The Transformation of Healthcare - hfmanj.org...Page 6 Healthcare M&A update Healthcare trading...

The Transformation ofHealthcare

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.


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


Market Dynamics


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%


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

ices

Med

ical

/Sur

gica

lDis

tribu

tion

Clin

ical

Labs

CR

Os

PB

Ms

Dru

gD

istri

butio

n

Dia

lysi

sP

rovi

ders

Inst

itutio

nalP

harm

acy

Ret

ailP

harm

acy

Hom

eH

ealth

Reh

abili

tatio

n/L

TAC

Hos

pice

Acu

teC

are

Hos

pita

ls

Spe

cial

tyM

anag

edC

are

Man

aged

Car

e

Imag

ing

Ski

lled

Nur

sing

Faci

litie

s

EV

/FY1

4EE

BIT

DA


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


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


Strategic deals trend Financial deals trend


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


Current Trends


Emerging trends in healthcareRegulatory related

►ACA►Election result impacts►Reimbursement considerations


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


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


Future trends


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


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


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


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


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?


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


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


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


Representative healthcare strategic activityJV and PE

JV PESelected key

themes

Cost reduction

Geographicexpansion



Control


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


monetizing


networks

Cooper UniversityHospital

AmeriHealth

Walgreens

AmerisourceBergen

Dignity Health

OptumHealth

IASIS Healthcare

Aurora Health Care

Evolent Health

TPG

Ascension HealthOak Hill Capital

Partners


Representative healthcare strategic activityM&A

M&ASelected key

themes

Cost cutting

Geographicexpansion



Control


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


monetizing


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

EY | Assurance | Tax | Transactions | Advisory

About EY

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© 2014 EYGM Limited.

All Rights Reserved.

ED None

This material has been prepared for general informational purposes onlyand is not intended to be relied upon as accounting, tax, or otherprofessional advice. Please refer to your advisors for specific advice.

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