key growth sectors in the health care services m&a market

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Key Growth Sectors in the Health-Care Services M&A Market

Sponsored by Regions BankMay 1, 2014

The Merger & Acquisition Webcast Series

Webcast Information:

The webcast can be accessed online and/or by phone.

A copy of the slide presentation is sent to each registered participant; it is also available by logging in to your online account at www.levinassociates.com/user.

If you have any trouble with the webcast, please call (800)248-1668 for assistance.

You can ask questions at any time; use the online question box or fax them to THE MERGER AND ACQUISITION WEBCAST at (203)846-8300.

2The Merger & Acquisition Webcast Series

Key Growth Sectors in the Health-Care M&A MarketSponsored by Regions Bank

May 1, 2014

Agenda:

Introduction: Today’s market When to buy, when to sell M&A activity: Hospitals and physicians group sectors M&A activity: Managed care sector, financing

PLEASE NOTE: You will be given the opportunity to ask questions live during the call. You may also fax your questions to (203)846-8300 at any time.



Christopher Carnahan PresidentCarnahan [email protected]

Christopher Carnahan has more than 21 years of experience in health care and finance. He has held executive-level positions in health care, technology, and manufacturing. Chris is the founder of Carnahan Group, Inc. and is responsible for the leadership, strategic direction, and financial matters of the firm. Chris has been involved with more than 150 medical staff demand analyses for not-for-profit and for-profit entities, including modeling demand and supply analysis for health-care services within diverse communities.



Robert James CimasiChief Executive OfficerHealth Capital [email protected]

Robert James Cimasi, MHA, ASA, FRICS, MCBA, CVA, CM&AA, serves as Chief Executive Officer of Health Capital Consultants (HCC), a nationally recognized healthcare financial and economic consulting firm headquartered in St. Louis, MO, serving clients in 49 states since 1993. Bob has over thirty years of experience in serving clients, with a professional focus on the financial and economic aspects of healthcare service sector entities including: valuation consulting and capital formation services; healthcare industry transactions including joint ventures, mergers, acquisitions, and divestitures; litigation support & expert testimony; and, certificate-of-need and other regulatory and policy planning consulting.



Court HouseworthManaging DirectorCain [email protected]

Court Houseworth, Managing Director, joined Cain Brothers in 2004 in San Francisco and serves as the co-head of the firm’s Managed Care and Behavioral Health investment banking practices. Prior to joining the firm, Court had been a managing director at Lehman Brothers and Bear Stearns. Over the past 25 years, Court has been involved in mergers and acquisitions, debt and equity financings, restructurings, valuations, and not-for-profit conversions. Cain Brothers has more experience with mid-market health-care transactions than any advisory firm.



Scott LiVice PresidentHammond Hanlon Camp [email protected]

Scott Li is a vice president in the New York office of Hammond Hanlon Camp LLC. With more than 10 years of experience across roles in investment banking and the health-care industry, Scott provides strategic and financial advisory services to a variety of health-care clients. He has recently completed or is actively working on engagements for clients in the hospital, senior living, and health IT sectors. Prior to joining Hammond Hanlon Camp LLC, Scott was Chief Financial Officer of pingmd, a provider of an online communication platform for primary care physicians. .


8

Investing In

Court HouseworthChristopher Carnahan(Moderator)

Scott Li Robert Cimasi

Healthcare Continuum

9© 2014 Carnahan Group

Prevention

Diagnosis

Treatment

Cure

Death

Patients Drive $


Patient Lifetime Expenditures


Personal Economics


The Economics

• Total Healthcare spending $2.8 trillion

• Population: 318,892,103• Life Expectancy: 78.5 • Average healthcare spending per

capita: $8,233• Growth rate: Depends on who you

ask– Assume long term growth of 3%

• Total life time spending: $2,793,566


Impact of Growth


Growth Rate i 3%Life Expectancy n 78.5Average Spending per Capita PMT 8,233$ Future Value FV 2,793,566$

3% Growth Rate


4% Growth Rate


2% Growth Rate

Macro Economics 2012• Hospital Care: increased 4.9 percent to $882.3 billion • Physician and Clinical Services: increased 4.6 percent to

$565.0 billion• Other Professional Services: $76.4 billion• Dental Services: increased 3.0 percent to $110.9 billion• Other Health, Residential, and Personal Care Services:

grew 4.5 percent to $138.2 billion• Home Health Care: increased 5.1 percent to $77.8 billion• Nursing Care Facilities and Continuing Care Retirement

Communities: increased 1.6 percent to $151.5 billion• Prescription Drugs: grew 0.4 percent to $263.3 billion• Durable Medical Equipment: Retail spending reached $41.3

billion • Other Non-durable Medical Products: Retail spending for

over-the-counter medicines, medical instruments, and surgical dressings grew 1.8 percent to $53.7 billion

Source: CMS National Health Expenditures 2012 Highlights


Trends …Consolidation

• “Healthcare is a low-margin economic activity. Almost a quarter of American hospitals are already losing money. With that number bound to increase in coming years, we already know what to expect because we’ve seen it before in the airline, supermarket, phone and electronics businesses. There will be a wave of mergers and acquisitions to improve quality and lower costs.” Delos Cosgrove, M.D. – CEO and President at Cleveland Clinic (Article: The Great Consolidation Begins)


http://www.linkedin.com/today/post/article/20130311203646-205372152-the-great-consolidation-begins

Deal Winners

Sector 2012 2011 %Change

d

2012 2011 % Changed

Behavioral Care 17 13 30.8% $1,005,650,000 $304,488,600 230.6%

Home Health & Hospice

35 29 20.7% $5,718,950,000 $289,992,000 1872.1%

Managed Care 27 20 35.0% $18,815,500,000

$7,906,000,000

138.0%

Physician Medical Groups

68 108 -37.0% $4,411,539,350 $466,534,545 845.6%


M&A Deal Volume for 2011 and 2012 Deal Volume Dollar Volume

Selected items from Source: Irving Levin Associates, January 2013Pasted from <http://www.levinassociates.com/pr2013/pr1301mamyearend>

http://www.levinassociates.com/pr2013/pr1301mamyearend

HAMMOND HANLON CAMP LLC h2cllc.com

Perspectives on Healthcare Services M&A Trends

May 1, 2014

Healthcare M&A Trends 19HAMMOND HANLON CAMP LLC h2cllc.com

Overview of Hammond Hanlon Camp

Hammond Hanlon Camp (“H2C”) LLC is a healthcare-focused strategic advisory and investment banking firm with a particular emphasis on the not-for-profit sector

H2C traces its heritage back almost 30 years through its predecessor organizations, including Shattuck Hammond Partners

H2C has assembled a team of professionals that have worked with leading health systems across the country and executed many of the most creative transactions in the not-for-profit healthcare industry

– Senior professionals average over 20 years of experience serving not-for-profit health systems

Offices in Atlanta, Chicago, New York and San Diego

Lead advisor on hundreds of transactions in the healthcare industry representing billions of dollars in value

Capital Markets & Derivatives

Financial advisor and/or placement agent on all types of debt and derivative transactions

Advisor on all types of affiliations, joint ventures, acquisitions and divestiture transactions

Mergers & Acquisitions

Financial advisor to restructure distressed credits / sell assets

Advisor on monetization and project financing of real estate assets

Real Estate

Services designed to assist organizations in evaluation of options prior to transaction

Restructuring

Strategic Advisory


Healthcare Provider Strategic Context

Tailwinds

Demographics: aging population, increasing life expectancy, etc.

Push to lower cost of care settings (for certain sectors)

Newly insured population growing

Reimbursement uncertainty due to ACA

Shift from volume to value

Intensifying focus on cost and choice for consumers and insurers

HeadwindsEcon

om

y

Post-ReformEnvironment


Illustrative Hospital Operating Income Projections

The New Normal

2012 2013 2014 2015 2016Prior Forecast Post-Reform Revised

Post-Reform Downside

Pro

ject

ed O

pera

ting Inco

me

The realities of shifting from volume to value are causing financial forecasts to evolve

Challenging reimbursement environment

Inpatient admissions

under pressureShift from

commercial to exchanges

Increasing consumeris

m


Not THAT Kind of Sustainability: the New Model for Survival

Across the continuum of care, providers will need to possess or develop many attributes to achieve sustainability or permanence in serving their community or customers

Capital

Essential market position

and critical mass

Integrated physicians

High quality

leadership and staff

Measurable quality and

cost effectivene

ss

IT and care manageme

nt infrastructu

res

Alignment with other providers /

payors


2, 4, 6, 8…Who Do We Integrate?

With the ACA sparking new payment systems – bundled payments, capitation, narrow networks – the delivery of and payment for service is becoming significantly more challenging

Hospitals have been and will continue to be the core of the health care system but the system will be different

A blurring of traditional lines between healthcare service sectors has continued with upstream or downstream diversification increasingly common

– Revenue diversification via cross-sector activity

– Payer-provider convergence

– Post-acute or behavioral health capabilities via ownership or partnership

The critical questions are:

– Which of these components will hospitals integrate into their systems?

– How will providers in other parts of the continuum respond?

Overall, providers will be joining together in vertically stacked organizations or networks to provide and bill for service

There are many ways for providers to access or offer these skills and attributes


New Kinds of Dance Partners

Once upon time, consolidation meant organizations in the same business joined forces

No longer as simple as saying bigger is better, even though that is often true

The new paradigm dictates that providers will need to align, partner, or merge with others in the continuum of care for a variety of skills and competencies

– Population health management capabilities

– Marketing capabilities to respond to increasing consumerism

– IT impacting strategic decisions

– Acquiring or refining activities in other parts of the continuum

Access to capital is critical and whether the debt and equity markets are supportive will be an especially important consideration

Comfort with for-profit operators is growing

– For-profit management style for not-for-profit organizations – “No Margin, No Mission” has never been more applicable

Private equity will continue to be a growing force across the continuum of care


Reassessing the Toolkit

Monetization to Improve Balance

Sheet

Sharpen Focus on Core Businesses

Enhance Service Quality and/or Reduce Cost

Increase Managerial Bandwidth

Harvesting Non-Core Assets


Will the M&A Activity Work?

“Only time will tell whether this merger makes sense or not”


The Four Pillars

27


28“Healthcare Valuation: The Financial Appraisal of Enterprises, Assets, and Services,” Robert James Cimasi, John Wiley & Sons, 2014, p. 980.

Physician PrimacyIntegration & Coordination Driving Consolidation


Supply of Physicians, 1975 – 2011

29

1975 1980 1985 1990 1995 2000 2011 -

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Primary CareSpecialty CareSurgeons

“Physician Characteristics and Distribution in the U.S.: 2013 Edition,” Derek R. Smart, American Medical Association, 2013, p. 288, 441.


Physician Supply and Demand

2008 2010 2015 2020 20250

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Supply Demand

-The difference between supply and demand represents the anticipated physician shortage.

“Physician Shortages to Worsen Without Increases in Residency Training” Association of American Medical College, https://www.aamc.org/download/153160/data/physician_shortages_to_worsen_without_increases_in_residency_tr.pdf (Accessed 4/30/14) 30


Physician Shortage

2008 2010 2015 2020 20250

10000

20000

30000

40000

50000

60000

70000

Specialist Shortage PC Shortage

7,400 13,700 62,900 91,500 130,600

Total Physician Shortage

“Physician Shortages to Worsen Without Increases in Residency Training” Association of American Medical College, https://www.aamc.org/download/153160/data/physician_shortages_to_worsen_without_increases_in_residency_tr.pdf (Accessed 4/30/14)

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Percent Change in Physician Practice Setting Since 2000

“Physician Characteristics and Distribution in the US” American Medical Association, 2002-2003 edition, p. 329; 2003-2004 edition, p. 320; 2004 edition, p. 322; 2005 edition, p. 311; 2006 edition, p. 311; 2007 edition, p. 311; 2008 edition, p. 403; 2009 edition, p. 406; 2010 edition, p. 438; 2011 edition, p. 436. 2011 edition, p. 436; 2012 edition, p. 440; 2013 edition, p. 440.

1998 2000 2002 2004 2006 2008 2010 201295%

100%

105%

110%

115%

120%

125%

Physicians in Office-Based Practices

Physicians in Hospital-Based Practices

Total Patient Care Physicians

32


Organizational Models of AlignmentEmerging Models in an Era of Reform

Degree of Hospital Control

MO

ST

LE

AS

T

"A Guide to Consulting Services for Emerging Healthcare Organization," By Robert James Cimasi, John Wiley & Sons, New York, NY, 1999, p. 51-56, 163. “Healthcare Valuation: The Financial Appraisal of Enterprises, Assets, and Services,” Robert James Cimasi, John Wiley & Sons, 2014, p. 646. “Hospital/Physician Integration: Three Key Models” by Michael A. Cassidy et al., American Health Lawyers Association, October 2011, p. 9.

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Model DescriptionSolo/Group Medical Practice Physicians practice independently

Independent Practice Association (IPA) Legal entities of independent physicians that contract with health insurance companies to provide medical services

Co-Management ArrangementTypically formed through a contractual agreement between a group of physicians and a hospital, for the purpose of the physicians providing management services to a specified hospital service line related to the specialty of the contracted physicians

Management Services Agreement (MSA)/Organization (MSO)

A legal entity that provides administrative and practice management services to a physician entity that is owned by participating physicians and that contracts with the MSO for services

Accountable Care Organization (ACO) Participant

A legal entity recognized and authorized under applicable State, Federal, or Tribal Law that is identified by a Taxpayer Identification Number (TIN) and is formed by one or more ACO participant(s)

Physician Practice Management Company (PPMC)

Company specializing in physician practice management with the goal of earning a profit; often purchase or affiliate with physicians, offering capital, management experience, economies of scale, and economic security

Physician Hospital Organization (PHO) (“Clinically Integrated Network”)

Unites Hospital with Physician through a contractual relationship. Usually owned by Physicians and Hospitals, and in many cases non-profit

Professional Service Agreement (PSA)An agreement in which an entity contracts with a physician practice, requiring the physician practice to provide professional medical services on behalf of the contracting entity

Physician Hospital Organization (PHO) (“Clinically Integrated Network”)

Unites Hospital with Physician through a contractual relationship. Usually owned by Physicians and Hospitals, and in many cases non-profit

Physician Employment Agreement (PEA) Hospital purchases some or all of a medical practice’s assets and begin employing the former medical group’s physicians directly


Provider Consolidation

Accountable Care Organizations (ACOs)• Healthcare organizations with a coordinated set of

providers• Provider mix dependent on whether it is a federal or

commercial ACO structure

• Share responsibility and accountability for the continuum of care• Clinical accountability – Quality of care• Financial responsibility – Cost of care

“Perspectives on Accountable Care Organizations-ACO Overview” by Robert James Cimasi, 2011 International Expo, Health Industry Group Purchasing Association & healthcare Industry Supply Chain Institute, Washington, D.C.: Oct. 12-14, 2011, p. 2.

3434


Different Approaches to Managing the Entire Continuum of Care for the PatientHistorical Forces:• Practice of medicine has historically been viewed as a learned profession,

with physicians perceived as professionals who applied their training and knowledge to provide quality patient care within their independent practices.

• Shift from physician-owned, independent private practices to captive practices with multiple affiliations within larger integrated health systems; another step towards the “corporatization” of professional practices, in contrast to the “cottage industry” healthcare delivery system of the past.

• Healthcare costs continue to rise faster than inflation, driven by advances in technology and treatment, as well the increased demand for services from the growing baby-boomer population

Result: A new healthcare delivery paradigm that promotes a managed “continuum of care,” in contrast to the current system of segmented independent provider “silos.”

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Different Approaches to Managing the Entire Continuum of Care for the Patient

• Provider affiliations are likely to increase due to:• Disproportionate number of physicians retiring • An inadequate supply medical graduates • Expected continuing growth in patient demand

• The diversification, specialization, and collaboration of physician and non-physician practitioners will continue to grow to meet the compounding demand, including: • Allied health professionals• Mid-level providers• Technicians and paraprofessionals• Complementary and alternative medical practitioners

36


What Has Changed This Time Around?

• Alignment is being seen as an offensive strategy, not merely as a defensive one

• Large single and multi-specialty groups are becoming more common and are often considered necessary to achieve optimal results

• The loss of autonomy is seen as a fair trade-off for the benefits of being an employee

• Much more experimentation• Direct employment is no longer the only option

37


Direct Employment A Fresh Look at an Old Concept

• Hospitals like the ability to require employees to use their facilities (except when patient needs dictate otherwise)

• Employment supports the use of clinical guidelines and emerging concepts such as the medical home

• Provider-based reimbursement is sometimes available

• Easier to invest in EMR technology

• Avoids some of the more difficult aspects of Stark, e.g., the severe limits placed on under arrangement deals

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Merger & Acquisition Volume, 2011-2013

As derived and calculated from reported transactional data from The Healthcare M&A Report by Irving Levin Associates, INC. Quarterly Reports from 2011 to 2013; Note that of the MD purchasers, approximately 2/3 were reported as being the original group. As to the remaining 1/3 of reported transactions, that fact may have been true, but was not reported.

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A B C D E

YearTotal Deals

Physician Medical Group

Acquisition

Non-Physician Medical Group

Acquisition

Reported Dollars Spent on

Physician Medical Groups M&A

1 2011 107 6 101 $464 Million

2 2012 68 8 60 $4.4 Billion

3 2013 65 3 62 $583 Million

4 Total 240 17 223 $5.447 Billion


Marcus Welby is DeadIncreasing Complexity of Integration Transactions

41


Types of Tangible and IntangibleProperty/Assets in Healthcare

“Valuation of Healthcare Entities and Assets: The Impact of 2010 Legislation” By Robert James Cimasi, CPA Leadership Institute (11/6/2012) p. 55.

42


Managed Care Agreements and Provider Service

Agreements

HMO Enrollment Lists

Human Capital-Related Intangible

Assets

Employee and Provider

Employee Agreements

Trained and Assembled

Workforce In-Place

Non-Copyrighted Policies and Procedures

Depth of Management

Intellectual Property-Related Intangible Assets

Clinical Practice

Protocols and Treatment Plans

Copyrights

Trademarks and Trade names

Patents

Trade Secrets or Other Know

How

Payor or Client Related

Operations and Location Related Intangible Assets

Historical Information and Documentation

Supplier Contracts

Asset Assemblage Factors and

Going Concern Value

Governance or Legal Structure

Related Intangible Assets

Organizational Documents

Income Distribution

Plans

Right of First Refusal

Covenants-Not-To-Compete

Marketing and Business

Development Related Intangible

Assets

Advertising

Franchise/Licensing

Agreements

Joint Venture Alliances

Regulatory or Legal-Related

Intangible Assets

Provider or Medical Licenses

Certificates of Need

Medicare Certification

Other Certifications and

Accreditations

Financial or Revenue Stream-

Related Intangible Assets

Office Share Arrangements

Management Service

Agreements

Financing Agreements

Financial Derivatives

Technology-Related Intangible

Assets

Computerized Management Information

Systems

Electronic Medical Records

Maintenance and Support

Relationships

Patient-Related Intangible Assets

Custodial Rights to the

Patient Medical Charts and

Records

Patient Recall Lists

Goodwill

Professional/Personal Goodwill

Practice/Commercial

Goodwill

Easements

Permits

Leasehold Interests

In-Place Leases

Zoning Waivers/

Variances

Use Rights

Tangible Real

Property

Tangible Personal Property

Cash and Investments

Accounts Receivable

Supplies & Drugs –

Consumables and Inventory Held for Sale

Furniture, Fixtures, and Equipment

Leasehold Improvements

Litigation Awards and Liquidated Damages

Land and Land

Improvements

Buildings

Subject Property Interest

Tangible Assets Intangible Assets

Assets

Intangible Real

Property

Intangible Personal Property


May 1, 2014

Webcast: "Key Growth Sectors in the Health-Care Services M&A Market."

Managed Care Industry M&A Perspectives

48

The Affordable Care Act has caused companies and their executives to turn their attention from execution to evaluating and implementing strategic initiatives

With the implementation of Health Care Reform, companies are evaluating transactions which provide both greater scale and diversification

Connolly, an insurance payments auditing company, agreed to acquire iHealth Technologies, a medical claims company

Guardian entered an agreement to acquire Premier Access Insurance, a diversified dental benefits company

Walgreens and Water Street announced an agreement to merge Take Care Employer Solutions with CHS to form a new worksite health company

Rite Aid signed agreements to acquire Health Dialog and RediClinic to expand its overall health and wellness strategy

Highmark agreed to merge with Blue Cross of Northeastern Pennsylvania

DaVita, the leader in kidney dialysis, acquired HealthCare Partners to enter the physician practice management sector

Private equity firms have remained interested in acquiring payer related companies

Starr Investment Holdings LLC, led by former AIG CEO Hank Greenberg, acquired health insurance claims processor MultiPlan Inc for $4.4 billion from private equity firms BC Partners Ltd and Silver Lake

KKR acquired two leading Workers’ Comp businesses -- Sedgwick Claims Management Services for $2.4 billion and Mitchell International for $1.1 billion

Apax Partners acquired One Call Care Management and Align Networks for approximately $3 billion

Goldman Sachs acquired MagnaCare

Managed Care Industry M&A PerspectivesIntroduction

4949

Sector Outlooks

Medicaid outlook very favorable due to PPACA expansion

Dual eligibles present significant opportunity for those that can effectively manage the population

Medicare outlook in the long-term is compelling, but near term reimbursement pressures will challenge plans

Individual and small group markets expected to face significant headwinds due to implementation of exchanges

Changing Delivery Model

Renewed focus on controlling costs and improving outcomes through enhanced care management

Managing care will require new levels of coordination amongst providers and payers

Will require significant information technology investments

Increased interest in integrated delivery models between providers and payers

Scale and Diversificatio

n

Scale will matter, which will lead to further increases in M&A activity

Consolidators will be looking to diversify product offerings

Increased focus on expansion of care management solutions

Other Concerns

Access to capital will be a critical factor for not-for-profit and provider owned health plans

Overhang with respect to the economic recovery, unemployment rate trends and the impact of sequestration

Ability to pass along annual insurance fee to mitigate any meaningful impact on health plans

The Affordable Care Act is dynamically changing the health care landscape by creating both opportunities and challenges that will require managed care organizations to adapt their traditional core businesses

Managed Care M&A Industry PerspectivesChanging Industry Landscape

5050

Managed Care M&A Activity

____________________Source: Irving Levin Associates, PWC October 2013 White Paper, Barclays research.Note: Excludes workers’ compensation transactions.(1) Total combined deal value includes Irving Levin and Barclays research. Deal volume per Irving Levin research.(2) Only includes data for first quarter 2014.

Deal Valu

e (

in m

illio

ns)

Deal V

olu

me

With increased visibility in the post reform era, health plans are expected to continue to use M&A as an avenue to increase scale, capabilities and diversification

(1)

Managed Care M&A Industry Perspectives

While 2012 was the most robust year for managed care M&A activity since 2005, 2013 and the first three months of 2014 were relatively quiet

(2)

0

5

10

15

20

25

30

35

40

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Deal Value Deal Volume

5151

Recent Acquisition Trends for Managed Care Plans

____________________Source: Wall Street research.

Government Programs

Commercial plans looking to diversify away from individual and small group to minimize expected headwinds from the exchanges

Medicaid plans looking to capitalize on Medicaid expansion from PPACA by entering new states or expanding footprint in existing geographies via acquisitions

Medicare Advantage plans looking to expand their scale in an effort to help offset expected MA reimbursement cuts and capitalize on long-term growth potential

ProvidersHealth Care Information

Technology

Increased coordination with providers viewed as an effective tool to more effectively manage populations

Interest areas include participation in integrated provider systems and low-cost alternate site clinics

Particular interest in acquiring services that enable better management of high cost populations (chronically ill, elderly, etc.)

Renewed acquisition appetite of physician groups by payers

Post reform health care model requires an expansion of HCIT capabilities for many plans

Focus on increasing analytic capabilities for enhanced population health management

Heath Information Exchange platforms and solutions will become a necessity post reform

Payer organizations are vacillating between vendor relationships and ownership of core technology

M&A Activity

Since 2012, the large managed care companies have invested over $17 billion via acquisitions to improve positioning and capabilities to serve seniors, low-income

individuals, and the dual eligible population

Managed Care M&A Industry Perspectives

Medicaid expansion and the need for cost-containing care management solutions have been driving the vast majority of recent M&A activity

52

Managed Care M&A Industry PerspectivesRecent M&A Activity

Select Medicare Operations

Pension Plans in Turkey

PCCM Network Medicaid Contract

(1)

____________________(1) Acquired non-controlling interest.

53

Managed Care M&A Industry PerspectivesRecent M&A Activity (cont’d)

Select Medicaid

Operations

Arcadian Medicare Operations in

Arizona

CareNex LLC

____________________(1) Announced sale of 1-800 Contacts to Thomas H. Lee Partners on January 8, 2014.(2) Acquired minority interest.

(1)

Plus One Health

Management

Other Selected M&A Activity

Target Acquirer Target Acquirer Target Acquirer

Citrus Universal

Healthcare

Amerigroup

Virginia

Michigan

Ohio

(2)

http://www.healthplus-ny.org/en/index_ENG_HTML.html

54

Neither provider / payer integration nor provider risk-bearing entities are new concepts. Provider-owned health plans and other risk bearing provider organizations (i.e. capitation) have been around since the 1980s

However, few provider-owned plans are truly integrated with the provider owner, and risk-bearing entities have long histories only in limited geographies

There are approximately 100 provider-owned health plans that manage on average around 100,000 lives per plan

Provider and payer consolidation trends have accelerated over the past several years, and these trends are expected to continue

Strengthen primary care network directly or indirectly

Foster coordination among all participating providers

Remove fee-for-service payment incentives so as to appropriately manage volume and quality

Foster accountability for total per-capita costs

Provide tools to providers to bear risk and benefit from lower cost / higher quality

Develop limited networks in order to coordinate care and lower cost

Provider and payer

organization concept

Objectives for providers and /

or payer organizations

Managed Care M&A Industry PerspectivesProvider and Payer Integration – An Accelerating Trend

55

Acquirer / Target

Highmark formed a holding company that is the parent of Highmark and of new Provider subsidiary (WPAHS)

WPAHS includes five acute care hospitals, 1,600 beds, and over 1,700 MDs on staff

Purchase Price = Not disclosed

Acquisition of more than 75 physicians, 90,000 active patients, including approximately 27,000 Medicare beneficiaries

Purchase Price = $800 million

NAMM is part of the Aveta’s family of companies – one of the largest providers of managed health care services

Acquisition of NAMM’s 600 primary care providers and 1,200 specialists

Purchase Price = Not disclosed

Minority equity investment by BCBSNC in FastMed. FastMed is the largest urgent care company in North Carolina and the second largest urgent care company in Arizona

Over 320,000 patient visits in 2012

WPAHS was a distressed system. Financial commitments by Highmark will maintain provider choice in the region

WPAHS part of a broader integrated delivery network strategy by Highmark

Driven by local market dynamics – competitor is an integrated provider/payer (UPMC)

Will bolster Florida Blue's value-based care presence in Tampa/St. Petersburg area

Acquisition will continue to promote implementation of additional aligned incentive models to meet Diagnostic Clinic Medical Group’s overall value-based goals of improving quality and enhancing member experiences while lowering overall cost

Allows continued expansion of a successful medical management model

Extends opportunities for UnitedHealth Group to build out further physician partnerships throughout the country

NAMM deal adds to strong Optum footprint in southern California, which includes Monarch, AppleCare Medical Group and Memorial HealthCare

Strategic collaboration will allow FastMed Urgent Care to expand its network of physician-owned urgent care clinics across North Carolina, while helping to launch innovative programs and services for BCBSNC customers

BCBSNC’s member population will receive increased access to convenient, high quality urgent care and lower medical costs

____________________Source: Company press releases and CapitalIQ.

Recent consolidation activity has included payer acquisitions of providers

Transaction

Summary

Transaction

Benefits and

Nuances

Managed Care M&A Industry PerspectivesRecent Provider-Payer Integration Activity

This document is for discussion purposes only and does not constitute advice of any kind, including tax, accounting, legal or regulatory advice, and Cain Brothers & Company, LLC (“Cain Brothers”) is not and does not hold itself out to be an advisor as to tax, accounting, legal or regulatory matters. We recommend that you seek independent third party legal, regulatory, accounting and tax advice regarding the contents of this document. The matters discussed herein are subject to our review and assessment from a legal, compliance, accounting policy and risk perspective, as appropriate, following our discussion with you.

This document was prepared on a confidential basis solely for discussion between you and Cain Brothers and not with a view toward public disclosure. This document, and any oral information provided in connection herewith, shall be treated as strictly confidential and may not be reproduced, distributed or disclosed, in whole or in part, except with our prior written consent. Cain Brothers assumes no obligation to update or otherwise revise these materials.

No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained herein and nothing contained herein is, or shall be relied upon as, a representation or warranty, whether as to the past or the future. Cain Brothers and our affiliates and our and their respective officers, employees and agents expressly disclaim any and all liability which may be based on this document and any errors therein or omissions therefrom.

This document does not constitute an offer or solicitation to sell or purchase any securities and is not a commitment by Cain Brothers or any of its affiliates to provide or arrange any financing for any transaction or to purchase any security or act as an agent or advisor or in any other capacity in connection therewith. This document does not constitute a recommendation to pursue, and is not intended to provide the sole basis for evaluating, a particular transaction, and you retain full responsibility for the decision to pursue any specific transaction discussed herein or otherwise.

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key growth sectors in the health care services m&a market

Healthcare

healthcare ma marketsponsored

health care andfinance

key growth sectors

variety of health

health itsectors

acquisition webcast

firmsmanaged care

growth rategrowth rate