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Are You Considering Selling Your Imaging Center or Practice? Or Merging With Your Healthcare
System? Part 1 of 2
Richard S. Cooper, Esq.McDonald Hopkins LLC
600 Superior Avenue, E., Suite 2100Cleveland, OH 44114
(216) [email protected]
mcdonaldhopkins.com
Kirk A. Rebane, ASA CFAHaverford Healthcare Advisors
43 Leopard Road, Suite 102Paoli, PA 19301(601) 407-4024
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Learning Objectives
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• Outline a plan to develop a strategic framework to identify high potential arrangements, and use set processes to execute the integration strategy
• Explain the various impacts of health reform and ACOs on radiology and imaging providers and their catalyst for transactions
• Articulate strategic advantages and opportunities that can flow from the relationships forged through such transactions
• Develop a strategic framework to evaluate the merits of alternative buyers/partners, transactions and structures
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General Business Issues that Drive a Radiology
Organization to Consider a Sale or Merger
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• Improving market share to better leverage payor contracts
• Benefitting from economies of scale• Increasing access to capital and technology• Expansion of service lines• Improved recruiting• Ability to sub-specialize• Ability to afford sales and marketing• Ability to cross-train personnel• Access to new customers and business
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Macro Industry Drivers of Transactional Trends
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• Factors contributing to the record levels of healthcare industry M&A activity and valuations:– Aging of the population: In 2009, there were 39.6 million
people over age 65, representing 15% of the U.S. population and 1/3rd of healthcare consumption. By 2030, those over 65 years old will increase to 72 million.
– Diagnostic imaging remains an extremely valuable service that represents a very small percentage of healthcare expenditures, but influences a very large percentage of physician decisions.
– Despite years of consolidation, the diagnostic imaging industry remains highly fragmented.
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– Economic recovery: Transactions that had been delayed by the recession have created a pent-up demand for acquisitions by buyers and an over-supply of willing sellers. The credit markets are continuing to thaw.
– Sellers will be motivated to sell prior to tax rate increases; capital gains tax rates revert from 15% back to 20% on January 1, 2013. In addition, the 2010 healthcare reform legislation included an additional 3.8% Medicare Tax surcharge on investment income, so the capital gains rate will actually be 23.8%.
– Big pharma, other large healthcare companies and foreign companies are entering/re-entering the domestic healthcare industry by paying top dollar for acquisitions.
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– New technologies are creating new markets.
– Private equity is attracted by the industry’s strong fundamentals and the non-cyclical nature of the industry. 12% of private equity deals completed in 2011 were investments in healthcare.
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– Healthcare reform has created the need – whether real or perceived – for consolidation of providers and service lines into healthcare systems.
– Radiologists who are increasingly challenged by their private practice’s financial situation are turning to their hospitals in search of clinical integration, operational combinations and even employment.
– Not-for-profit hospitals have been experiencing extreme pressure on operating and non-operating cash flows, and have faced increasingly restrictive and expensive tax-exempt debt. Many hospitals continue to operate with negative margins.
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– Proposed budget cuts total more than $125 billion to $360 billion from Medicare, Medicaid and other health programs over the next ten years, forcing hospitals to continue to look for new sources of revenue.
– Traditional operational strategies to improve liquidity and generate capital, including revenue cycle improvements, expense reduction programs, operational efficiency efforts, and deference of capital expenditures, have been fully implemented in many cases – there is no more cash to squeeze out for many hospitals. In addition, deferred capital investment in plant and IT will need to be satisfied at some point – some cost cuts are unsustainable.
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– Not-for-profit hospitals that are not looking at expansion as the solution to healthcare reform instead are increasingly looking to capitalize on the hidden value in their non-core assets, such as the imaging center operations, with an objective of raising much-needed cash.
– The allocation process for scarce capital resources (including cash capital, management resources capital and space capital) can result in the classification of imaging operations as non-core.
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– Hospitals are seeking to monetize non-core and/or underperforming assets and service lines throughout joint ventures or outright sales
• Generates immediate and substantial cash proceeds for a healthcare system
• Can reduce a health system’s ongoing cost for ancillary services
• Allows for the redeployment of capital – both financial and human capital – into more optimal strategic areas for the system
• Ensures the ancillary’s offerings will be at the technological cutting edge
• Enables the avoidance of capital investment in the ancillary
• Preserves employment in the community, often critical to a mission statement
• Maintains or improves current service levels
• Lets management focus on core assets/business of the institution
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– From a buyer’s perspective, former hospital assets or service lines can be attractive for several reasons:
• Third party specialty operators can often operate businesses more efficiently and profitably, with no degradation in quality, than a hospital
• Third party specialty operators often have lower cost structures, primarily due to wages and benefits
• Third party specialty operators often have a clinical expertise, and can demonstrate better clinical outcomes at lower costs than hospitals
• Hospital-oriented assets or service lines often benefit from a continuing referral stream of business
• The third party acquirer can still benefit from trading on the goodwill and name of the hospital, proactively through co-marketing and co-branding
– Therefore, we anticipate that healthcare industry deal activity and valuations will remain at their current high levels for the foreseeable future
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The Impact of Healthcare Reform on Radiology and Imaging Transactions and
Joint Ventures
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• Regardless of the ultimate fate of the Affordable Care Act, healthcare reform is becoming a powerful catalyst for consolidation and integration in the healthcare industry.
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• Healthcare reform will impact consolidation in several key areas:– Decreasing revenues: Payment rates will decrease,
indirectly encouraging consolidation by forcing healthcare participants to find new ways to decrease costs and increase negotiating clout with both suppliers and payors
– Increasing costs: The cost of doing business will increase as healthcare entities spend more on compliance, technology and physician employment
– The ACO-type of model will encourage network formation and greater clinical integration by rewarding integrated healthcare systems that can reduce costs and improve quality
– Independent healthcare entities may have restricted access to payor contracts and patient populations
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• At least for now, the ranks of the insured are expected to rise dramatically as the political uncertainty over healthcare reform slowly changes. Focus on population management will drive providers to consolidate in order to integrate services, generate economies of scale and minimize leakage out of the system.
• The rise of ACOs due to healthcare reform are causing healthcare systems to acquire ancillaries and physician practices in an attempt to broaden and fill-out service line offerings and to ultimately create one-stop-shopping providers.
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• Historical reimbursement cuts, expected lower reimbursements in the future and tighter control over utilization have weakened the financial performance of many current industry providers. Finding a partner or a suitor may be the only way to salvage the business.
• Early detection can reduce downstream healthcare costs. Therefore, diagnostic companies such as imaging centers are seen as valuable components of an overall healthcare organization’s strategic plan.
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• Providers must demonstrate to both government payors and commercial payors that they can provide high-quality care at a lower cost. There is a paradigm shift toward outcome measurement and evidence-based medicine. Such efforts will require not only a diverse array of service offerings within an organization, but also the financial strength and breadth of management to analyze and demonstrate outcomes.
• Larger organizations that have greater critical mass will be able to compete more effectively in this environment– Larger entities can spread fixed costs over a broader
revenue base– Larger entities will have better access to affordable capital– Larger entities will be better able to develop sophisticated
systems that can measure quality and allow for sharing of best practices
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Successful Transaction Requirements
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• Successful organizations understand their options, have developed a strategic framework to identify high potential arrangements and use set processes to execute the integration strategy– Take an inventory of non-core and/or underperforming
assets and service lines– Determine the strategic implications of disposing of, or
entering into a joint venture on, the identified assets and/or service lines
– For those assets and/or service lines that survive the strategic test, conduct a preliminary valuation in order to quantify the monetization opportunity
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• From a seller’s perspective, it is important to:– Find the partner or buyer which is best able to meet your
organization’s strategic objectives
– Maximize the value and purchase terms of a transaction
– Minimize organizational disruption during the sale process
– Structure a process that facilitates regulatory approval
– Consummate a transaction which leaves a service line consistent with your mission statement
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• From a buyer’s perspective, it is important to:– Find the target best able to achieve your organization’s
strategic objectives
– Obtain the best possible price and deal terms
– Consummate a transaction which results in an organization consistent with your mission statement
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• The selling process should include:– An assessment of all strategic options
– Transaction planning and strategy development
– Development of acceptable confidentiality agreement
– Development of confidential information memorandum
– Development of acceptable buyer list
– Information exchange coordination and process
– Proposal evaluation and negotiation
– Due diligence coordination efforts
– Negotiation of definitive purchase agreements and ancillary agreements
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• The buying process should include:– Development of acquisition target criteria– Transaction planning and strategy development– Development of acceptable confidentiality agreement– Target identification– Assessment of strategic and financial implications to your
organization with respect to each identified target– Financing analysis– Valuation and transaction structuring– Development and negotiation of offer– Due diligence coordination efforts– Negotiation of definitive purchase agreements and
ancillary agreements
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Transactions Overview
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Type of transaction
Options Description Full Liquidity Future Control
Capital raise Raise money to expand
No Yes
Recapitalization Sale of partial percent
Some Some
Sale with equity Sale to larger company and
reinvest
Significant Minimal
Sale of 100 percent
Sale of company Yes No
Joint venture
Strategic partnering –
usually no “take-out” event
No Depends on ownership
percentage and terms
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Type of buyer
Type of Buyer Future
Involvement
Deal Terms Confidentiality Financing Other
Financial
•Consulting or employment required•Equity reinvestment typical
•Price may be limited by available funds•Rigid structure
•Less of a concern unless similar portfolio companies
•Cash flow•Focused•More certain to close
•Increased capital can aid growth and competitiveness•Preserve name and legacy
Strategic
•Employment not required or shorter period
•May value higher based on synergies•Tougher terms
•Greater concern •Revenue•Focused•Less certain to close
•Greater disruption to business via “transition”•Greater economies of scale & benefits
Management •Employment not required
•Flexible on terms and structure
•Less of a concern
•Limited financing•Less certain to close
•Least disruptive
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Asset vs. stock
Type of Deal Buyer Perspective
Seller Perspective
Other Considerations
Asset Purchase
•Only assume specific liabilities•Write-up value of assets & get tax deduction
•Requires wind-up of business•Greater tax on proceeds
•Transfer of licenses may be prohibited•Use of 338(h)(10) election
Stock Purchase
•Greater liability risks may lead to lower value
•Better tax treatment•Better liability protection
•Easier to execute•Requires greater buyer due diligence
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Auction vs. targeted sale
Process Pros Cons Other Considerations
Auction •Better value
•Better terms
•Loss of confidentiality
•Disruption to business
•Use of advisors and their skills
Targeted •Synergies •Less leverage •Financing
ASRT Code:
VAD0052056
AAPC Code:
26338HKFCB
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