The Transformation of Healthcare
The Transformation ofHealthcare
Page 2 Healthcare M&A update
The demand to derive greater value from health care, producing the bestpatient outcomes at the lowest cost, is pervasive – and urgent. Driven by thevalue challenge, industry stakeholders are pursuing a variety ofstrategies. Health care providers are embracing payer incentives to deliverhigh-value care through such models as pay-for-performance, bundled-payment, global budgets and financial-risk-sharing within accountable careorganizations. Payers are finding new ways to partner with providers to addvalue to the patient experience. This presentation will address the value innew payment and delivery models, mergers and acquisitions, healthinformation technology and other topics.
Page 3 Healthcare M&A update
Healthcare Facts and Figures
FAST FACTSAnnual HC expenditures
Spending as a % of GDP
Government expenditures
HC% of M&A
Hospitals
ACA
Annual domestic National Healthcare Expenditures (NHE) are $2.5trillion or $8,000 per person per year.
Healthcare spending is17.6% of GDP and is projected to rise to over19.0% by 2019. Healthcare spending will exceed GDP growth.
Federal government spending is approximately 50.0% of all NHE
Total US hospitals is 5,754, of which 1,013 (17.6%) are privatelyheld/investor owned, and 4,700 (83.4%) operated as not-for-profit.
Only 10.9% of commercial payments are value-oriented
20m more lives on Medicaid; 18m more in exchanges with subsidies.Potential $160 billion per year more spend on healthcare by 2017
Healthcare M&A comprises approximately 20.0% of reported M&Aactivity per recent Jefferies report.
Payers
Page 4 Healthcare M&A update
Market Dynamics
Page 5 Healthcare M&A update
Public company HC sector performance12 month change in stock price
44.2%39.4%
33.5%31.0%
30.5%27.8%
26.5%20.9%
20.0%17.5%17.4%17.2%
14.6%13.8%
12.2%12.2%
11.4%7.2%
6.7%5.5%
(1.8)%(5.8)%(6.7)%(9.4)%
-20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Acute-Care HospitalsPsychiatric Hospitals/Management
Health Care StaffingContract Pharmacy Manufacturing
Emergency ServicesContract Research Organization
HMO - MedicalMedical Devices and Products
Surgicenters/RehabilitationDialysis ServicesLong-Term Care
Home Care, Hospice and Home InfusionDental Products
Life Sciences ToolsSpecialty Pharmacy ManagementMedical/Surgical/Dental Supplies
Assisted LivingDiagnostic Imaging
Disease ManagementSpecialty Managed Care
Clinical LaboratoriesInformation Services
Durable Medical EquipmentPhysician Pratice Management
HC composite – 16.1%S&P 500 – 17.3%
Page 6 Healthcare M&A update
Healthcare trading comparablesSector analysis
HCIT continues to enjoy premium valuations relative to other healthcare services subsectors
Comparable company valuation analysis by subsector (EV/2014E EBITDA)
Source: Capital IQ as of August 31, 2014
15.1x
13.4x 12.9x 12.9x12.1x 11.7x 11.4x 11.2x 11.0x 10.5x 10.4x 9.9x 9.7x 9.7x 9.5x 9.3x 8.9x 8.5x 8.3x 8.0x 7.9x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
HC
IT
Cor
rect
iona
lCar
e
Sur
gery
Cen
ters
Soc
ialS
vcs.
/Beh
avio
ralH
ealth
Phy
sici
anP
ract
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ical
/Sur
gica
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tribu
tion
Clin
ical
Labs
CR
Os
PB
Ms
Dru
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istri
butio
n
Dia
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sP
rovi
ders
Inst
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nalP
harm
acy
Ret
ailP
harm
acy
Hom
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ealth
Reh
abili
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n/L
TAC
Hos
pice
Acu
teC
are
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ls
Spe
cial
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edC
are
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aged
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Imag
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lled
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sing
Faci
litie
s
EV
/FY1
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BIT
DA
Page 7 Healthcare M&A update
Source: Capital IQ; LTM as of August 31, 2014
Deal value and volume trend
Healthcare M&A
Volume by buyer type – LTM Value by buyer type – LTM
StrategicBuyer85%
FinancialBuyer15%
StrategicBuyer82%
FinancialBuyer18%
4,45
7 8,46
8
6,86
3
4,01
0
3,88
3
12,8
71
1,12
5
1,41
4
7,85
9
4,79
0
4,74
6
27,9
51
020406080100120140160180200
0
4,000
8,000
12,000
16,000
20,000
24,000
28,000
Sep1
3
Oct
13
Nov
13
Dec
13
Jan1
4
Feb1
4
Mar
14
Apr1
4
May
14
Jun1
4
Jul1
4
Aug1
4
Dea
lVol
ume
$m
Deal Value Deal Volume
2,52
1 7,20
9
6,22
1
2,73
8
3,13
5 8,27
3
782
1,31
5 6,60
6
3,11
0
3,87
0
26,7
88
020406080100120140160180
0
5,000
10,000
15,000
20,000
25,000
30,000
Sep1
3
Oct
13
Nov
13
Dec
13
Jan1
4
Feb1
4
Mar
14
Apr1
4
May
14
Jun1
4
Jul1
4
Aug1
4
Dea
lVol
ume
$m
Deal Value Deal Volume
1,93
6
1,25
9
642 1,
272
748
4,59
9
343
99
1,25
2
1,68
0
875 1,16
3
0
5
10
15
20
25
30
35
40
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,000
Sep1
3
Oct
13
Nov
13
Dec
13
Jan1
4
Feb1
4
Mar
14
Apr1
4
May
14
Jun1
4
Jul1
4
Aug1
4
Dea
lVol
ume
$m
Deal Value Deal Volume
Strategic deals trend Financial deals trend
Page 8 Healthcare M&A update
PE in healthcareHealthcare represents ~15% of private equity transactions in a given year – investmentsare often trying to capitalize on sector trends and new business models
0
20
40
60
80
100%
('00-'04)
n=997
('05-'09)
n=1,264
('10-'12)
n=785
2013
MedicalDevices
HealthProducts
Pro
vide
rs
Soft-ware
Info/Internet
Payers
Diagnostics
Pharma/Biotech
n=244
%of
Tota
lHea
lthca
reD
eals
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1995
874
1996
1997
1998
1999
2000
3,60920
0120
0220
0320
0420
0520
0620
07
2,844
2008
2009
2010
2011
2012
2,115
2013
2014
YTD
Num
bero
fPE
Inve
stm
ents
1,867
1,000
HealthcareOther
Number of US PE Investments, 1995–2013 PE Investments in Healthcare (US), 2000–2013
Page 9 Healthcare M&A update
Current Trends
Page 10 Healthcare M&A update
Emerging trends in healthcareRegulatory related
►ACA►Election result impacts►Reimbursement considerations
Page 11 Healthcare M&A update
Emerging trends in healthcareProvider related
►Transitioning from utilization to outcomes value-basedmedicine
►Desire to control more of the continuum of care►Convergence/consolidation across the value chain – M&A, JV
and Alliances►Requirement for continued investment in HCIT►Pressure points
►Continued migration of healthcare services to lower-cost of caresettings
►Ongoing capital stresses in smaller facility based NFP providersegment
►Reimbursement►Expense management/synergy realizations
Page 12 Healthcare M&A update
Emerging trends in healthcarePayer and Patient related
► Payer►Evolving dynamics of employer-sponsored health insurance►Adoption of public/private exchanges►Challenges and opportunities from the expanded government
role in healthcare►Retail focus►Convergence w/Provider►HCIT/Analytics
► Patient►Increased consumer decision-making with HDHP’s►Greater patient awareness/engagement►Personalized diagnostics/health care delivery
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Future trends
Page 14 Healthcare M&A update
Results
Annualphysical
Labtests
Inpatient care
Wait tohear
Hospital
Doctor’s office
Rx
Diagnosis
► Opaqueparadigm
► Periodicmeasurement
► Treatmentof disease
► Providershave control
Healthcare delivery today
Source: EY
Home
Page 15 Healthcare M&A update
Patient’shome
Healthcare delivery tomorrow
► Transparentparadigm
► Continuousmonitoring
► Prevention,behaviorchange
► Patientshave control
► Next frontier in“personalized”medicine
Medicalizedconsumerdevices
Consumerizedmedicaldevices
Caregivers,other HCPs
Providers
Social mediaSmartphoneapps
Source: EY
Page 16 Healthcare M&A update
Transformation of healthcareThe transition to value based reimbursement is disrupting the healthcare business model
Although the healthinsurance exchangeprovisions of theACA have receivedmore attention, theprovisions whichaccelerate thetransition to valuebasedreimbursement willhave a significantlymore disruptiveeffect on the UShealthcarebusiness model
Page 17 Healthcare M&A update
Emerging trends in healthcareValue Based Reimbursement
►Approximately 30% of payers today are using a mix ofvalue based reimbursement models (risk sharing, P4P,bundled payments, etc)
►Payments using a mix of value based reimbursement isexpected to be over 66% by 2020
►True pay for performance (P4P) will increase the largestfrom approximately 10% today to 20% by 2018
►Key challenges►Implementing and aligning the necessary technology►Right analytics and decision support►Clinician engagement
►Risk sharing (the C word)►Narrow networksSource: ORC Int’l study for McKesson Health Solutions
Page 18 Healthcare M&A update
Impact of trends in healthcareThe transition forces actors in the healthcare ecosystem to become co-dependents vs.competitors
Coordinated/accountable care
capable healthcareenterprise
Care delivery partners(Expanded IDN: wellness, counseling,
primary, secondary, tertiary,post-acute, home care, hospice)
Operations partners(Staffing firms, BPO,
ITO, GPO, DR/BCP, etc.)
Compliance and risk partners(Law firms, audit,
liability insurance, etc.)
Research partners(Medical schools,
pharma, biotech, etc.)
Technology,connectivity and
data mgmt. partners(HIE, EMR, devices,
analytics and digital assistants,mobility, apps and social media,
Infrastructure etc.,)
Channel/referral partners(Exchanges, healthplans, employers)
Financial partners(Payers, financial institutions,RCM service providers, etc.)
IP sharing?
Health outcomeaccountability?
Revenuesharing?
Financialrisk sharing?
Compliance and regulatoryrisk sharing?
Ops disruption/failurerisk sharing?
Functionality,security and data
requirements?
Page 19 Healthcare M&A update
Impact of trends in healthcareYou can expect to see more novel transactions as these actors experiment with differentpartnerships to build/acquire the capabilities they need
► Health plans and health systems aligningto pool data and develop populationhealth management capabilitiesdesigned to reduce healthcareconsumption
► Managed service providers, technologyvendors and healthcare providersaligning to integrate mobile healthdevices, monitoring technologies andpredictive analytics into the continuum ofcare
► Retailers, health plans and healthcareproviders aligning to transform thepatient experience
Examples of disruptive transactionsto create co-dependency
Page 20 Healthcare M&A update
Healthcare sector integration
Consumer Productsu Consumerism is a driving forceu Wearable products are part of
preventive careu Retail is playing an increasingly
large role in the delivery of careu Payors are engaging customers
more directly moreu New entrants – Walgreen’s,
CVS, Walmart, Best Buy
Telecommunicationsu Telecommunications has
become a key tool in improvingoutcomes through integration,communication and diagnostics
u Telemed is a rapidly growingand effective healthcare deliverymethod
u Telehealth is enhancingprovider workflow and education
Technologyu Technology is revolutionizing the way
healthcare is being delivered – medicalinformatics, molecular medicine, roboticsurgery, etc
u Social media is enhancing patient careu New entrants – Google, Apple, Facebook
Insuranceu Insurance products exist for health related
matters – primary care, long-term care, endof life, government supplemental care
u New networks and models of care
Life Sciences
TelecomTechnology
HealthcareIntegration
ConsumerProducts Insurance
Government/Public Sector
Page 20
Government /Public Sectoru Primary markets overlapping
with health include military,prisons, social security andlong-term care.
u New entrants includegovernment contractors in otherfields
Life Sciencesu Pharma and medtech each play critical
roles driving healthcare outcomes in thecontinuum of care
u Life sciences and medtech have increasinginterest in their customers - the payors andproviders - as well as ultimate consumers
Page 21 Healthcare M&A update
Representative healthcare strategic activityCommercial and alliance
Commercial AllianceSelected key
themes
Trading volumefor brand/
monetizing
Cost reduction
Geographicexpansion
Service lineexpansion
Access/diversification
Formingintegrated care
networks
Control
Stakeholderpotential
Risk Lower
Lower
Lower
ü ü ü ü ü
ü
üüü
üüü
ü ü ü ü ü
üü
ü
Cleveland Clinic Mayo Clinic AllSpire HealthPartners Qualcare Inc. Healthfirst
Page 22 Healthcare M&A update
Representative healthcare strategic activityJV and PE
JV PESelected key
themes
Cost reduction
Geographicexpansion
Service lineexpansion
Access/diversification
Control
Stakeholderpotential
Risk Medium to higher
Lower to medium
Lower to higher
ü
ü
ü ü ü ü ü ü
üü
ü
ü
üü
ü
ü
ü
üü
ü
Trading volumefor brand/
monetizing
Formingintegrated care
networks
Cooper UniversityHospital
AmeriHealth
Walgreens
AmerisourceBergen
Dignity Health
OptumHealth
IASIS Healthcare
Aurora Health Care
Evolent Health
TPG
Ascension HealthOak Hill Capital
Partners
Page 23 Healthcare M&A update
Representative healthcare strategic activityM&A
M&ASelected key
themes
Cost cutting
Geographicexpansion
Service lineexpansion
Access/diversification
Control
Stakeholderpotential
Risk Higher
Highest
Highest
ü ü ü ü ü ü ü ü
ü
üü
üü
ü
üü
ü
üü
ü
üü
üü
ü
üü
ü
ü
ü
ü
Trading volumefor brand/
monetizing
Formingintegrated care
networks
Surgery Partners
Symbion Healtcare
Amsurg
Sheridan
Aetna
Coventry Health Care
CHS CommunityHealth Systems
H Health ManagementAssociates
Tenet
Vanguard HealthSystems
DaVita
HealthCare PartnersMedical Group and
Affiliated Physicians
Baylor HealthCare System
Scott & White
SSM HealthCare
Dean
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