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Valuation of Healthcare Ancillary Services Providers H EALTH C APITAL C ONSULTANTS 9666 Olive Blvd., Suite 375 St. Lo

Valuation of Healthcare Ancillary Services Providers H EALTH C APITAL C ONSULTANTS 9666 Olive Blvd., Suite 375 St. Louis, MO 63132-3025 (800) FYI-VALU • www.healthcapital.com San Diego, CA – December 12, 2008. Presented By: ROBERT JAMES CIMASI, MHA, ASA, CBA, AVA, CM&AA President.

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Valuation of Healthcare Ancillary Services Providers H EALTH C APITAL C ONSULTANTS 9666 Olive Blvd., Suite 375 St. Lo

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  1. Valuation of Healthcare Ancillary Services Providers HEALTH CAPITAL CONSULTANTS 9666 Olive Blvd., Suite 375 St. Louis, MO 63132-3025 (800) FYI-VALU • www.healthcapital.com San Diego, CA – December 12, 2008 Presented By: ROBERT JAMES CIMASI, MHA, ASA, CBA, AVA, CM&AA President This presentation addresses information and developments in the admittedly broad and rapidly changing regulatory environment as it relates to healthcare assets. Neither the presenters nor the sponsor intend this presentation to render any legal or accounting advice, but rather to provide general information and sources.  Neither the presenter, nor the sponsor, assume any liability with respect to the use of information contained in this presentation. For legal or accounting advice, individuals and their firms are urged to consult their attorney or CPA.

  2. Table of Contents I INTRODUCTION II CASE STUDY: VALUATION OF AN AMBULATORY SURGERY CENTER 1. Description of the Valuation Assignment 2. History, Background & Description of the Subject Entity 3. Economic & Demographic Conditions 4. Healthcare & Ambulatory Surgery Trends 5. Financial Data 6. Valuation Approaches and Methodologies 7. Reconciliation, Correlation and Synthesis of Approaches and Methods – Final Conclusion of the Value

  3. Table of Contents I INTRODUCTION A Basic Economic Valuation Tenets B Value Pyramid C Buy or Build? – Value as “Incremental Benefit” D The “Standard of Value” and “Premise of Value” E Valuation Adjustment for Risk F Recent Events Impacting Valuation of Ancillary Services Providers G Conclusion

  4. I INTRODUCTION The Four Pillars of Valuing Healthcare Enterprises

  5. I.A Basic Economic Valuation Tenets Principle of Anticipation • ● All value is the expectation of future benefit • ●Value is forward looking • ● The best indicator of future performance • is usually performance of the immediate past

  6. I.A Basic Economic Valuation Tenets • ● Historical accounting and other data are useful primarily as a road map to the future.

  7. I.B Value Pyramid Key “value drivers” of surgical hospital enterprises may be viewed within the context of the following "Value Pyramid”.

  8. I.C Buy of Build? – Value as “Incremental Benefit” Principle of Substitution

  9. I.D The “Standard of Value” and “Premise of Value” • The “Standard of Value”(e.g., fair market value, fair value, market value, investment value, book value, etc.) defines the type of value to be determined and is often described as answering the question “Value to Whom?” • The “Premise of Value” under which a valuation is conducted, is an assumption further defining the “Standard of Value” to be used. The “Premise of Value” defines the hypothetical terms of the sale and answers the question, “Value under what further defining circumstances?” (e.g., going concern, orderly disposition, forced liquidation, etc.).

  10. I.D The “Standard of Value” and “Premise of Value” The Standard of Value and the Universe of Typical Buyers • The standard of Fair Market Value is defined as • the most probable price that the subject interest should bring • exposed for sale on the open market as of the valuation date • exclusive of any element of value arising from the accomplishment or expectation of the sale

  11. I.D The “Standard of Value” and “Premise of Value” • This standard of value assumes: • a universe of typical buyers

  12. I.D The “Standard of Value” and “Premise of Value” • This standard of value assumes: • an anticipated hypothetical transaction

  13. I.D The “Standard of Value” and “Premise of Value” • This standard of value assumes: • The buyer and seller are each acting prudently, knowledgeably

  14. I.D The “Standard of Value” and “Premise of Value” • This standard of value assumes: • the price is not affected by any undue stimulus

  15. I.D The “Standard of Value” and “Premise of Value” The Premise of Value and the Investment Time Horizon • The Premise of Value defines the hypothetical terms of the sale and answers the question • “Value under what further defining circumstances?” • Two (2) general concepts relate to the consideration and selection of the “Premise of Value” • “Value in Use” and “Value in Exchange”

  16. I.D The “Standard of Value” and “Premise of Value” The Premise of Value and the Investment Time Horizon – Value in Use • Value in Use is that premise of value which assumes • assets will continue to be used as part of an ongoing business • enterprise • producing profits as a benefit of ownership.

  17. I.D The “Standard of Value” and “Premise of Value” The Premise of Value and the Investment Time Horizon – Value in Exchange • Value in Exchange describes a sale of the assets of a business enterprise under conditions other than its continued operation as a going concern • The liquidation can be on the basis of an orderly disposition of the assets where more extensive marketing efforts are made and sufficient time is permitted to achieve the best price for all assets, or on the basis of forced liquidation where assets are sold immediately and without concern for obtaining the best price

  18. I.E Valuation Adjustments for Risk • The valuator's assessment of an appropriate risk adjusted required rate of return for investment • forecast of the most probable Income/Earnings/Benefit Stream • related to and must be carefully correlated to an informed, realistic and unsparing assessment of a universe of typical buyers'current"perceptions of the market” • the future performance of the subject enterprise • the market's assessment of risk related to an investment in such an enterprise

  19. I.E Valuation Adjustments for Risk • Valuation of healthcare ancillary services enterprises is sensitive to • government interventions impacting on the liquidity of capital either by • disrupting the makeup of the market investor pool • expected investment holding period time horizon • may require a significant discount for lack of control and/or • marketability

  20. I.F Recent Events Impacting Valuation of Ancillary Services Providers I.F.1 Potential Impact of CHAMP Section 651 Provisions on Surgical Hospitals I.F.2 Specialty Hospital Moratorium and Lingering Effect of the Deficit Reduction Act of 2006 I.F.3 Realignment of DRG Reimbursement I.F.4 Rebalancing Payment Levels Between Outpatient Sites of Service I.F.5 The FTC/DOJ Hearings on Healthcare and Competition Law and Policy I.F.6 Provider Taxes I.F.7 Insurance Company Payment Disparities I.F.8 Transactional Market Information

  21. I.G Conclusion • In order to estimate the future economic benefits of ownership and the futureeconomic risk related to those benefits, investors and healthcare valuators must continuously assess • the implications of changing laws and regulations • the ever-changing competitive environment • increasingly forbidding landscape • new provider and payor configurations, tactics, and strategies

  22. I.G Conclusion • Economic conditions and events expected to result in a changed • paradigm for healthcare delivery • rapid acceleration in expected demand for increased health services • "demographic time bomb" of the aging “baby-boomer" generation • Pressures to reduce rising healthcare costs should be examined • within the framework of the “four pillars” • set the context from which buyers, sellers, owners and investors consider the valuation of surgical hospitals enterprises.

  23. II CASE STUDY: Valuation of an ASC • II.A INTRODUCTION • Objectives • Analyze and discuss the general and specific information involved; • Apply this information to the valuation process within the context of the industry background; • Understand several of the valuation approaches and methods often selected as appropriate in the valuation of ASCs; • Evaluate the information upon which each method relies and how each method comes to an indication of value; and, • Review the correlation and synthesis of the indicated value results from each method employed to arrive at a final conclusion of value.

  24. II.B Defining the Valuation Engagement • Range of Valuation Assignments • Appraisal Report – The development and reporting if an opinion of value of a business enterprise or an equity interest in a business entity. • Appraisal Consulting – The development and reporting of a recommendation, analysis or opinion to solve a problem. • Appraisal Review – The development and reporting of an opinion regarding the quality of an appraisal report prepared by another VALUATOR.

  25. II.B Defining the Valuation Engagement • Scope of Valuation Reports • Under the 2006 Uniform Standards of Professional Appraisal Practice and Advisory Opinions (USPAP), Scope of Work Rule 2: • identify the problem to be solved; • determine and perform the scope of work necessary to develop credible assignment results; • disclose the scope of work in the report; and, • be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results • Scope of work includes, but is not limited to: • extent to which the property is identified; • extent to which tangible property is inspected; • type and extent of data researched; and, • type and extent of analyses applied to arrive at opinions or conclusions [1] [1] “Scope of Work Rule 2,” Uniform Standards of Professional Appraisal Practice, Effective July 1, 2006.

  26. II.B Defining the Valuation Engagement • Define: • The client and intended users • The intended use of the appraisal • Definition of entity and asset being appraised • Standard and premise of value and purpose of appraisal • Effective date of the appraisal

  27. II.C Valuation Steps to Complete a Typical Case II.C.1 PRE-ENGAGEMENT A Engagement Definition B Project Parameters C Engagement Fees and Agreement II.C.2 DURING THE ENGAGEMENT A Develop a Detailed Work Program B Gather the Necessary Data to Perform the Engagement C Analyze the Data that is Gathered D Estimate the Value of the Interest Being Appraised E Write the Report of Communicate the Value F Engagement Timeframe II.C.3 POST ENGAGEMENT A. Prepare and Submit Final Billing B. Conduct a Post-Engagement Review C. Records Retention

  28. II CASE STUDY: Valuation of an ASC Report Sections Transmittal Letter Narrative Section 1 Description of the Valuation Assignment Section 2 History, Background and Description of the SUBJECT ENTITY Section 3 Economic and Demographic conditions Section 4 Healthcare Industry Trends Section 5 Ambulatory Surgery Center Trends Section 6 Financial Data of the SUBJECT ENTITY Section 7 Valuation Approaches and Methodologies Section 8 Reconciliation, Correlation and Synthesis of Approaches and Methods Section 9 Certification of VALUATOR Schedules Appendices

  29. II CASE STUDY: Valuation of an ASC Section 1: Description of the Valuation Assignment 1.1 Overview of Valuation 1.2 Description of the SUBJECT ENTITY and VALUATION DATE 1.3 Objective, Purpose and Use of Valuation 1.4 Standard and Premise of Value Selected 1.5 Assets and Liabilities Considered 1.6 Sources of Information 1.7 Definitions 1.8 Contingent and Limiting Conditions

  30. II CASE STUDY: Valuation of an ASC Section 2: History, Background & Description 2.1 Structure of the SUBJECT ENTITY 2.2 Limited Partnership Interests 2.3 Prior Transactions/ Changes in Ownership 2.4 Description of SUBJECT ENTITY Services 2.5 Summary of Relationships of the SUBJECT ENTITY 2.6 Providers, Management & Staff 2.7 Operations 2.8 Productivity 2.9 Patient Base 2.10 Description of Facility 2.11 Competition 2.12 Outstanding Litigation 2.13 Licensure and Certification

  31. II CASE STUDY: Valuation of an ASC Summary of SUBJECT ENTITY Relationships

  32. II CASE STUDY: Valuation of an ASC Section 2: History, Background & Description Productivity: Number of Cases Performed at the SUBJECT ENTITY “Yearly Volume Trends” report provided by the SUBJECT ENTITY.

  33. II CASE STUDY: Valuation of an ASC Section 2: History, Background & Description Productivity: Charges and Net Revenue of the SUBJECT ENTITY Source: Audited financial states of the SUBJECT ENTITY.

  34. II CASE STUDY: Valuation of an ASC Section 2: History, Background & Description SUBJECT ENTITY Payor Mix

  35. II CASE STUDY: Valuation of an ASC Section 2: History, Background & Description Description of Facility

  36. II CASE STUDY: Valuation of an ASC Section 2: History, Background & Description Main Competition of the SUBJECT ENTITY [1] Distance obtained from: www.mapquest.com, accessed 3-4-04. [2] Information available only from SUBJECT ENTITY. SMG marketing group and “The California Bulletin.”.

  37. II CASE STUDY: Valuation of an ASC Section 3: Economic & Demographic Conditions 3.1 National Economy 3.1.1 General Economic Overview 3.1.2 Consumer Spending and Inflation 3.1.3 Business and Manufacturing Productivity 3.1.4 Industrial Production and Capacity 3.1.5 The Financial Markets 3.1.6 Housing Starts and Building Permits 3.1.7 Unemployment 3.1.8 Interest Rates 3.1.9 Summary and Outlook 3.2 Effect of State and Local Economy 3.3 Implications for the SUBJECT ENTITY

  38. II CASE STUDY: Valuation of an ASC Section 3: Economic & Demographic Conditions Population Projection: MARKET SERVICE AREA and United States

  39. II CASE STUDY: Valuation of an ASC Section 3: Economic & Demographic Conditions Projected Income: MARKET SERVICE AREA and United States

  40. II CASE STUDY: Valuation of an ASC • Section 4: Ambulatory Surgery Center Trends • 4.1 Healthcare Industry Background • The nature of health creates an unpredictable, urgent, and “infinite”level of demand. • The ubiquitous involvement of insurance, private and governmental, as an intermediary in the purchase of healthcare interferes with consumer motivations and consequently their choice of providers and services. • The difficulties in measuring healthcare quality and beneficial outcomes and the lack of information on the relative costs of healthcare providers and services also inhibits consumer selection, further removing incentives to providers to increase quality and lower costs.

  41. II CASE STUDY: Valuation of an ASC • Section 4: Healthcare Industry Trends • The over 65 years old portion of the US population is expected to increase more rapidly than the general population, with those aged 65-74 years old projected to be ten percent (10%) of the population by 2030. • As healthcare costs continue to rise faster than inflation in the overall economy, driven by advances in technology and treatment (as well as the growing baby-boomer population), pressures to reduce costs will result in a changed paradigm for healthcare delivery, most likely leading to some form of healthcare rationing. 

  42. II CASE STUDY: Valuation of an ASC Section 5: Ambulatory Surgery Trends 5.1 Background/Overview 5.2 Patients and Procedures 5.3 Reimbursement 5.4 Competition 5.5 Technology 5.6 Regulatory Environment 5.7 Industry Outlook 5.8 Implications for the SUBJECT ENTITY

  43. II CASE STUDY: Valuation of an ASC • Section 5: Ambulatory Surgery Center Trends • 5.1 Background/Overview • Ambulatory Surgery Centers (ASC): Facilities where surgeries not requiring inpatient admission are performed. • An estimated 80% of procedures can now be performed on an outpatient basis.[1] • There are approximately 5,063 freestanding outpatient surgery centers in the United States in 2005. [2] [1] “Medicare May expand Approved Outpatient Surgeries” Modern Healthcare, Dec 21. 2005, http://www.modernhealthcare.com/news.cms?newsId=4637, (accessed5/10/06). [2] “Verispan Reports: Dynamic Growth of Outpatient Surgery Centers Continues; Market Exceeds 5,000 Facilities,” Verispan, Nov 9, 2005, http://www.verispan.com/about/press_release_details.php?id=gg6yggkh45 (accessed 5/18/07).

  44. II CASE STUDY: Valuation of an ASC Section 5: Healthcare Industry and Ambulatory Surgery Trends 5.2 Patients and Procedures: % of Surgical Cases by Specialty Type (2004 and 2005)* “Intellimarker: Ambulatory Surgical Centers Financial & Operational Benchmarking Study” Informed Healthcare Media, 2006, p.20.

  45. II CASE STUDY: Valuation of an ASC Section 5: Healthcare Industry and Ambulatory Surgery Trends 5.3 Reimbursement of Freestanding ASCs Medicare ASC Group Payments Effective 1/1/08 • Freestanding ASCs reimbursed at 65% of Hospital Outpatient Prospective Payment System rate for the same procedures performed in a hospital outpatient department • Transition for CY 2008 (25/75 blend): specifically twenty-five percent (25%) of the CY 2008 revised ASC rate plus seventy-five percent (75%) of the CY 2007 ASC rate. • CY 2009: the blend will change to 50/50 • CY 2010: the blend will be 75/25

  46. II CASE STUDY: Valuation of an ASC Section 5: Healthcare Industry and Ambulatory Surgery Trends 5.4 Competition • Continued Growth in Freestanding ASCs • Rise in ASC – Hospital Joint Ventures • Increasing Scrutiny of “Under Arrangement” Relationships • Certificate of Need (CON) concerns

  47. II CASE STUDY: Valuation of an ASC Section 5: Healthcare Industry and Ambulatory Surgery Trends 5.5 Technology • Continued advancements leading to procedures being performed in outpatient setting • Laparoscopic and minimally invasive techniques (particularly in orthopedic practice) • Increasing Use of Electronic Medical Records (EMR)

  48. II CASE STUDY: Valuation of an ASC Section 5: Healthcare Industry and Ambulatory Surgery Trends 5.6 Regulation • Federal Anti-kickback Statute • Federal and State Stark Law self-referral prohibitions • OIG Scrutiny of Physician Compensation • Increasing Scrutiny of “Under Arrangement” Relationship

  49. II CASE STUDY: Valuation of an ASC • Section 5: Healthcare Industry and Ambulatory Surgery Trends • 5.7 Industry Outlook • ASCs often achieve better quality results and predominantly lower overall costs of treatment than comparable inpatient facilities . • ASCs often achieve better quality results and predominantly lower overall costs of treatment than comparable inpatient facilities . • ASCs likely to excel over the next five years include those that are hospital-physician joint ventures and those that offer spine, orthopedic, and general surgery.

  50. II CASE STUDY: Valuation of an ASC • Section 5: Healthcare Industry and Ambulatory Surgery Trends • 5.8 Implications for the SUBJECT ENTITY • Improvements in technologies and treatments have continued to expand the range of treatments which are preferred to be performed on an outpatient basis. • The Deficit Reduction Act (DRA) is scheduled to have a significant impact on reimbursement beginning January 2008. • There exists a generally favorable but somewhat uncertain industry environment.

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