Key Community Hospital Partnership Considerations

Taking Your Board through a Process with a Practical Approach

Webinar: Wednesday, January 30, 2013,

12 Noon – 1:00 pm CST

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Presenters

Mike Williams, president & CEO

Community Hospital Corporation, Plano, Texas

Glenn Robinson, CEO

Hillcrest Health System, Waco, Texas

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Community Hospitals in Perspective

Total U.S. Hospitals 5,754

Community Hospitals 4,985

Rural Community Hospitals 1,987

Critical Access Hospitals 1,325

Urban Community Hospitals 2,998

Community Hospitals in a System 2,941

Community Hospitals in a Network 1,508

Source: American Hospital Association’s Hospital Statistics, 2012 edition, data from 2010 annual survey.

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Community Hospital Opportunities

• Community commitment

• Do what you do well

• Clinical integration

• Operational efficiency

• Advances in technology

• Meaningful use/financial improvement

• Strategic alternatives to preserve independence

4

Community Hospital Challenges

• Low patient volumes

• Recruitment of physicians/specialists

• Physician alignment

• Policy and market changes

• Medicare and Medicaid cuts

• Economic downturn pressures

• Access to capital

5

Partnership Conversations

• Community need

• Clinical service breadth

• Physician alignment and strength

• Revenue, sustainability

• Managed care leverage

• Compatibility of purpose

• Reputation

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Partnership Considerations

The more $$$ you need, the less control you will

have in your local governance.

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Partnership Considerations

Responsible action is more favorable than the last possible moment.

• Think proactively

• Board dynamic is critical

• Define your optimal terms

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Unique Partnership Options

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First, Get Your ‘House’ in Order

• Assess market position: know your market clout; it provides a position of strength during conversations with potential partners and physicians.

• Assess finances, profits: know operational areas of challenge and profitability.

• Industry transformation: educate the local board and hospital management about inevitable industry changes such as increased regulatory scrutiny and declining reimbursement rates.

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Next, Understand Your Strategy

• Clinical services: understand the hospital’s clinical

strengths, areas that can be expanded, and what is

lacking to appropriately serve area populations.

• Infrastructure: explore shared infrastructure and

areas where the hospital needs guidance.

• Know what you are willing to give up.

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Potential “For Sale”

Where’s the fruit? Characteristics of a targeted community hospital: • Likely to target non-performing organizations

– Room for quick fiscal improvement – Stable demographics (but not as significant a factor) – Physician recruitment opportunity – Limited available capital for improvements

• In addition, look for: – Minimal managed care – Niche player – sole community provider – Opportunity for higher margins – Control issues

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Tactics

• Target indirect stakeholders – Commissioners

– Physicians

– Former board members

• Promise of $$$ – Can be very “promising,” particularly to a city or

county commissioner struggling with funding

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Case Study

Hillcrest Baptist Medical Center

Waco, Texas

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15

Old Providence Location Hillcrest Baptist Medical Center

Providence

New Hillcrest Location

Hillcrest Health System

16 16

Hillcrest Health System

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Hillcrest Baptist Medical Center

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MARKET SHARE OF HOSPITALIZED MCLENNAN COUNTY RESIDENTS

(Actual Market Share Based on Texas Hospital Assn. Patient Data System Data)

58.1% 57.7%55.8%

53.1% 53.9%

49.4%47.9%

45.1%43.4%

29.9% 30.1% 31.1%

35.0%33.5%

38.1%40.4%

44.5%46.5%

7.3% 7.8% 9.0% 8.0% 8.7% 9.1% 8.3% 7.5% 6.9%4.7% 4.5% 4.2% 3.9% 4.0% 3.4% 3.3% 2.9% 3.2%

0%

10%

20%

30%

40%

50%

60%

70%

1999 2000 2001 2002 2003 2004 2005 2006 2007*

Hillcrest Providence Scott & White Other

* 2007 based on partial year data annualized

HHS – Market Share Trend

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HILLCREST HEALTH SYSTEM CONSOLIDATED EBIDA

( $000 )

$(6,013)

$10,039

$(8,000)

$(6,000)

$(4,000)

$(2,000)

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

EBIDA

( $0

00 )

FY07

FY08 (9 Mos.)

HHS – Financial Situation

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HILLCREST HEALTH SYSTEM REQUIRED EBIDA BEGINNING IN FY2010

( $ Millions )

$19.5

$24.8$27.4

$33.5

$-

$5

$10

$15

$20

$25

$30

$35

$40

Debt Service +

Required Mortgage

Reserve Funding

HUD-Expected 1.5

Times Debt Service

Coverage

Amount Required for

P&L Breakeven

Amount Required to

Provide Cap Ex = to

Depreciation

($ M

illi

on

s)

HHS – Projected EBIDA Necessary

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• Strained Physician Relationships

– Trust

– Communication

• 1-on-1 Visits

– >200 physician visits in 1st 120-days

• Development of Physician Leadership Group

• Focus on Operational Excellence

HHS – Turnaround Strategies

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• 15 Member Physician Panel • Physician Lead • Selected by CEO • Meets Monthly • Other Attendees:

– Admin ops staff – Board chairman

• Main Focus: – Clinical issues – Process issues

Physician Leadership Group

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E E O B

4.0

4.5

5.0

5.5

6.0

May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08

E B I D A($ in 000's)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

EBIDA 582 (3,950) 973 (7,535) (482) 1,011 2,165 (456) 1,443 2,317 1,314 1,450

May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08

HHS – Operational Improvements

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• Strong, Immediate Operational Improvement • Replacement Hospital Under Construction • Strong Primary Care Network - HFHC • Open Medical Staff

– High quality – Committed to remaining independent

• Future of Healthcare Uncertain – Continued decline in reimbursement – Growing uninsured/underinsured

• Long Term, Sustained Growth???

Hillcrest – Protecting our Future

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• Continued Choice in our Community • Protect Name and Brand

– Hillcrest Baptist Medical Center – 80 year history in community

• Fair and Balanced Board – Community/Hillcrest interest protected

• Hillcrest Family Health Centers would remain a separate entity of the partnership – 38 primary care physicians and 7 clinics

• Continue with our major expansion project • Protect our Faith-Based Heritage

– Retain our affiliation with the Baptist General Convention of Texas

Ideal “Must Haves”

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• Culture

• Physician-oriented

• Financial strength

• An added strength - existing presence in the marketplace

Ideal Partner

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• Non-profit integrated healthcare delivery system based in Temple, Texas

• Physician-founded and physician-led – Employs more than 1,000 physicians and scientists

• Primary teaching affiliate – Texas A&M College of Medicine

• Financial Strength – Joint AA-, Aa3, stable credit rating – Highest A.M. Best rating (A-) issued & affirmed to S&W Health Plan

(2007)

• Quick Stats – Over 14,000 employees – Over 1,000 licensed beds – Serving more than 1.5 million patients annually – 240,000-member health plan

Scott & White Healthcare

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• Governance:

– A new 12-person Board of Directors

– HHS will appoint 6 Directors

• A majority of whom would reside in Waco

– S&W will appoint 5 Directors

• A majority of whom would reside in Waco

Hillcrest Baptist Medical Center

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• Due to a weaker financial position, other negotiation points gained increased value:

– Board Composition (50/50)

– Reserved Powers – Certain actions would require the approval of both HHS and S&W boards – i.e.: • Amendment of Articles of Inc. or Bylaws

• Change in tax-exempt status or mission and purpose

• Admission of any new corporate member

Hillcrest Baptist Medical Center

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• Operations:

– Employees – Hillcrest would employ all personnel (except CEO – who would be employed by CHC)

– Clinical Matters – The Board would delegate authority to the PLG – comprised of physicians and representatives of HHS and S&W

Hillcrest Baptist Medical Center

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• Lose our full independence

• Risk relationship with medical staff

• Risk relationship with HFHC

• Risk relationship with certain community stakeholders

Potential Downsides

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• Mitigation of financial threats

• Stable beginning at our new location

• S&W health plan access

• Perceived “halo effect” by many

– S&W Healthcare = high quality

• Further expansion of training programs

• Synergies in key service lines

– Trauma, post-acute, oncology, etc.

Potential Upsides

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• Memorandum of understanding approved by both HHS and S&W

– Announced 1 year prior to merger

• Conducted due diligence

• Definitive agreement – April 1, 2009

Creation of HBMC

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• Sustained operational and financial improvement – FY12 was our strongest financial year in over 16 years

• Strengthened physician relationships

• Strengthened community relationships

• Sustained positive market share trend

• Addition of new services – S&W Center for Rehabilitative Medicine

– S&W Regional Cancer Center – Hillcrest

– Hillcrest Surgery Center

– Additional surgical specialty growth

Successes

$(6.5)

$12.9 $12.7

$27.9 $29.3 $32.8

$(10)

$(5)

$-

$5

$10

$15

$20

$25

$30

$35

FY07 FY08 FY09 FY10 FY11 FY12

$ M

illio

ns

Operating EBIDA

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• Part of Integrated Healthcare System positioned for the future

– Local, State and National Presence

– Baylor Scott & White Health Announcement

• Continued commitment to local community and the delivery of high quality, affordable healthcare to our region

– Adoption of Best Clinical Practices

– Synergistic relationship that creates value

Future

Questions & Answers

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Thank You!

Community Hospital Corporation

5801 Tennyson Parkway, Suite 550

Plano, Texas 75024

972.943.6400

www.communityhospitalcorp.com