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HEALTH CARE DEAL DESIGN: SCHEMATICS FOR SUCCESS
June 6, 2017
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MODERATOR: BKD HEALTH CARE
Matt Smith, CPA, CHFPPartner [email protected]
Matt Smith is a member of the BKD National Health Care Group. He leads specialized due diligence & financial statement audit engagements for hospitals, health systems & private equity portfolio companies.
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PANELIST: BKD TRANSACTION SERVICES
Matt Klauser, CPA, CM&AA, CHFPDirector [email protected]
Matt Klauser is a leader in BKD’s Transaction Services division & specializes in health care M&A serving hospitals, health systems & private equity firms
Anne Hancock ToomeyCo-Founder & Partner,
Jarrard Phillips Cate & [email protected]
• Advisor to healthcare leaders on high stakes issues • Specializes in navigating the politics of healthcare M&A• Former communications leader for hospital company
PANELIST: JARRARD PHILIPS CATE & HANCOCK
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AHCA: WHERE ARE WE?
HOUSEMay 2017 – Passed
CBO SCORINGJune 2017 Results
SENATETBD
IMPACT OF CURRENT EVENTS
Insured Rate
Quality & Efficiency
Scale
Health IT
Consumerism
Medicaid
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HOSPITAL M&A MARKET
Anne Hancock ToomeyCo-Founder & Partner,
Jarrard Phillips Cate & [email protected]
• Advisor to healthcare leaders on high stakes issues • Specializes in navigating the politics of healthcare M&A• Former communications leader for hospital company
Guest Panelist
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Everybody Is Shopping
Hospitals planning to pursue alignment with another
hospital or health system
-HFMA Value Project Report
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Volume of Transactions: Trending Downward
(Ponder & Co., 2017)
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Trend 1: Deal Mix Shifting, Gaining Complexity
(Ponder & Co., 2017)
81%
19%
Change-of-Control Transactions
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Trend 1: Deal Mix Shifting, Gaining Complexity
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Trend 2: Strategic M&A Deals Getting Bigger
“Decisions about whether to pursue partnerships increasingly are strategic in nature, rather than purely financial.” (Kaufman Hall, 2017)
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Despite a Dip in Volume…
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M&A Today: The Ugly Truth
of transactions fail after Letter of Intent
- Becker’s Hospital Review
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Why Deals Fall Apart
Source: The Private Business Owner
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The Politics of Healthcare
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Don’t Believe Us?
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Engagement Strategy
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Rule #1: Define the Win
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Rule #2: Build a Campaign Team
► Important perspectives:
• Clinical• Legal• Finance
► The Goal: One Team. One Strategy
• Communications• Operational• Political/Community
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Rule #3: Have a Big Story
Threat Vision Solution
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Rule #4 : The Messenger IS a Message
► Find and use the credible voice
► Someone invested, trusted
► Likely candidates
► Must be a trained, coordinated team
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Rule #5: Think Like the Opposition
► Possible opposition inside and out
► Each one needs a plan
► Don’t dance to someone else’s music
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► Proactively communicate leadership’s vision
► Communicate context for change
► Be the expert on healthcare in your community
► Start well before you suggest major change
Rule #6 : Communicate Early and Often
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► Employees and Physicians: drivers of your mission… or stop it in its tracks
► Engage, don’t just communicate
► Win the Primary Vote
Rule #7: Start Internal
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Rule #8: Be Responsibly Transparent
► Commit to transparency and willingness to be proactive
► Right information at the right time
► “I don’t know” is ok
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Rule #9: Overcommunicate
► Acknowledge Facebook and Twitter exist
► Acknowledge the 7x Rule
► Drumbeat at and between every milestone
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► Integration is big, important work
► Selling the necessary changes is even harder
► It’s a new campaign to run
Rule #10: Plan Beyond the Finish Line
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OTHER DRIVERS OF SUCCESS: FINANCIAL DILIGENCE PROCESS
PANELIST: BKD TRANSACTION SERVICES
Matt Klauser, CPA, CM&AA, [email protected]
Matt Klauser is a leader in BKD’s Transaction Services division & specializes in health care M&A serving hospitals, health systems & private equity firms
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• Organizational matters• Contracts & commitments• Tax matters• Financial information• Real & personal property• Licensure & accreditation• Insurance• Third-party reimbursement• Litigation• Information systems• Market assessment
• Corporate compliance• Employment matters• Benefit plans• Mission• Clinical policies & procedures• Medical education• Research• Intellectual property• Medical staff• Quality• Supply chain
HEALTH CARE DUE DILIGENCE – WHERE DO I START?
General Risk Real World ExampleCOMMONLY OVERLOOKED TRANSACTION RISKS
• Accuracy of financial statements • Inability to explain financial
trends with key performance indicators (KPIs)
• Sustainability of standalone organization
• Pro forma changes• Lack of due diligence
• AR allowance waterfall (even if you have an audit)
• Payer mix, price/volume analysis• EBITDA to free cash flow
reconciliation• Synergies, reimbursement• Valuation oversight
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• AR allowance is one of the most subjective estimates on the balance sheet which can significantly impact earnings Is allowance methodology consistent from period to period? How do estimated reserves compare to actual results?
• Comparing net AR % to net revenue % is a start Age of receivables & period-end payer mix impact AR allowance
• To get the clearest picture, dig deeper Match transaction level billing & cash receipts databases Apply the results to period-end AR aging reports by payer
ACCURACY OF FINANCIAL STATEMENTS
AR ALLOWANCE WATERFALL
AR Aging AmountApplicable Reserve %
Calculated Reserve Amount
Applicable Reserve %
Calculated Reserve
Less than 1 month 37,400$ 21.3% 7,985$ 35,150$ 21.3% 7,504$ 1-2 months 3,450 28.8% 993 3,800 28.8% 1,094 2-3 months 2,550 43.4% 1,107 3,170 43.4% 1,376 3-4 months 1,750 60.7% 1,062 2,130 60.7% 1,293 4-5 months 1,150 67.8% 780 1,660 67.8% 1,125 5-6 months 950 74.7% 710 1,200 74.7% 896 6-7 months 600 81.7% 490 780 81.7% 637 7-8 months 400 87.2% 349 520 87.2% 454 8-9 months 150 91.3% 137 360 91.3% 329 9-10 months 300 94.4% 283 360 94.4% 340 10-11 months 250 99.9% 250 360 99.9% 360 11-12 months 200 97.9% 196 360 97.9% 353 Over 12 months 850 100.0% 850 2,150 100.0% 2,150 Total 50,000 30.4% 15,192 52,000 34.4% 17,911 Reported allowance 15,500 17,500 Over(under)statementof allowance 308 (411)
Earnings Impact (Change in Allowance Adjustment) (719)$
Prior Period Current Period
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• Net patient revenues can be volatile over multiyear period Gross revenues are impacted by volumes & charge inflation Net revenues are further impacted by contractual allowances & bad
debts
• Volatility presents challenges bridging historical to projections What is “normal” collection rate (remember last slide)?
• KPIs can help tell the story Can be used to explain the trend in any financial statement line item
EXPLAINING FINANCIAL TRENDS WITH KPIS
PAYER MIX & PRICE VOLUME ANALYSIS
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• Many health care buyers will need to gain scale to be successful• Purchase price may consist of a variety of formats Upfront cash Capital commitments Guarantee of debt payments
• In these transactions, buyer often wants to ensure its partner can sustain itself without requiring financial support
• EBITDA is a transaction metric frequently used, but free cash flow should not be overlooked
SUSTAINABILITY OF STANDALONE ORGANIZATION
• Adjusted EBITDA is result of quality of earnings process
• NWC may impact cash flows due to changes in AR collections, etc.
• Care should be given to capital expenditures to separate growth (one-time) from maintenance (recurring)
EBITDA TO FREE CASH FLOW RECONCILIATION
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• Quantify potential synergies & decide how those impact structure of the transaction
• Consider potential changes in reimbursement post-transaction
• Payer contracts• Supplies/services (GPO)• Headcount reductions• Employee benefits
• EHR• DSH• Classification of clinics• 340B
PRO FORMA CHANGES
“ ”
Diligence is the mother of good luck– Benjamin Franklin
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Popular excuses for skipping due diligence1. It is a simple, straightforward transaction2. We know & trust the other party3. There is no consideration transferred4. We already have a business valuation
LACK OF DUE DILIGENCE
Can you explain to your investment committee the
impact a transaction will have on your
organization?
Transaction Background Due Diligence Findings
CASE STUDY: BUSINESS VALUATION OVERSIGHT
Critical access hospital planned to acquire physician clinicLOI indicated purchase price based on business valuationClinic refused to include NWC true-up
Valuation was staleTerminated physician wages added back but revenues not removedLack of AR allowanceOut-of-period shared wagesBelow market physician wages48% lower cash flows compared to valuation assumptionsPro forma cost report impact
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Kaiser PermanenteHCA
Providence Health & Services
Spectrum Health
UPMC
Cedars-Sanai
Ascension
HEALTH SYSTEM VENTURE FUNDS: FRIEND OR FOE?
• Multiples are high, volume is good• Very targeted investing Expanding platforms Where can the investor add value Disruptors/problem solvers Providers that are well positioned with payers
• Quality of management teams & advisors• Sectors that are overvalued can still yield success
INSIGHT INTO HEALTH CARE PE DEALS
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Matt KlauserDirector
BKD Transaction Services
Anne Hancock ToomeyCo-Founder & Partner,
Jarrard Phillips Cate & Hancock
Matt SmithPartner
BKD National Health Care Group
QUESTIONS FOR PANELISTS
THANK YOU!FOR MORE INFORMATION
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