HEALTH CARE DEAL DESIGN: SCHEMATICS FOR SUCCESS June 6, 2017 1 - PDF document

6/5/2017 HEALTH CARE DEAL DESIGN: SCHEMATICS FOR SUCCESS June 6, 2017 1

6/5/2017 TO RECEIVE CPE CREDIT • Participate in entire webinar • Answer polls when they are provided • If you are viewing this webinar in a group  Complete group attendance form with • Title & date of live webinar • Your company name • Your printed name, signature & email address  All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar  Answer polls when they are provided • If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar MODERATOR: BKD HEALTH CARE Matt Smith, CPA, CHFP Partner msmith@bkd.com 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. 2

6/5/2017 PANELIST: BKD TRANSACTION SERVICES Matt Klauser, CPA, CM&AA, CHFP Director mklauser@bkd.com Matt Klauser is a leader in BKD’s Transaction Services division & specializes in health care M&A serving hospitals, health systems & private equity firms PA PANELIST: JARRAR RRARD PHIL PHILIP IPS C CATE TE & & HANC HANCOCK Anne Hancock Toomey Co-Founder & Partner, Jarrard Phillips Cate & Hancock atoomey@jarrardinc.com • Advisor to healthcare leaders on high stakes issues • Specializes in navigating the politics of healthcare M&A jarrardinc.com • Former communications leader for hospital company 3

6/5/2017 AHCA: WHERE ARE WE? HOUSE CBO SCORING SENATE May 2017 – Passed TBD June 2017 Results IMPACT OF CURRENT EVENTS Health IT Insured Rate Scale Consumerism Quality & Efficiency Medicaid 4

6/5/2017 HOSPITAL M&A MARKET Guest P Guest Panelist nelist Anne Hancock Toomey Co-Founder & Partner, Jarrard Phillips Cate & Hancock atoomey@jarrardinc.com Advisor to healthcare leaders on high stakes issues • • Specializes in navigating the politics of healthcare M&A jarrardinc.com • Former communications leader for hospital company 5

6/5/2017 Everybody Is Shopping Hospitals planning to pursue alignment with another hospital or health system -HFMA Value Project Report jarrardinc.com Volume of Transactions: Trending Downward (Ponder & Co., 2017) jarrardinc.com 6

6/5/2017 Trend 1: Deal Mix Shifting, Gaining Complexity 19% 81% Change-of-Control Transactions (Ponder & Co., 2017) jarrardinc.com Trend 1: Deal Mix Shifting, Gaining Complexity jarrardinc.com 7

6/5/2017 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) jarrardinc.com Despite a Dip in Volume… jarrardinc.com 8

6/5/2017 M&A Today: The Ugly Truth of transactions fail after Letter of Intent - Becker’s Hospital Review jarrardinc.com Why Deals Fall Apart Source: The Private Business Owner jarrardinc.com 9

6/5/2017 The Politics of Healthcare jarrardinc.com Don’t Believe Us? 10

6/5/2017 jarrardinc.com Engagement Strategy jarrardinc.com 11

6/5/2017 Rule #1: Define the Win jarrardinc.com Rule #2: Build a Campaign Team ► Important perspectives: • Communications • Clinical • Operational • Legal • Political/Community • Finance ► The Goal: One Team. One Strategy jarrardinc.com 12

6/5/2017 Rule #3: Have a Big Story Threat Vision Solution jarrardinc.com Rule #4 : The Messenger IS a Message ► Find and use the credible voice ► Someone invested, trusted ► Likely candidates ► Must be a trained, coordinated team jarrardinc.com 13

6/5/2017 Rule #5: Think Like the Opposition ► Possible opposition inside and out ► Each one needs a plan ► Don’t dance to someone else’s music jarrardinc.com Rule #6 : Communicate Early and Often ► Proactively communicate leadership’s vision ► Communicate context for change ► Be the expert on healthcare in your community ► Start well before you suggest major change jarrardinc.com 14

6/5/2017 Rule #7: Start Internal ► Employees and Physicians: drivers of your mission… or stop it in its tracks ► Engage, don’t just communicate ► Win the Primary Vote jarrardinc.com 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 jarrardinc.com 15

6/5/2017 Rule #9: Overcommunicate ► Acknowledge Facebook and Twitter exist ► Acknowledge the 7x Rule ► Drumbeat at and between every milestone jarrardinc.com Rule #10: Plan Beyond the Finish Line ► Integration is big, important work ► Selling the necessary changes is even harder ► It’s a new campaign to run jarrardinc.com 16

6/5/2017 OTHER DRIVERS OF SUCCESS: FINANCIAL DILIGENCE PROCESS PANELIST: BKD TRANSACTION SERVICES Matt Klauser, CPA, CM&AA, CHFP Director mklauser@bkd.com Matt Klauser is a leader in BKD’s Transaction Services division & specializes in health care M&A serving hospitals, health systems & private equity firms 17

6/5/2017 HEALTH CARE DUE DILIGENCE – WHERE DO I START? • Organizational matters • Corporate compliance • Contracts & commitments • Employment matters • Tax matters • Benefit plans • Financial information • Mission • Real & personal property • Clinical policies & procedures • Licensure & accreditation • Medical education • Insurance • Research • Third-party reimbursement • Intellectual property • Litigation • Medical staff • Information systems • Quality • Market assessment • Supply chain COMMONLY OVERLOOKED TRANSACTION RISKS General Risk Real World Example • Accuracy of financial statements • AR allowance waterfall (even if • Inability to explain financial you have an audit) trends with key performance • Payer mix, price/volume analysis indicators (KPIs) • Sustainability of standalone • EBITDA to free cash flow organization reconciliation • Pro forma changes • Synergies, reimbursement • Lack of due diligence • Valuation oversight 18

6/5/2017 ACCURACY OF FINANCIAL STATEMENTS • 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 AR ALLOWANCE WATERFALL Prior Period Current Period Applicable Calculated Applicable Calculated AR Aging Amount Reserve % Reserve Amount Reserve % 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 15,192 52,000 17,911 30.4% 34.4% Reported allowance 15,500 17,500 Over(under)statement of allowance 308 (411) Earnings Impact (Change in Allowance Adjustment) $ (719) 19

6/5/2017 EXPLAINING FINANCIAL TRENDS WITH KPIS • 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 PAYER MIX & PRICE VOLUME ANALYSIS 20

6/5/2017 SUSTAINABILITY OF STANDALONE ORGANIZATION • 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 EBITDA TO FREE CASH FLOW RECONCILIATION • 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) 21

6/5/2017 PRO FORMA CHANGES • Payer contracts • Quantify potential synergies & • Supplies/services (GPO) decide how those impact • Headcount reductions structure of the transaction • Employee benefits • Consider potential changes in • EHR reimbursement post- • DSH transaction • Classification of clinics • 340B “ ” Diligence is the mother of good luck – Benjamin Franklin 22