acquisition of Mercy reported in 9/2011; closed in 3/2012
Merger of Provena & Resurrection Health Care (closed 11/2011)
Merger of Delnor & Central DuPage Hospital (closed 3/2011)
Vanguard acquires West Suburban & Westlake Hospital from Resurrection Health Care (closed 8/2010)
More than 30%20% - 30%10% - 20%0% - 10%Less than 0%
Population Growth 2000-2007
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Northwestern terminated diligence with Elmhurst; also in discussions with Northwest Community and Roseland Community Hospital • Elmhurst – announced 10/2011 • Roseland – reported 11/2011 • Northwest Community –
rumored in early 2011
MetroSouth Medical Center (FP) acquired by Community Health Systems (FP) - definitive agreement announced 12/2011
Centegra Health discussions with Froedtert (Winter 2011)
Academic Medical Centers
Advocate
Alexian Brothers (Ascension)
Loyola (Trinity)
RHC - Provena
Centegra
CDH – Delnor
Vanguard
Other
1
2
+ +
Sherman rejects Centegra merger proposal (2/2011); Sherman undertaking merger RFP process (5/2012)
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Polling Question #2
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Discussion Topics
3. Healthcare Reform
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Health Care Reform a/k/a Putting Out Fire with Gasoline
Election 2012
Repeal of material provisions of the Affordable Healthcare Act will grow increasingly difficult to accomplish as: – Benefits of PPACA begin to be available to the currently uninsured – Providers and payors reconfigure themselves for governmental and commercial value and/or budget-based payment
arrangements – Providers can no longer rely on the fee-for-service model
Who will Win as a Result – Transformation, and not just another reimbursement model, will allow big wins for those who partake – Robust IT and monitoring capabilities necessary – Those with a track record of collaborating on patient care – Providers with a stable primary care patient base – Providers that have standardized clinical processes and protocols – Providers with aligned incentives – Providers with strong governance and change management structures
On November 20, 2012, the Obama Administration issued guidance for insurance companies
– Pre-existing conditions / Market reform – Essential health benefits – Wellness incentives
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– Cost
– Quality
– Accountability
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Recurrent Themes
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– Hospital Value Based Purchasing Program
– Accountable Care Organizations
– Pilot Program on Payment Bundling
– Readmission Reduction Program
– Payment Adjustments for Hospital-Acquired Infections
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Cost and Quality Initiatives
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Coordination/Integration of health care services across treatment settings
Reduction:
– in the cost of health care services
– of preventable hospitalizations
– of emergency room visits
– of hospital readmissions
– of hospital-acquirement infections
Improvements:
– in quality and health outcomes
– in patient and family-caregiver satisfaction
– in the efficiency of care
Doing More with Less
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New Technology Costs
A need, no longer an option, for a strong IT infrastructure to support:
– The coordination of care
– Quality of care measurement, improvement and reporting
– New payment models and Policies
– Expanded Benchmarking Functions
– Data Capturing, Reporting, Counseling
– Electronic Medical Records
– Performance Based Compensation
– Community Need Initiatives
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Physician Alignment
A need for strong physician platforms, both primary care and specialists
A willingness to change governance and share control with physicians and to align economic incentives to incentivize quality care
A buy-in to evidence based medicine and an adherence to clinical protocols
The capital necessary to build satellite facilities and support vertical integration
A recognition that defensive practice acquisitions can be as or more important than strategic ones that are planned in advance
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Scale, Scale, Scale
Size really does matter and can shape strategic direction in that it can provide:
– An ability to achieve economic and operational efficiencies
– Access to Capital
– Healthy relationships with payors
– An ability to respond to unexpected market or industry changes nimbly
– Capital to support further strategic alignment initiatives
– A broader knowledge base to leverage
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Discussion Topics
4. Bogies, Blunders and Bombs
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Strategic Rationales
– Stating opportunistic, rather than mission-driven rationales for a transaction
– Stating inconsistent rationales in governing documents and agreements
– Ensuring that all available options for meeting strategic rationales have been analyzed
Missing Critical Deal Points
Executive Incentives
– Attorney General review
– Closing bonuses and success fees
– Following the executive compensation process
– Finding a legitimate and justifiable balance
Bogies, Blunders and Bombs
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Antitrust Missteps
– The need for a due diligence “clean team”
– Educating the full management team on antitrust protocols
– Keeping Communications Clean
– Avoiding Gun-Jumping
Shortcutting Diligence
– Board fiduciary issues
– Reputational harm
– Ugly contingent liabilities
Getting used as a “Stalking Horse”
Bogies, Blunders and Bombs
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Polling Question #3
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Discussion Topics
5. Emerging Models
Recent joint ventures
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DLP Ventures – Duke-LifePoint – Two systems have had a cardiovascular affiliation in place for four years in Danville,
VA
– 4 Transactions together announced
LHP – St. Mary’s Hospital and The Waterbury Hospital* (both in Waterbury, CT)
– Bay medical Center (Panama City, FL) and Sacred Heart Health System (Pensacola, FL)
Aurora Health Care and IASIS Healthcare form Aurora IASIS Health Partners
Aggressive For-Profits
Acquisition of non-profits beyond the traditional rural and suburban markets into urban non-profit hospitals
– Vanguard Health System acquisition of Detroit Medical Center and two Chicago-area Resurrection Health Care hospitals
– Creation of Ascension Health Care Network with Oak Hill
– Healthcare reform driving increased returns for investments that formerly did not seem profitable
Providing ongoing capital commitments post-acquisition
18% of US hospitals
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Joint Ventures Between not-for-profit and for-profit hospitals in the US
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LHP management has been involved in 70.6% of these structures.
Source: LHP Proposal for Marion County Hospital District. Feb. 2012
Other groups pursuing joint ventures
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• Duke LifePoint (DLP)
• Health Management Associates
• Hospital Corporation of America
• Tenet Healthcare
• Not-for-profits
Example #1
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Not-For-Profit
For-Profit
JV LLC
New Hospital
$20M $80M
• $100 million Hospital Cost • For-Profit owns 80%; manages operations • Not-for-Profit owns 20%; receives income on tax-free basis • 50/50 governance
Example #2
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Not-For-Profit For-Profit
JV LLC
Existing Hospital
Assets Cash
• Hospital Valuation = $100 million • For-Profit pays Not-for-Profit $80 million for 80% share of JV • Not-for-Profit retains 20% ownership; receives income on tax-free basis • 50/50 governance
Cash
The Rise of the Non-Profit
Emergence of aggressive acquisition programs in not-for-profits – Trinity Health merger with Catholic Health East
– Partners Healthcare’s acquisition of South Shore Memorial
Increased experience in strategy by hospital executives – Use of strategic consultants and internal M&A personnel allows not-for-profit hospitals to
take a proactive approach to transactions, looking for deals themselves
Availability of new strategies and structures – Duke LifePoint joint venture
– LHP Hospital Group (+ others) • 80/20 ownership, but 50/50 governance
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Clinical Branding and Management Arrangements
– Use and Protection of Brands
– Measuring effectiveness, economically and clinically
– Clearly defining obligations and expectations
– Rights of first refusal and non-competition provisions
– Watching out for the Trojan Horse
Emerging Deal Structures (Service Line Branding and Affiliation Transaction)
Opportunities Beyond Hospitals
Buying physician practices – “Under-the-radar” deals
– Primary care vs. hospital based physicians
– Non-traditional companies looking to enter physician practice management
Service line activity – Inpatient rehabilitation
– Psychiatry
– Dialysis
Back office functions
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What is Next?
Critical Access Hospitals
Hospitals with <$100 million NPR
Consolidation within cities
For profit hospital company bandwidth
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Polling Question #4
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QUESTIONS?
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Recent Healthcare Mergers & Acquisitions - Business and Legal Trends
John Callahan Partner and Head of International Healthcare M&A
MCDERMOTT WILL & EMERY LLP
312.984.7553
Michael A. Crabb, III (Trey) Managing Director and Hospital M&A Practice Leader
ZIEGLER INVESTMENT BANKING
312.705.7272
Twitter: healthbanker
45
Appendix
Acute Care Hospital Comparative Valuations
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Post-Acute Comparative Valuations
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Other Healthcare Comparative Valuations
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Healthcare REIT Comparative Valuations
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