Analyzing the Health System Market

Analyzing the Health System Market
Mergers, Acquisitions, and Joint Ventures
October 24, 2013
Greg Koonsman, CFA
Senior Partner
Overview
I. Overview of the U.S. Health System
II. Challenges in the Current Market
III. Current M&A Environment
IV. Hospital Merger & Acquisition Pricing
V. Implications for ASCs
VI. Final Thoughts
2
I. Overview of the U.S. Health System
The Current U.S. Health System - By Size of System
System Category
Identified
Systems
Hospitals
(Rounded)
11
52
63
65
199
866
59
1,350
2,600
600
1,200
1,800
400
550
1,100
100
1,350
5,300
Major Systems (10 + Hospitals)
For-Profit
Not-for-Profit
Total Major Systems (10 + Hospitals)
Regional Health Systems (5-9 Hospitals)
Local Health Systems (2-4 Hospitals)
Government Hospitals (state, county and city)
Academic Health Systems
Single Hospital Health Systems (non-government)
TOTAL (Rounded)
Source: American Hospital Directory, American Hospital Association, VMG Research
Notes: 1) Totals do not include psychiatric, long-term acute care, or rehabilitation hospitals.
2) The data above includes hospitals that may report under a parent hospital’s provider ID.
3)Totals Include Surgical Hospitals
4
Stand Alone Hospitals
Stand alone hospitals account for nearly 40% of all U.S. hospitals
Type of Ownership
For-Profit*
Not for Profit, Non-Government
Government (State, Local, County Owned)
Total Single Hospital Estimate
Hospitals
280
1,040
800
2,120
Includes 37 identified surgical hospitals
Source: American Hospital Directory, American Hospital Association, VMG Research
Notes: 1) Totals do not include psychiatric, long-term acute care, or rehabilitation hospitals.
2) The data above includes hospitals that may report under a parent hospital’s provider ID.
3)Totals Include Surgical Hospitals
5
The Current U.S. Health System – Financial Position
For-Profits
EBITDA Margin
Debt / Total Capital
Debt / EBITDA
Days Cash On Hand
Average Bond Rating
(Moody's)
# of Hospitals in Category
Net Revenue Range ($ in mm)
Major
For-Profits
10+ Hospitals
16.4%
59.6%
4.3
NSF
Not-for-Profit
Regional
5-9 Hospitals
11.8%
40.4%
3.8x
231.0
Major
10 + hospitals
10.4%
36.3%
3.7x
204.4
B2
Aa3
A2
A3-A2
604
1,213
379
449
$747-$33,033
$154-$16,253
$116-6,215
$116-$3,442
Local
2-4 Hospitals
10.6%
38.8%
4.1x
251.5
Source: VMG Health analysis of publicly available health system financial statements as of 6/30/2013.
1) Based on VMG calculations and estimates. May not match other third party research or credit reports.
6
Not-for-Profit Systems – By Net Revenue
NFP Hospitals , by Revenue
> $5 billion
$3-$5 billion
$1 - $3 billion
$500 million - $1.0 billion
<$500 million
Data Unavailable
TOTAL (Rounded)
Identified
Systems1
14
23
98
96
1,843
226
2,300
Hospitals
543
387
651
328
1,970
321
4,200
Sources: VMG Health Research, American Hospital Association, MSRB, Company SEC Filings and Annual Reports
1) The figures above include hospitals that may report under a parent hospital's provider ID.
2) Net revenue was estimated for approximately 2,100 stand-alone hospitals based on charge / collection ratios and each
hospital's gross charges.
Source: American Hospital Directory, American Hospital Association, VMG Research
Notes: 1) Totals do not include psychiatric, long-term acute care, or rehabilitation hospitals.
2) The data above includes hospitals that may report under a parent hospital’s provider ID.
3)Totals Include Surgical Hospitals
7
The Current U.S. Health System – Financial Position
Small systems are more highly levered than their larger peers
EBIDA Margin
Debt / Total Capital
Debt / EBIDA
Days Cash On Hand
# of Hospitals in Category
$> 5 billion
9.6%
39.5%
3.8
193.0
543
Average Bond Rating (Moody's)
Aa3
Not-for-Profit Hospitals
$3-$5 billion $1-3 billion $500 million - $1 billion < $500 million
10.5%
10.6%
10.1%
10.3%
36.6%
37.0%
33.4%
51.8%
3.3x
3.6x
4.1x
7.9x
189.6
239.3
253.4
219.8
387
646
301
199
A1
A1
A2
A3
8
II. Challenges in the Current Environment
Challenges in the U.S. Health System
CHALLENGES
RESULTS
1. Economic Pressures &
Commercial Insurance Plan
Design
2. New Payment Models
Uncertainty
3. Capital Constraints
10
Challenge 1: Economic Pressures
“Unfortunately, the economic realities of our individual markets
continue to hamper our growth, especially in smaller markets.
Our management team has intensified its efforts on volume
initiatives, expense management and operating strategies.”
– Wayne T. Smith, CHS
“The soft inpatient volume environment, which adversely
impacted the industry in Q1, has continued into Q2.”
-Daniel J. Cancelmi , Tenet Healthcare
11
Results of Economic Pressures : Declining Admissions
Same-Facility Admissions
Same-Facility Adjusted Admissions
0.7%
0.2%
874,900
868,900
1,405,000
YTD 2012
YTD 2013
355,337
YTD 2012
YTD 2013
(3.9%)
334,643
YTD 2013
256,326
YTD 2012
681,819
YTD 2013
399,630
(3.8%)
YTD Period as of June 30, 2013
YTD 2012
709,841
(5.8%)
YTD 2012
1,407,800
(1.6%)
246,651
YTD 2013
YTD 2012
393,105
YTD 2013
12
Results of Economic Pressures: Declining EBITDA
Quotes / Commentary
EBITDA Trend
$3,392
(4.0%)
YTD 2012
YTD 2013
(9.8%)
YTD 2012
$1,402
YTD 2013
$610
YTD 2012
YTD Period as of June 30, 2013
One of only two companies to experience
positive EBITDA growth in Q2 2013
•
Experienced 14% EBITDA decline in Q1 2013
$3,257
$1,554
$598
•
2.0%
YTD 2013
“For the second quarter, consolidated EBITDA
margin was 12.8% versus 14.9%. The decrease of
210 basis points is primarily due to increased salary
and benefits and higher supply costs.”
[W. Larry Cash, CFO]
“We drove solid growth in outpatient visits,
improved commercial pricing and strong cost
control in order to increase adjusted EBITDA by
nearly 17%.”
[Trevor Fetter, President and CEO]
13
Challenge 2: Uncertainty Surrounding New Payment Models
Current Environment:
Fee for Service
The Next Five Years:
???
Risk Sharing
Bundled Payments
Narrow Networks
HMO / Risk Based Models
Value-based
Purchasing
???
HDHPs
14
Challenge 2: Uncertainty Surrounding New Payment Models
Up to 6.0% of Medicare Part A payments will be at risk by 2017.
2013
1.00%
2014
1.00%
2.00%
2.00%
1.25%
2.25%
2015
3.00%
2016
3.00%
2017
3.00%
2.00%
1.0%
2018
3.00%
2.00%
1.0%
2019
3.00%
2.00%
1.0%
0.00%
1.00%
Re-admissions
2.00%
1.50%
1.0%
1.75%
3.00%
1.0%
4.00%
Value-based Purchasing
5.50%
5.00%
5.75%
6.00%
6.00%
6.00%
6.00%
7.00%
Hospital Acquired Conditions
Source: CMS
15
Challenge 2: Uncertainty Surrounding New Payment Models
• Nearly half of
exchange products
will have tiered or
narrowed networks
• Currently only 16% of
Americans are
insured under an
HMO
Individual Exchange Market
Product Filings – As of Oct. 1
Exclusive
Provider
Organization
5%
HMO
42%
Point of
Service
5%
PPO
48%
Sources: Statehealthfacts.org, Modern Healthcare
16
Results of Payment Model Uncertainty: More Physician
Employment
Hospitals have ramped up physician employment to build integrated networks
70%
Hospital Employment of Physicians: 2000-2011
60%
59%
50%
42%
40%
PCPs
30%
Specialists
20%
10%
0%
2000
2004
2008
2011
Source: New England Journal of Medicine, VMG Analysis of MGMA Physician Compensation and Production Survey, 20032012
17
Results of Payment Model Uncertainty: Development of ACOs
Medicare ACOs are highly concentrated in states with large risk-based populations.
h
Pioneer ACOs
Shared Savings ACO’s 2012 Cohort
Shared Savings ACO’s 2013 Cohort
Source: CMS
18
Challenge 3: Capital Constraints
Health systems are capital intensive enterprises
Assets / Bed
Revenue / Bed / Yr.
EBITDA / Bed / Yr.
D&A Expense per Bed
D&A as % of EBITDA
2011 Operating Statistics - By Bed
HCA
CYH
THC
HMA
646,680
772,218
645,019
608,450
713,613
604,530
659,654
515,565
139,515
86,728
92,004
89,386
35,221
33,139
30,338
27,148
25.2%
38.2%
33.0%
30.4%
Assets / Bed
Revenue / Bed / Yr.
EBITDA / Bed / Yr.
D&A Expense per Bed
D&A as % of EBITDA
2012 Operating Statistics - By Bed
HCA
CYH
THC
HMA
Average
671,586
816,678
684,322
632,177 704,463
789,709
640,749
689,997
580,567 643,283
155,296
84,003
91,329
87,117
97,921
40,164
35,682
32,536
34,463
34,437
25.9%
42.5%
35.6%
39.6%
36.9%
Average
668,092
623,340
101,908
31,462
31.7%
Source: Capital IQ
Shift from inpatient bed focus to outpatient focus
19
Effects of Capital Constraints: More Downgrades
71% of not-for-profit downgrades occurred for systems with <$500mm in revenue
2013 Year-to-Date Hospital Downgrades *
# of Downgrades
10
8
8
4
2
- “Hospitals with less than $500 million
in revenues are in a weaker position to
face upcoming challenges…”
7
6
3
2
5
4
4
2
0
$0-$250
$250-$500 $500-$1,000 $1,000+
System Revenue
Upgrades
Quotes from Moody’s Ratings
Downgrades
During Q2 2013:
- “11 of the 14 downgraded hospitals
were small and may have been unable
to respond quickly to inpatient volume
declines.”
Downgrade counts as of September 15, 2013
*Source: Moody’s, Becker’s Hospital Review, VMG Research
20
Effects of Capital Constraints: More Downgrades
“… [For Health Systems] We still believe downgrades will continue to outpace upgrades.”
- Carrie Sheffield, Moody’s
Bond Rating Development
July 2013:
Old
Ba1
New
Ba2
-
Anticipation of significant operating losses
Challenging demographics
Highly leveraged balance sheet
Concerns of shrinking cash balances
New
Ba1
-
Declining cashflows
Heavy debt burden
Aging population
Government payor cuts
September 2013:
Old
Baa3
September 2013:
(KY)
Old
A1
Source: VMG Health Research, Moody’s
Reason for Credit Action
New
A2
- Continued weakening of operating
cashflow
- Losses in physician employment strategy
- Operating losses from recent acquisitions
- Same-store volume declines
21
Conclusion: An Increase in M&A Activity and JV Development
Health systems need to grow to expand referral networks and gain access to capital.
Aims of Healthcare Reform:
Means of Reform
Scale
-Vertical Integration
- Population Health
Management
Size
-Horizontal Expansion
- Access to Capital
- Economies of Scale
22
III. The Current M&A Environment
M&A Activity in the Era of Reform – as of 6/30/2013
Hospital M&A activity has risen since 2009.
ACA Era
Hospital Merger and Acquisition Trends, 2002-2012
400
352
331
350
300
250
200
164
163
150
100
227
214
100
60
68
2002
2003
81
212
172
139
85
107
103
91
131
85
89
92
109
71
37
50
0
2004
2005
2006
2007
Number of Deals
2008
2009
2010
Facilities Involved
2011
2012
YTD
2013
Sources: Modern Healthcare, Irving Levin & Associates
24
Themes in Health System Consolidation: Major Mergers & Acquisitions
Major Transactions
- For Profit
- Not-for-Profit
M&A Activity by State
Joint Ventures
25
For-Profit Acquisitions
Transaction
Transaction Notes
• $7.3 billion transaction
• Transaction multiples1
• 8.6x TEV/EBITDA
• 1.3x TEV/Revenue
• $4.3 billion transaction
value
• $21.00 / share
• Transaction multiples1
• 8.2x TEV/EBITDA
• 0.7x TEV/Revenue
Source: emma.msrb.org, VMG Research, CapitalIQ
Commentary
• Expands CHS’ presence in Florida, Mississippi and
Oklahoma
• Deal is expected to create $150mm-180mm in
synergies over 2.5 years
• Strengthens Tenet’s existing market
• Will add markets in Arizona, Illinois, Michigan,
Connecticut, Massachusetts, and Arizona
• Expected synergies: $100-200mm per year
26
Not-for-Profit Mergers and Acquisitions
Merger
Commentary
•
•
•
Merger includes three regional health systems
• St. John Health System, OK
8 hospitals
• Via Christi Health, KS
8 hospitals
• Ministry Health Care, WI
15 hospitals
Marian Net Revenue:
(2011):
$3.1 billion
Ascension Health net revenue
(2011):
$15.9 billion
• Closed September 2013
• Formed to improve population health management in the State of Texas
• Hospitals:
42
• Physicians:
3,000
• Employees: 30,000
Source: emma.msrb.org, VMG Research, CapitalIQ
27
Not-for-Profit Mergers and Acquisitions
Merger
Commentary
• Merger Closed: May 2, 2013
• Created the 2nd largest not-for-profit health system in the U.S.
• 82 hospitals in 21 states
• Combined Revenue: $13.3 billion
• Employees: 87,000
• Physicians: 4,100
• $2.0 billion transaction
• Increases competitive pressure in the Houston market for both regional
and national players
• Grows and enhances significant affiliations with BCM, MD Anderson Cancer
Center, Texas Heart Institute, and Texas Children’s Hospital
Source: emma.msrb.org, VMG Research, CapitalIQ
28
Themes in Health System Consolidation: Major Mergers & Acquisitions
Major Transactions
- For Profit
- Not-for-Profit
M&A Activity by State
Joint Ventures
29
Number of Transactions: As of 9/18/2013
1
1
2
4
3
1
1
3
1
2
5
2
2
1
1 1
1
5
Key Themes
Ohio:
-
Competition
Not-for-Profit
Consolidation
Cost Containment
New Jersey:
3
2
3
-
Survival
Reimbursement Pressures
New For-profit Players
Source: Irving Levin & Associates, VMG Health Research
*Florida Market transactions consist of three transactions with five individual hospitals involved
** Does not include multi-state transactions
30
Noted Individual Transactions: Ohio
Transaction
Transaction Notes
Commentary
• Announced: 8/22/2013
• First Cleveland Clinic – CHS deal
• Terms undisclosed
• Akron General will convert to a for-profit
entity post transaction
• Hospital Size: 521 Beds
• Revenue: $467mm
• Acquisition helps the hospital compete
with rival Summa Healthcare
• Announced: 7/1/2013
• Employed physicians: 500
• Parma Community leaders pointed to
sequestration as the “tipping point” for
the merger
• Hospital Size: 332
• Strong provider network
• Non-cash acquisition
• Announced: 2/21/2013
• CHP paid $250 million cash for
30% interest in Summa
• Revenue: $1.4 billion
• EBITDA Margin: 7.0%
Source: emma.msrb.org, VMG Research, CapitalIQ
• Summa’s goal: Partner with a large, notfor-profit system
• CHP appointed five members to the 16
person Summa board
31
New Jersey Hospital Market
32
Noted Individual Transactions: New Jersey
Transaction
Transaction Notes
Commentary
• Announced: May 16, 2013
•
Jersey City goal: obtain access to capital
• Terms: Cashless merger
•
Strengthened Barnabas’ footprint in
Northern New Jersey
•
Deal is pending state approval
• Number of Beds: 205
• Total Net Revenue: $294mm
• Announced: June 20, 2013
• Terms: Undisclosed
• Number of Beds: 218
• Total Net Revenue: $245mm
• Announced: 5/3/2013
• Deal involved three Saint
Clare’s hospitals:
• Dover (60 beds)
• Denville (272 beds)
• Sussex
Source: emma.msrb.org, VMG Research, CapitalIQ
• Competitive bidders included RWJ and
Atlantic Health System
• Expands RWJ’s reach in Central New
Jersey
• Deal is pending regulatory approval
• The deal marked CHI’s exit from the New
Jersey market
• Competitive bidders included CarePoint
Health
• Prime remains an active acquirer in the
NJ market
33
Themes in Health System Consolidation: Major Mergers & Acquisitions
Major Transactions
- For Profit
- Not-for-Profit
M&A Activity by State
Joint Ventures
34
Single Hospital Joint Ventures
Joint Venture Model: For-profit buyer joint ventures with a not-for-profit hospital
Source: LHP Hospital Group Proposal for the Marion County Hospital District, 2012
35
Recent Joint Venture Models: Health System Alliances
2011: Duke University Health System Forms Alliance with Lifepoint Hospitals
• Combines LifePoint’s operational strength with Duke’s clinical and quality
expertise
- Acquired four hospitals since January 1, 2012
• Total employed physicians: 3,000
• Three pending transactions as of June 2013
2013: CHS Forms Strategic Alliance with the Cleveland Clinic
• Combines operational strength with clinical expertise
• Recently announced acquisition of Akron General Hospital
• Total CHS physicians: 16,000 affiliated, 2,500 employed
36
Source: VMG Research, CapitalIQ
Recent Transactions – Joint Ventures
Joint Venture
Commentary
• The LHP / Hackensack UMC JVs have allowed a capital constrained
health system to expand in a competitive market:
• LHP Hospital Group Joint Ventures with Hackensack UMC Mountainside
• LHP Hospital Group Joint venture with HackensackUMC at
Pascack Valley
•
VMG Health provided fairness opinion for the deal
•
John Muir Health invested $100 million to acquire 49% of San Ramon
Regional Medical Center
•
The JV will seek ASC and ancillary investment opportunities
• Transaction closed: January 2, 2013
• VMG Health provided valuation and due diligence advisory services
• The final deal consisted of an 80/20 ownership split between Ardent
and Baptist Community.
37
Source: emma.msrb.org, VMG Research, CapitalIQ
Pros and Cons – Joint Ventures
Pros
Cons
• Lower-risk entrance into new
markets
For Acquirers
For Targets
• Access to new physicians
• Deal negotiations can be
difficult
• Access to new acquisition
opportunities
• Potential conflicts in shared
decision making for both
parties
• Provides capital constrained
systems access to capital
• Complex accounting
• Combines strengths and
market knowledge of both
parties
• Anti-trust / regulatory issues
38
IV. Hospital M&A Pricing Multiples
Public Company Valuations
Multiple ranges for the public hospital companies have risen since the passage of the ACA.
Hospital TEV / EBITDA Multiples: 2010 - Present
11.00x
10.00x
9.00x
January–2010
January 2010
July- 2011:
March 2010:
Wide
Dispersion
Wide
Dispersion ofof
Multiples
Multiples
October
Present:
Oct
20122012– Present:
Multiple
s
Rise
Multiples Riseand
and
Widen
Range Widens
July 2011-November
2012:
July 2011
– November
2012:
Multiple Ranges Tightened
Multiple Ranges Tighten
Passage of ACA
Supreme Court Upholds ACA
8.00x
7.00x
6.00x
5.00x
HCA
CYH
THC
HMA
LPNT
VHS
Average
40
Source: CapitalIQ
Hospital Acquisition Revenue Multiples
Total Invested Capital / Revenue:
Statistic
Median
Mean
25th Percentile
75th Percentile
High
Low
Number of Observations
Total Transactions
All Data
1/10 - 6/13
0.70 x
0.75 x
0.45 x
0.84 x
1.81 x
0.15 x
101
275
Last 3-yrs
6/10 -6/13
0.71 x
0.76 x
0.46 x
0.98 x
1.81 x
0.15 x
94
258
Last 2-yrs
6/11 -6/13
0.76 x
0.80 x
0.48 x
1.01 x
1.81 x
0.15 x
58
171
Last 1-yr
6/12 -6/13
0.87 x
0.91 x
0.60 x
1.28 x
1.60 x
0.15 x
30
94
Source: VMG Research, Irving Levin & Associates, public filings and press releases
41
Hospital Acquisition EBITDA Multiples
Total Invested Capital / EBITDA:
Statistic
Median
Mean
25th Percentile
75th Percentile
High
Low
Number of Observations
Total Transactions
All Data
1/10 - 3/13
7.43 x
7.56 x
5.79 x
9.22 x
12.43 x
3.93 x
50
275
Last 3-yrs
6/10 -6/13
7.43 x
7.49 x
5.79 x
9.09 x
12.43 x
3.93 x
46
258
Last 2-yrs
6/11 -6/13
7.47 x
7.57 x
5.79 x
9.00 x
12.43 x
4.08 x
30
171
Last 1-yr
6/12 -6/13
7.34 x
7.18 x
5.93 x
8.06 x
10.66 x
4.08 x
18
94
Source: VMG Research, Irving Levin & Associates, public filings and press releases
42
Revenue Multiple Trends
Increased demand have driven valuation multiples upwards for hospital transactions.
Public Company Transactions
(2010-Present)
2.00 x
1.81 x
1.63 x
1.60 x
1.60 x
1.52 x
1.40 x
1.37 x
1.36 x
1.27 x
1.20 x
1.19 x
1.20 x
0.98 x
1.00 x
1.00 x
1.03 x
1.00 x
0.91 x0.88 x
0.80 x
0.60 x
1.20 x
0.92 x
0.88 x
0.84 x
0.81 x
0.94 x
0.77 x
0.72 x
0.74 x
0.48 x
0.40 x
0.55 x
0.49 x
0.45 x
0.33 x
0.57 x
0.55 x
0.52 x
0.49 x
0.45 x
0.39 x
0.40 x
0.30 x
0.20 x
0.19 x
0.17 x
August-13
July-13
June-13
June-13
April-13
March-13
February-13
January-13
December-12
October-12
September-12
July-12
April-12
April-12
February-12
January-12
December-11
October-11
October-11
October-11
September-11
September-11
September-11
May-11
May-11
May-11
December-10
December-10
November-10
October-10
October-10
October-10
October-10
September-10
September-10
August-10
July-10
July-10
0.00 x
May-10
Total Invested Capital / Revenue Multiples
1.80 x
43
43
V. Implications for ASCs
New ASC Development Continues to Decline
ACA Era
6,000
ASC Development, 2000-2011
10%
5,000
8%
7%
4,000
6%
3,000
5%
4%
2,000
Growth (YOY)
# of Medicare Certified ASCs
9%
3%
2%
1,000
1%
0
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Medicare Certified ASCs
Growth
45
Supply of ASCs has Exceeded Demand for Physicians
40
35
30
25
20
36
# of Eligible Physicians per ASC
32 31
9-10% Annual
Growth in ASCs
29
26
23
21 20
19 19 19 18
2-3% Annual
Growth in
Eligible Drs.
15
10
5
>40% Decline
In Eligible Drs.
Per ASC
0
46
Current Trends in ASC Acquisitions
Structure
Goals
• Access to capital
Joint Ventures
HOPD
Conversions
• Risk sharing
• Access to hospital
referral networks
• Higher
Reimbursement
• Monetization
• Physician
employment of
specialists
Commentary
• Physician alignment and
negotiations can be slow
• Possibility of “win-win” coownership of a facility
• Consumers with HDHPs may
chose ASC procedures over
HOPDs to save on out-of-pocket
costs
• HOPD reimbursement premium is
temporary
47
ASC Joint Ventures
ASC Mgmt. Co
49.9%
Ownership
Hospital
50.1%
Ownership
ASC Management Company /
Health System
Joint Venture
51%
51%
Hospital System
Rates for Commercial
Insurance
Mgmt.
Agreements:
ASCs & JVs
51%
ASC #1
ASC #2
ASC #3
Physicians 49%
Physicians 49%
Physicians 49%
48
Quotes on ASC Joint Ventures
“We feel like this partnership offers to benefit consolidation, volume and
efficiencies and also gives our hospital system partner the opportunity to
increase their weighting and ability to grow in outpatient services. The
agreement further calls for jointly acquiring and developing additional centers
in the market.”
–Christopher Holden, AMSG CEO, Q1 2013 Earnings Call
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Pros and Cons: ASC Joint Ventures
Pros
•
•
•
•
•
Opportunity for lifted
reimbursement
Cons
•
Complex accounting
•
Antitrust issues
•
Regulatory issues create additional
complexity (Anti-Kickback)
•
Transaction negotiations take time
•
Shared ownership may cause
conflicts between health systems,
physicians, and management
companies
Access to new patient populations
Access to more JV development
opportunities
Hedge against bundled payment /
quality model
Higher margins
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HOPD Conversions
Hospitals are acquiring specialists for employment in HOPDs more than ever
Hospital
Purchases ASC
Hospital Hires
Surgeons
Hospital Converts
ASC to HOPD
Ramifications of HOPD Conversions
• Used by health systems to build integrated delivery networks of care
• Good hedge against bundled payments (Vertical Integration – IDS)
• Higher HOPD revenues for the same procedure
• Health systems are increasing their market share of specialists in key markets
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Challenges Facing the HOPD Conversion Model
• Increased employment of specialists has made the ASC pipeline less
robust for some health systems
• Consumer-driven / high deductible health plans may cause consumers to
reconsider higher price procedures in an HOPD setting
• The pricing differential for HOPDs may be temporary
• ASC Multiples have risen into the 7-8x EBITDA range for several multispecialty centers
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VI. Final Thoughts
Final Thoughts
Uncertainty will be a fact of life for healthcare in the foreseeable future
• In the face of uncertainty, hospital boards are considering their options
much differently than ever before
• Capital constrained not-for-profit health systems may need a capital
partner in order to remain competitive in the current market
• Publicly traded hospital chain multiples and individual transaction
multiples have increased
• Health systems will continue to grow in size and breadth of services
•
Health systems may look to joint venture ancillary businesses (ASCs) in
the wake of reform
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Questions?
Greg Koonsman, CFA
Senior Partner
Gregk@vmghealth.com
Main: 214.369.4888
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