2009 Physician Hospital Valuation Survey

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Barrie Bruce
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1 2009 Physicia Hospital Valuatio Survey How do physicia hospital compaies assess value? i cooperatio with

2 We are pleased to aouce the results of the 2009 Physicia Hospital Valuatio Survey. I cooperatio with Physicia Hospitals of America, HealthCare Appraisers, Ic. surveyed the physicia hospital idustry to determie treds i both the value of physicia hospital owership iterests ad the maagemet fees charged to these etities. Thirty respodets, represetig approximately 100 hospitals throughout the coutry, respoded to this year s survey. The followig summarizes highlights of the survey. Executive Summary Valuatio Multiples ad Methodologies Whe purchasig a cotrollig iterest i a physicia hospital, 54% of the respodets reported prevailig valuatio multiples of 5.0 to 6.9 times EBITDA, while 18% reported higher valuatio multiples, ad 28% reported lower multiples. 40% of respodets perceive that valuatio multiples have stayed cosistet with the prior year, while 55% perceive that multiples have decreased. Oly 5% believe multiples are icreasig. Whe buyig out retirig or departig physicias, half of the respodets pay betwee 3.0 to 4.9 times EBITDA, but a quarter of the respodets pay a multiple of 5.0 times or higher. Whe buyig out retirig or departig physicias, 52% of respodets base the redemptio price o a predetermied formula. For ew physicia ivestors, 28% of respodets report usig a formula to establish the buyi price; 24% allow the board to determie the purchase price; ad 41% obtai a idepedet, fair market value opiio. Regardig the measure of profitability utilized by the respodets, 88% measure earigs based o earigs before iterest, taxes, depreciatio ad amortizatio (EBITDA). I valuig potetial acquisitios, 57% look at trailig 12 moths of fiacial data, ad 19% rely o the most recetly completed fiscal year. With respect to political proposals related to baig or limitig self-referral to physicia-owed hospitals, 72% report that this has o impact o the valuatio process; however, 81% of respodets report that Presidet Obama ad the Democratic majority i Cogress have a egative effect o the outlook for physicia hospitals, icludig 26% who idicated that the effect is very egative. Trasactio Activity Durig 2008, 63% of respodets reported performig due diligece for physicia hospital acquisitios, but oly 21% of respodets actually completed oe or more acquisitios. Whe biddig o acquisitio targets, half of the respodets report 2 to 3 bidders, ad 30% report 4 or more bidders. For 2009, 42% of respodets pla to purchase betwee 1 to 3 physicia hospitals. Of these, 10 respodets report plas to close oly 1 trasactio, ad 5 respodets pla to purchase betwee 2 ad 3 hospitals. 65% of respodets stated that they were opportuistic with respect to selectig physicia hospital opportuities. More tha two-thirds of the respodets fud their acquisitios pricipally through debt, while 18% fud pricipally with cash. 71% of respodets will cosider a purchase opportuity regardless of the magitude of the ivestmet, while 21% of respodets will ot cosider a ivestmet over $50 millio. De vo (Start-up) versus Purchase Oe-third of the respodets report that they seek de ovo opportuities; 23% seek turaroud opportuities; ad 43% seek established cash-flowig ceters. For a start-up hospital, 54% of respodets reported buyi prices of less tha $75,000 per 1% iterest. Respodets were fairly evely spread o the owership iterest they seek to purchase; however, 42% of respodets idicated that a 50-75% owership iterest was most desirable. Preferred Physicia Specialties The respodets idicated the followig strogly desired specialties for physicia-ivestors: orthopedics, spie, geeral surgery, ENT, ad gastroeterology. Cosmetic surgery ad ocology were idetified as udesirable specialties i a physicia-owed hospital. Maagemet Fees 39% of the respodets reported that acquisitio activity i the physicia hospital market is decliig, while half idicated that there has bee o chage i activity from the prior year. 32% of respodets reported that competitio for physicia hospital ivestmet opportuities has declied, while 18% reported that competitio has icreased. Half reported o chage. The majority of respodets reported maagemet fees ragig from 5-6% of et reveue, with 50% listig 5% as the miimum fee ad half of the respodets listig 6% as the maximum fee. 73% of respodets idicate that they have a equity positio i the hospitals they maage, but 68% of the respodets idicate that equity owership has o ifluece o the level of the maagemet fee charged. 2

3 1. Your compay is: Public Private 0% 100% 7. How may Hospitals do you pla to purchase over the ext year? 2. How may Hospitals do you have uder owership? Hospitals Uder Owership % Respodets 1 to 3 73% 4 to 6 10% 7 to 10 10% 11+ 7% 3. How may Hospitals do you have uder maagemet? Hospitals Uder Maagemet % Respodets 1 to 3 78% 4 to 6 11% 7 to 10 7% 11+ 4% 4. How may potetial acquisitio cadidates have you performed due diligece o over the last year? Potetial Acquisitio Cadidates % Respodets e 37% 1 20% 2 13% 3 13% 4 4% 5+ 13% 5. Icludig your compay, how may potetial acquirers typically participate i the biddig process? Potetial Acquirers % Respodets 1 20% 2 to 3 50% 4 to 5 20% 6+ 10% 6. How may Hospitals have you purchased over the last year? Number of Hospitals to Purchase % Respodets e 58% 1 28% 2 7% 3 7% 4 0% 5+ 0% 8. Of the followig specialties, we regard their desirability i a physicia-owed Hospital as follows: (Data sorted from most desired to least desired) Udesirable Preferece Desirable Orthopedics Spie Geeral Surgery ENT GI Urology Neurosurgery OB/GYN Cardiology Itervetioal Radiology Ophthalmology Vascular Surgery Neurology Cardiac Surgery Plastic Surgery Medical Ocology/Hematology Radiatio Ocology I the cotext of a start-up Hospital share pricig, what is the typical rage observed per 1% iterest? 2009 Physicia Hospital Valuatio Survey Results Number of Hospitals Purchased % Respodets e 79% 1 7% 2 10% 3 4% 4 0% 5+ 0% Start-up Share Pricig Per 1% % Respodets < $50,000 29% $50,000 - $75,000 25% $75,001 - $100,000 8% $100,001 - $150,000 21% $150,001 - $200,000 4% $200,001 - $250,000 13% > $250,001 0% 3

4 10. For sigle-specialty Hospitals, your compay geerally prefers how may active physicia owers? Preferred Number of Physicia Owers % Respodets 1 to 5 0% 6 to 10 32% 11 to 15 32% 16 to 20 8% % 15. How do you determie FMV for buy out trasactios (e.g., retirig physicias or departig physicias)? 38% 10% Formula 52% Idepedet FMV Opiio Board Determied Amout 2009 Physicia Executive Hospital Valuatio Summary Survey Results 11. For multi-specialty Hospitals, your compay geerally prefers how may active physicia owers? Preferred Number of Physicia Owers % Respodets 1 to 5 0% 6 to 10 4% 11 to 15 4% 16 to 20 24% % 12. From a equity stadpoit, your compay's preferred owership is: Preferred Equity Owership % Respodets < 10% 13% 11% to 29% 20% 30% to 50% 17% 51% to 75% 42% > 75% 8% 13. How are your Hospital acquisitios geerally fiaced? 5% 5% 5% Mostly Cash 18% Mostly Debt Seller Fiaced Bak Fiaced (Debt) e 67% 14. What is the total ivestmet level (buy-i price) that would preclude your compay from participatig i a Hospital acquisitio? 16. What valuatio multiples (i.e., for miority iterest buyout) have you most typically observed i the marketplace durig the past 12 moths? Valuatio Multiples % Respodets < % 2.0 to 2.9 8% 3.0 to % 4.0 to % 5.0 to % % 17. How do you determie FMV for ew physiciaivestor buy is? 24% 7% 41% 28% Formula Idepedet FMV Opiio Board Determied Amout Other 18. What valuatio multiples have you most typically observed i the marketplace durig the past 12 moths for physicia-ivestor buy is? Valuatio Multiples % Respodets < % 2.0 to % 3.0 to % 4.0 to 4.9 9% 5.0 to % % 19. Whe sellig miority iterests to ew physicia ivestors, o average how log does it take to idetify the buyer ad cosummate the sale? Ivestmet Level (Buy-i Price) % Respodets $15,000,000 8% $50,000,000 13% t Applicable - ay potetial ivestmet is cosidered 71% t Applicable - other 8% Time Period % Respodets < 3 moths 27% 3 to 6 moths 46% 6 moths to 1 year 23% > 1 year 4% 4

5 20. With respect to your acquisitio strategy, do you prefer established facilities with immediate cash flow, turaroud situatios at lower multiples/asset values or de ovo developmet opportuities? Acquisitio Strategy % Respodets Established cash-flowig ceters 43% Turarouds 23% De vo (i.e., start-ups) 33% (Multiple resposes allowed) 21. What best describes your compay's posture with respect to selectig ew Hospital opportuities? 35% Plaed 65% Opportuistic 22. What valuatio multiples (i.e., for cotrollig iterest) have you most typically observed i the marketplace durig the past 12 moths? Valuatio Multiples % Respodets < 4.0 9% 4.0 to % 5.0 to % 6.0 to % 7.0 to 7.9 9% % 23. I the past year, what best describes the multiples paid (or cosidered) by your compay? Chage i Valuatio Multiples % Respodets Chage from previous year 40% 24. I the past year, what best describes your observatios i the marketplace related to acquisitio activity? Decreasig 55% Icreasig 5% Chage from previous year Decreasig Icreasig 39% 11% 50% 25. I the past year, what best describes your observatios related to competitio for acquisitios? Chage i Acquisitio Competitio % Respodets Chage from previous year 50% Decreasig 32% Icreasig 18% 26. How have political proposals related to baig or limitig self-referral of Medicare/Medicaid cases to physicia-owed hospitals impacted your valuatio process? 28a. Do you cosider payig premiums for Hospitals i CON states ad/or where there are sigificat barriers to etry? 28b. What is the magitude of the premium paid by your compay i a CON state? Limited Impact 28% Impact 72% 27. How has the electio of Presidet Obama ad a stroger Democrat majority i Cogress affected your outlook for physicia-owed hospitals? Impact o Outlook % Respodets Impact 11% Positive 4% Slightly Positive 4% Slightly Negative 29% Negative 26% Very Negative 26% Yes 40% 60% Impact Expressed i Multiples of EBITDA % Respodets < 0.25x 10% 0.26x to 0.50x 18% 0.51x to 0.75x 36% 0.76x to 1.0x 18% > 1.0x 18% 29. Whe valuig a potetial acquisitio cadidate, o what primary earigs measure do you rely? Primary Earigs Measure % Respodets EBITDA 88% Cash Flow to Shareholders 4% Net Icome 4% All of the Above 0% IRR Model 0% N/A 4% 2009 Physicia Hospital Valuatio Survey Results 5

30. I valuig a potetial acquisitio cadidate, what periods are most typically icorporated ito the valuatio/ purchase offer? 34. Does the maagemet fee vary based o reveue levels of the Hosptial (i.e., do you use a slidig scale)?

6 30. I valuig a potetial acquisitio cadidate, what periods are most typically icorporated ito the valuatio/ purchase offer? 34. Does the maagemet fee vary based o reveue levels of the Hosptial (i.e., do you use a slidig scale)? 2009 Physicia Hospital Valuatio Survey Results Measuremet Period % Respodets Trailig 12 moths ( TTM ) 57% Most recetly completed fiscal year 19% Average or weighted average of historical periods 19% Other 5% 31a. If you have sold a cotrollig iterest i a Hospital durig the last year, approximately how log did it take to idetify a buyer ad cosummate the sale? Time Period % Respodets < 3 moths 0% 3 to 6 moths 0% 6 moths to 1 year 9% > 1 year 4% t Applicable 87% 31b. If you sold a cotrollig iterest, the buyer of your iterest was: 33% Sigle Existig Ower 32. What is the miimum maagemet fee your compay charges? (stated as a % of et reveue) % of Net Reveue % Respodets 3% 25% 4% 15% 5% 50% Other/Flat Fee 10% 67% Sigle Outside Ower 33. What is the maximum maagemet fee your compay charges? (stated as a % of et reveue) 55% 35. Does the maagemet fee vary based o the level of services provided? 55% 36. Does the maagemet fee vary based o your level of equity owership? 68% Yes 45% Yes 45% Yes 32% 37. Do you maitai a equity owership i all Hospitals that you maage? % of Net Reveue % Respodets 5% 22% 6% 50% 7% 11% Other/Flat Fee 17% 27% Yes 73% 6

7 HealthCare Appraisers ad Physicia Hospitals of America would like to thak the followig compaies for their participatio i the 2009 Physicia Hospital Valuatio Survey: Ameris Health Systems, LLC Beaumot Boe & Joit Istitute Browsville Doctors Hospital, LLC Cirrus Health Cook Childre s rtheast Hospital Edgewood Surgical Hospital Foudatio Surgical Hospital Affiliates Kasas Medical Ceter, LLC Kasas Spie Hospital Lafayette Surgical Specialty Hospital Natioal Surgical Care Nebraska Orthopaedic Hospital NSH Nueterra Healthcare Orthopedic Hospital P & S Surgical Hospital Physicias Hospital System Pie Creek Medical Ceter Presbyteria Plao Ceter For Diagostics & Surgery Prexus Health Reliat Healthcare Parters Rockwall Hospitals, Ic. Sugar Lad Surgical Hospital Surgical Care Affiliates, LLC Surgical Developmet Parters Surgical Specialty Ceter at Coordiated Health Surgical Specialty Ceter of Bato Rouge Symbio Healthcare Texas Istitute for Surgery The NeuroMedical Ceter Surgical Hospital 2009 Physicia Hospital Valuatio Survey Participats 7

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