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

Transcription

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

2 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 & 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 ed 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

3 PANELIST: BKD TRANSACTION SERVICES Matt Klauser, CPA, CM&AA, CHFP Director Matt Klauser is a leader in BKD s Transaction Services division & specializes in health care M&A serving hospitals, health systems & private equity firms PANELIST: JARRARD PHILIPS CATE & HANCOCK Anne Hancock Toomey Co-Founder & Partner, Jarrard Phillips Cate & Hancock atoomey@ Advisor to healthcare leaders on high stakes issues Specializes in navigating the politics of healthcare M&A Former communications leader for hospital company 3

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

5 HOSPITAL M&A MARKET Guest Panelist Anne Hancock Toomey Co-Founder & Partner, Jarrard Phillips Cate & Hancock Advisor to healthcare leaders on high stakes issues Specializes in navigating the politics of healthcare M&A Former communications leader for hospital company 5

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

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

8 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) Despite a Dip in Volume 8

9 M&A Today: The Ugly Truth of transactions fail after Letter of Intent - Becker s Hospital Review Why Deals Fall Apart Source: The Private Business Owner 9

10 The Politics of Healthcare Don t Believe Us? 10

11 Engagement Strategy 11

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

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

14 Rule #5: Think Like the Opposition Possible opposition inside and out Each one needs a plan Don t dance to someone else s music 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 14

15 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 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 15

16 Rule #9: Overcommunicate Acknowledge Facebook and Twitter exist Acknowledge the 7x Rule Drumbeat at and between every milestone 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 16

17 OTHER DRIVERS OF SUCCESS: FINANCIAL DILIGENCE PROCESS PANELIST: BKD TRANSACTION SERVICES Matt Klauser, CPA, CM&AA, CHFP Director 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

18 HEALTH CARE DUE DILIGENCE WHERE DO I START? 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 COMMONLY OVERLOOKED TRANSACTION RISKS General Risk Accuracy of financial statements Inability to explain financial trends with key performance indicators (KPIs) Sustainability of standalone organization Pro forma changes Lack of due diligence Real World Example AR allowance waterfall (even if you have an audit) Payer mix, price/volume analysis EBITDA to free cash flow reconciliation Synergies, reimbursement Valuation oversight 18

19 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 AR Aging Amount Prior Period Applicable Reserve % Calculated Reserve Amount Current Period Applicable Calculated Reserve % Reserve Less than 1 month $ 37, % $ 7,985 $ 35, % $ 7, months 3, % 993 3, % 1, months 2, % 1,107 3, % 1, months 1, % 1,062 2, % 1, months 1, % 780 1, % 1, months % 710 1, % months % % months % % months % % months % % months % % months % % 353 Over 12 months % 850 2, % 2,150 Total 50, % 15,192 52, % 17,911 Reported allowance 15,500 17,500 Over(under)statement of allowance 308 (411) Earnings Impact (Change in Allowance Adjustment) $ (719) 19

20 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

21 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

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

23 LACK OF DUE DILIGENCE Can you explain to your investment committee the impact a transaction will have on your organization? 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 CASE STUDY: BUSINESS VALUATION OVERSIGHT Transaction Background Critical access hospital planned to acquire physician clinic LOI indicated purchase price based on business valuation Clinic refused to include NWC true-up Due Diligence Findings 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 23

24 HEALTH SYSTEM VENTURE FUNDS: FRIEND OR FOE? Ascension Cedars-Sanai Providence Health & Services Spectrum Health HCA Kaiser Permanente UPMC INSIGHT INTO HEALTH CARE PE DEALS 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 24

25 QUESTIONS FOR PANELISTS Anne Hancock Toomey Co-Founder & Partner, Jarrard Phillips Cate & Hancock Matt Smith Partner BKD National Health Care Group Matt Klauser Director BKD Transaction Services THANK YOU! FOR MORE INFORMATION 25

26 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: 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. CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 26

27 Subscribe to Our Thinking 27