Chicago - March 29-30, 2012

2012 PLUS Medical PL Symposium

Private Equity In Healthcare:

What’s the Attraction?

PRIVATE EQUITY IN HEALTHCARE: WHAT'S THE ATTRACTION?

MODERATOR: James J. Kennedy, III, Esq., Shareholder, Carlton Fields

PANELISTS: Todd Rudsenske, MBA, CPA, Managing Director, Cain Brothers & Company, LLC John Telenko, Vice President, Healthcare, Allied World Assurance Company, Ltd.

Private Equity in Healthcare: What’s the Attraction?

MODERATOR: • James J. Kennedy, Esq., Shareholder, Carlton Fields, PA

PANELISTS: • Carrie Cope, Esq., Shareholder, Schuyler, Roche & Crisham, P.C.• James Fasone, ARM, RPLU, SVP, Alliant Healthcare Solutions, Inc.• Ciara Frost, Esq., Partner, Kerns, Frost & Pearlman, LLC• Douglass Hewitt, Esq., Partner, Kubasiak, Fylstra, Thorpe & Rotunno, P.C.• John O’Byrne, Esq., Partner, Mendes & Mount, LLP

Current Situation

____________________

Source: Wall Street research.

Trends Commentary

Lower patient volumes as patients defer elective services

Increased charity care/bad debt expense due to high unemployment and the loss/reduction of insurance Unfavorable changes in payer mix away from commercial payers due to elevated levels of

unemployment

Medicare/Medicaid rates reductions going forward Challenged State budgets further affecting Medicaid rates

Commercial insurer leverage pressuring reimbursement rates State insurance exchanges likely driving reimbursement below commercial payers

Reduced ability to cost shift

Higher interest expense due to credit deterioration Costs of implementing physician alignment initiatives

IT investments Unfunded pension liabilities

Deferred maintenance - need to revitalize aging plants

Increased volume shift from inpatient to outpatient Increased competition from specialty hospitals/providers

Position for healthcare reform – clinical integration Synergies and operational efficiencies, rationalization of services

Increased negotiating leverage Access to quality infrastructure, care management capabilities, and sophisticated IT platforms

Weak Economy

Rate Reductions

Higher Expenses

Increased P/E Activity

Competitive Environment

Private and Health Care

Access to Capital

Economies of Scale

Private EquityWeak Economy

Physician Integration

Access to Full Continuum of Care

Factors Driving ConsolidationUnprecedented combination of macro-economic influences, industry pressures and market dynamics driving consolidation.

CONSOLIDATION

Management Expertise

Physician Recruitment &

Retention

Investments in Technology

Purchasing Leverage

Low Interest Rate Environment

Risk Bearing Capabilities

Operating Efficiencies

Managed Care Expertise

Private Equity and Health Care

Hospital and Health Care System Strategic Response Hospitals and healthcare systems across the U.S. are evaluating their

strategic options.

Approaching systems viewed as most favorable partner with skill, scale, share and resources

Develop new regional systems with other independent hospitals Leveraging a competitive partnering process to maximize value of assets and ensure

most attractive terms including purchase price, capital commitments, continuity of services

Developing specialty service provider in the market – “carving out a niche”

Multi-State Systems

Market by market strategic assessment; portfolio analysis - invest, partner, divest or swap

Take advantage of opportunities to grow in existing markets where viewed as favorable partner

Clinical integration through physician acquisitions Monetize non-core assets and re-deploy capital in markets with greater chance of

success Own across continue of care or partner to provide ancillary services (home health,

post-acute, etc.) Conversion to investor-owned

Assess wherewithal to be a consolidator or proactively approach most favorable partner(s)

Formation of “super regional” systems JV strategies to pursue growth, defend market share, build networks (acute &

ambulatory surgery) Clinical integration through physician acquisitions Conversion to investor-owned

Regional Systems

Independent Standalone Hospitals

Private Equity and Health Care

Quarterly Deal Volume by Healthcare ServiceHospitals Labs, MRI,

Dialysis

Long Term Care Managed Care Physician Groups

Rehabilitation

____________________

Source: Irving Levin.

383635

2827

20

0

5

10

15

20

25

30

35

40

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

7

11

7

3

2

0

1

2

3

4

5

6

7

8

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

27

18

29

13

912

0

5

10

15

20

25

30

35

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

2

3

5

1

4

2

0

1

2

3

4

5

6

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

32

242424

18

9

0

5

10

15

20

25

30

35

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

4

11

89

16

8

0

2

4

6

8

10

12

14

16

18

Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11

Private Equity and Health Care

Year Number of Deals Dollars Committed

2002 56 $ 3,403,681,000

2003 37 $ 2,341,550,000

2004 59 $ 9,706,390,000

2005 50 $ 2,905,729,000

2006 55 $35,533,500,000

2007 61 $ 9,257,130,000

2008 60 $ 2,580,600,000

2009 51 $ 1,813,600,000

2010 75 $10,792,632,000

2011 86 $ 7,938,260,000

Total 590 $86,273,072,000

Hospital Mergers & Acquisitions 2002 - 2011

____________________

Source: DealSearchOnline.com.

Private Equity and Health Care

Deal Value QuarterHighmark acquired West Penn Allegheny $1.475 billion Q2:11

HCA acquired the remaining interest in HealthONE

$1.45 billion Q2:11

Ascension Health acquired Alexian Brothers $645 million Q2:11

Health Management Associates acquired Mercy Health Partners

$525 million Q3:11

Trinity Health acquired Loyola University Health System

$475 million Q1:11

Five Largest Hospital Deals of the Past 12 Months

____________________

Source: DealSearchOnline.com.

Private Equity and Health Care

For-Profit Hospital Management CompaniesThe universe of for-profit hospital management companies is shifting.

Financial sponsors are changing their view of hospital management companies in response to

the pressures of health care reform. New players are emerging while others are exiting the industry.

Private Equity and Health Care

Significant P/E Investments in the Hospital Sector

($ in Millions)____________________(1) Formerly Behavioral Healthcare Corp.(2) Date on which Merit, set up as an investment vehicle, bought its first hospital(3) TPG acquired IASIS from JLL in a transaction that valued IASIS at $1.3 billion. TPG owned 74.4% of IASIS post transaction.(4) Blackstone acquired Vanguard in a transaction valued at $1.75 billion. Blackstone owned 66% of Vanguard post transaction.(5) Commitment equals amount of equity invested at transaction.

Date Sponsor Company Focus $ Commitment Chairman/CEO CFO Hospitals Owned

5/ 2/ 2001(1) (1) Urban $330 David Vandewater Clint Adams 8

4/ 12/ 2002(2) Urban $100 Tyree Wilburn John Thompson 2

1/ 5/ 2004 Rural $80 Michael Browder Steven Wylie 3

5/ 7/ 2004(3) (3) Urban $590 (5) Carl Whitmer John Doyle 18

7/ 23/ 2004(4) (4) Urban $749 (5) Charles Martin Phillip Roe 26

5/ 4/ 2005 Rural $200 Daniel Slipkovich Denise Warren 15

11/ 4/ 2005 Rural $150 James Dalton/ Charles Miller Steven Paterson 2

7/ 24/ 2006 Urban $4,966 (5) Richard Bracken Milton Johnson 164

1/ 21/ 2008 Urban $500 Dan Moen Bill Hibbitt 5

7/ 15/ 2009 Rural $300 Marty Rash John Bakewell 4

3/ 25/ 2010 Urban $400 (5) Ralph de la Torre James Renna 6

8/ 16/ 2010 Urban $200 (5) Sam Lee Michael Heather 5

2/ 21/ 2011 Urban $400 (5) Leo Brideau Tony Speranzo NA

Private Equity and Health Care

P/E Firms Highly Interested in Hospital Sector

General/Macroeconomic Favorable demographics

Stable, predictable, growing population

Weak economy

Low interest rates

Industry Specific Highly fragmented industry Non-cyclical Large component of GDP Capital intensive Public market valuations low Availability of seasoned mgmt

talent Precedent successes (HCA, Triad,

etc)Factors Driving

Private Equity Investments

Health Care Reform

Efficient debt markets Low-cost of capital Available cash for acquisitions Strong fundraising environment

as investors search for alternative to stock market

Financing Reduces uncompensated care Demands efficient delivery model Opportunity to effectively assume

risk and capture more total healthcare dollars spent

Ability to turnaround operations and make acquisitions accretive

Private Equity and Health Care

Deterrents to Private Equity

Private Equity and Health Care

• Highly regulated industry

• Reimbursement cuts

• Decreases in inpatient surgery volumes

• Uncertainty of Healthcare Reform

Evolving Policies at State Governments

New Jersey

Florida

Massachusetts

Committee appointed to study a plan to dismantle the University of Medicine and Dentistry of New Jersey and replace it with an enhanced delivery system in Newark

Commission on Taxpayer Funded Hospital Districts established in March 2011 Created to assess and make recommendations on the role of hospitals districts and whether

it is in the public’s best interest to have government entities operating hospitals

For-profit hospital companies have been actively acquiring stand-alone not-for-profits, a trend that is not expected to cease anytime soon, nor one that is necessarily unwelcome by the State government

Massachusetts’ unique health insurance model (e.g. RomneyCare) positions it as a testing ground for health care reform readiness strategies

____________________Sources: Industry publications and periodicals.

State and local governments are beginning to view for-profit hospitals as a welcome new source of tax revenue.

Illinois Illinois’s Department of Revenue is scrutinizing, and in some instances revoking, hospitals’

property tax exemption due to alleged inadequate charitable care levels

Private Equity and Health Care

• Leverage is a common way to fund acquisitions

• Healthcare companies issued over 7% of all high yield debt in 2010 Vanguard - $1,990 million

in three sales since 2010

UHS - $1,600 million in 2010

Tenet - $1,525 million in two sales since 2009

Capella - $500 million in 2010

HCA - $4,460 million in four sales since 2009

Ardent - $325 million in 2010

Hospitals tend to move through cycles of levering up to make acquisitions, then spend the next few years using their free cash flow to de-lever and create balance sheet capacity for

the next round of acquisition growth.

Private Equity and Health CareLeverage

Private Equity and Health CareRisk: Private vs. Not-for-Profit

For-Profits

• Liability of Officers & Directors

• Freedom from labor agreements

Not-for-Profits• Sources of Funds• Intermediate Sanctions• Unrelated Business Income Tax

(UBIT)

• Liability-Limiting StatutesBoth FP and NFP

• Employment Practices Liability (EPL)

• Anti-trust risk• Government Regulations

& Compliance

Private Equity in Healthcare: What’s the Attraction?

Questions?