The Future of LTACHs: A Case Study for Industry Consolidation

1. Jason S. Greis, Esq. McGuireWoods LLP Tuesday, October 13, 2009 ALTHA Legal Issues Meeting The Future of LTACHs: A Case Study for Industry Consolidation

2. Current State of the LTACH Industry (an M&A Perspective) • Top 10 companies own approximately 73% of LTACHs; • 5 publicly-traded companies own approximately 47% of LTACHs; • Publicly-traded companies with substantial cash reserves will likely explore strategic acquisitions in next 18 months; • Increased deal activity anticipated after passage(?) of potential health care reform bill; • More than 60 LTACHs (15%) may change ownership or enter into strategic alliances by end of 2010!

3. “Perfect Storm” of Macroeconomic Events Resulting in Consolidation • MMSEA development and bed expansion moratorium; • Regulatory uncertainty causing some operators to re-think strategic focus; • Credit crisis, slow-pay Medicaid agencies and increased bad debt causing escalation in average debt burden and distressed sale activity; • Increasing disparity in hospital and system payor mix; • Increasing inequality in resources due to I.P.O. and private equity investment and system-wide economies of scale; • EBITDA multiples remaining low due to bargain and distressed sales and choosy strategic purchasers—caveat emptor (generally 4.5 to 5x), with certain notable exceptions; • Overbedding in certain geographic markets, underutilization in others.

4. Key Provider-Level Issues Leading to Consolidation • R.A.C. and Wisconsin Physician Services/AdvanceMed-type audits; • Increased capital expenditure needs for development and expansion of high observation/intensive care units; • Continued need for more intensive provider outreach and education; • Physician contracting issues (vertical incentive alignment); • Electronic health record adoption; • Revised MS-LTC-DRG relative weights for remainder of FY 2009 and 2010; • Ever-increasing insurance costs, despite soft insurance market; • Delays in Medicaid reimbursement.

5. The Future of LTACHs: Gazing into the Crystal Ball • LTACHs will continue to be an essential part of the continuum of care. • The only true constant is change! • Medicare payment rate adjustments; • Post-acute care bundling pilot or demonstration project; • Mandatory quality reporting; • Competition from SNFs, IRFs and continuing care hospitals(?), unless facility and patient criteria developed; • Loss of executive compensation rebuttable presumption; • Restrictions on physician hospital ownership and JVs; • Increasing transparency in relationship with physicians. • Leading to a market dominated by a small number of well capitalized companies able to roll with the changes.

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7. THANK YOU! Jason S. Greis, Esq. McGuireWoods LLP 77 W. Wacker Drive, Suite 4100 Chicago, Illinois 60601 Phone: 312.849.8217 jgreis@mcguirewoods.com www.GreisGuidetoLTACHs.com