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

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

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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

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6/5/2017 1

HEALTH CARE DEAL DESIGN: SCHEMATICS FOR SUCCESS

June 6, 2017

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  • 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

TO RECEIVE CPE CREDIT 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.

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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

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
  • Former communications leader for hospital company

PA PANELIST:

JARRAR RRARD PHIL PHILIP IPS C CATE TE & & HANC HANCOCK

jarrardinc.com

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AHCA: WHERE ARE WE?

HOUSE May 2017 – Passed CBO SCORING June 2017 Results SENATE TBD

IMPACT OF CURRENT EVENTS

Insured Rate Quality & Efficiency Scale Health IT Consumerism Medicaid

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HOSPITAL M&A MARKET

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
  • Former communications leader for hospital company

Guest P Guest Panelist nelist

jarrardinc.com

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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

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Trend 1: Deal Mix Shifting, Gaining Complexity

(Ponder & Co., 2017)

81% 19% Change-of-Control Transactions

jarrardinc.com

Trend 1: Deal Mix Shifting, Gaining Complexity

jarrardinc.com

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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)

jarrardinc.com

Despite a Dip in Volume…

jarrardinc.com

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M&A Today: The Ugly Truth

  • f transactions fail after

Letter of Intent

  • Becker’s Hospital Review

jarrardinc.com

Why Deals Fall Apart

Source: The Private Business Owner

jarrardinc.com

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The Politics of Healthcare

jarrardinc.com

Don’t Believe Us?

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jarrardinc.com

Engagement Strategy

jarrardinc.com

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Rule #1: Define the Win

jarrardinc.com

Rule #2: Build a Campaign Team

► Important perspectives:

  • Clinical
  • Legal
  • Finance

► The Goal: One Team. One Strategy

  • Communications
  • Operational
  • Political/Community

jarrardinc.com

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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

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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

jarrardinc.com

► 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

jarrardinc.com

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► Employees and Physicians: drivers of your mission…

  • r stop it in its tracks

► Engage, don’t just communicate ► Win the Primary Vote

Rule #7: Start Internal

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

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Rule #9: Overcommunicate

► Acknowledge Facebook and Twitter exist ► Acknowledge the 7x Rule ► Drumbeat at and between every milestone

jarrardinc.com

► 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

jarrardinc.com

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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

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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 Example

COMMONLY OVERLOOKED TRANSACTION RISKS

  • Accuracy of financial statements
  • Inability to explain financial

trends with key performance indicators (KPIs)

  • Sustainability of standalone
  • rganization
  • 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 Amount Applicable 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)statement

  • f 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 diligence

1.

It is a simple, straightforward transaction

2.

We know & trust the other party

3.

There is no consideration transferred

4.

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

  • rganization?

Transaction Background Due Diligence Findings

CASE STUDY: BUSINESS VALUATION OVERSIGHT

Critical access hospital planned to acquire physician clinic LOI indicated purchase price based on business valuation Clinic refused to include NWC true-up Valuation was stale Terminated physician wages added back but revenues not removed Lack of AR allowance Out-of-period shared wages Below market physician wages 48% lower cash flows compared to valuation assumptions Pro forma cost report impact

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Kaiser Permanente HCA 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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6/5/2017 25 Matt Klauser

Director BKD Transaction Services

Anne Hancock Toomey

Co-Founder & Partner, Jarrard Phillips Cate & Hancock

Matt Smith

Partner BKD National Health Care Group

QUESTIONS FOR PANELISTS

THANK YOU!

FOR MORE INFORMATION

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CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE

  • credit. Complaints regarding registered sponsors may be submitted to the National Registry of

CPE Sponsors through its website: www.nasbaregistry.org The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

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attendance

  • For questions, concerns or comments regarding CPE credit,

please email the BKD Learning & Development Department at training@bkd.com

CPE CREDIT

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