HOME HEALTH OVERVIEW - Harris Williams & Co.

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HOME HEALTH OVERVIEWFebruary 2015

LARGE, RAPIDLY GROWING MARKETHome health is a rapidly growing 87 billion market. Several trends drive strong industry growth Aging population results in strong demographic trends Preference of patients to receive treatment at home Low cost setting driving utilization by payors Industry landscape continues to favor players of scale, driving significant M&A activityHOME HEALTH EXPENDITURES( in millions) 180 160 140 120 100 80 60 53 58 62 67 71 74 78 82 87 93 100 107 116 125 134 145 157 40 20 0200620082010201220142016201820202022Source: CMS.1

CONTINUED NEED FOR INDUSTRY CONSOLIDATIONThe need for greater scale and operational efficiency will drive continued consolidationamong the home health agencies. Despite significant historical consolidation, the home health industry is highly fragmented acrossover 12,000 agencies, with providers of scale accounting for less than 5% of the total provideruniverse Only Top 5% of providers generate more than 5 million in annual Medicare revenue Only Top 10% of providers generate more than 3 million in annual Medicare revenue Economies of scale and changing referral patterns will reinforce consolidation, as smaller providersare expected to face difficulties maintaining profitabilityFRAGMENTED MARKETPLACEAgency13,000 12,000 Home Health Market Share# of 177,0001.3%361.2%10.9%100.8%220.8%Source: Health Market Science, Company websites.DISCHARGES TO POST ACUTE SETTINGS43Despite continued industry consolidation, the number of homehealth agencies is at an all-time high95% of home health businesses generate less than 5 million ofannual Medicare Cost-Based199920012003InterimPaymentSystem (IPS)200520072009201112013Prospective Payment System (PPS)Source: MedPac.(1) 2013 estimated based on agencies outstanding on June 6, 2014.2

TRENDS IN REIMBURSEMENT RATESContinued industry consolidation will benefit providers of scale as less efficient providersare disproportionately impacted by changes in reimbursement rates.HOME HEALTH REIMBURSEMENT TRENDS In November 2013, CMS provided clarity on futurereimbursement by issuing a final rule for rebasing,with an annual base reduction of 2.8% in 2014 andestimated annual reductions of 2.1 to 2.5% per yearthrough 2017 Implementation of rebasing makes it less likelythat home health would be targeted for cuts in ashort-term doc fix bill Rebasing and additional productivityadjustments are expected to offset mandatedmarket basket updates, which average a 2.5%increase annuallyReimbursement clarity provides optimism for thefuture environment and reflects the need for homehealth as the low cost solution for an 7%)-6.0%-8.0%(0.5%)(4.3%)(2.9%)(7.0%)Market Basket UpdatesNet UpdateRebasing and Other AdjustmentsSource: CMS, Marwood Group.3

INCREASED REGULATION AND REDUCED REIMBURSEMENTProviders are accelerating adoption of technology to comply with regulatory mandates,in response to reimbursement pressures, and achieve greater operating efficiency.TIMELINE2010201120122013INCREASED REGULATION2014201520162017 Face-to-Face and Functional Assessments / Therapy ReassessmentsRegulationsGAO Report on Increased CMS OversightRecovery Audit Contractors (RAC) and Zone Program Integrity Contractors (ZPIC)ReimbursementRebasing and Rate Cuts Readmission PenaltiesACOsAdditional Readmission PenaltiesIMPACT OF REBASING ON AVERAGE INDUSTRY EBITDA MARGINS1REDUCED REIMBURSEMENT 15.7% 10.8%9.0%Regulatory requirements are tightening tominimize fraud and abuse within the industryRecent requirements and conditions forpayment that are increasing the need forbetter documentation, reporting, andprocesses include: Face-to-face and therapy requirements Content requirements on Plans of Care andCertifications of NeedInstituting procedures to ensure regulatorycompliance has become essential tohomecare providersSince 2009, Medicare homecare funding hasbeen reduced by over 20%Recent rebasing changes in reimbursementpolicy is creating margin pressure onhomecare providers7.7%6.2%20102011201220132014(1) Industry Peer Group composed of Almost Family, Amedisys, Gentiva, and LHC Group.4

INCREASING PREVALENCE OF MEDICARE ADVANTAGEMedicare Advantage enrollment numbers continue to climb. 15.7 million beneficiaries – 30 percent of the Medicare population – enrolled in a MedicareAdvantage plan in 2014 Payment rates for MA plans are 22% lower, on average, than for fee-for-service Providers will need to weigh increased volume for potentially lower rates as they consider whether to contractwith MA plans Plans will need to evaluate how to “pay for quality” of outcomes to entice providers to accept their contractsMEDICARE ADVANTAGE PENETRATIONMEDICARE ADVANTAGE PLANS BY TYPEYoY growth in Medicare Advantage enrollment, 2008 - 2014Based on Percentage of Medicare Claims8.6% CAGR (‘08 to -ForServiceMedicare,70%20%15%Total MAEnrollment,2014 15.7millionHMO, 64%MedicareAdvantage,30%Local PPO,23%10%Regional PPO, 8%Other, 5%5%0%2008Source: CMS.200920102011201220132014Source: Kaiser Family Foundation.5

CASE STUDY:ENCOMPASS HOME HEALTHCompany Location: Dallas, TXBuyer: HealthSouth CorporationHW&Co. Client: Management and CresseyCOMPANY OVERVIEWINVESTMENT HIGHLIGHTSScale and density in attractive markets 5th largest provider of Medicare-focused (82%Medicare) skilled home health services in the U.S.with 140 locations across 13 states Founded in 1998 and based in Dallas, Texas Highly regarded management team with benchstrength Best in class quality and operational efficiency Acquired 45 businesses since 2005 Leading position in states across the U.S. LTM Revenue of 355 million and industry-leadingmargins2012#22Highly integrated technology platforma portfolio company ofClinical excellencehas been acquired byInnovative partner to health systems, payors, and ACOsExceptional financial profile and cash flowTRANSACTION OVERVIEW2012#7#12011#3Sustainable and replicable cultureProven ability to consummate and integrate acquisitions2012#172011Best-in-breed management 4#11Encompass presence, year of entry, and current market position 750 million purchase price Accretive upon closing with expected Adjusted EBITDAcontribution of 75 million in 2015 Transaction to be funded with cash on hand and debt ―resulting in pro forma HealthSouth leverage of 3.5x HealthSouth will create a new home health and hospiceoperating division To be run by Encompass managementRetain Encompass trade name and headquartersExisting HealthSouth home health agencies to be integratedinto Encompass6

DISCLOSURESHarris Williams & Co. (www.harriswilliams.com) is a preeminent middle market investment bank focused on the advisory needs of clientsworldwide. The firm has deep industry knowledge, global transaction expertise, and an unwavering commitment to excellence. Harris Williams &Co. provides sell-side and acquisition advisory, restructuring advisory, board advisory, private placements, and capital markets advisory services.Investment banking services are provided by Harris Williams LLC, a registered broker-dealer and member of FINRA and SIPC, and Harris Williams& Co. Ltd, which is authorised and regulated by the Financial Conduct Authority. Harris Williams & Co. is a trade name under which HarrisWilliams LLC and Harris Williams & Co. Ltd conduct business.THIS REPORT MAY CONTAIN REFERENCES TO REGISTERED TRADEMARKS, SERVICE MARKS AND COPYRIGHTS OWNED BY THIRD-PARTY INFORMATIONPROVIDERS. NONE OF THE THIRD-PARTY INFORMATION PROVIDERS IS ENDORSING THE OFFERING OF, AND SHALL NOT IN ANY WAY BE DEEMED ANISSUER OR UNDERWRITER OF, THE SECURITIES, FINANCIAL INSTRUMENTS OR OTHER INVESTMENTS DISCUSSED IN THIS REPORT, AND SHALL NOT HAVEANY LIABILITY OR RESPONSIBILITY FOR ANY STATEMENTS MADE IN THE REPORT OR FOR ANY FINANCIAL STATEMENTS, FINANCIAL PROJECTIONS OROTHER FINANCIAL INFORMATION CONTAINED OR ATTACHED AS AN EXHIBIT TO THE REPORT. FOR MORE INFORMATION ABOUT THE MATERIALSPROVIDED BY SUCH THIRD PARTIES, PLEASE CONTACT US AT 1 (804) 648-0072.The information and views contained in this report were prepared by Harris Williams & Co. (“Harris Williams”). It is not a research report, as suchterm is defined by applicable law and regulations, and is provided for informational purposes only. It is not to be construed as an offer to buy orsell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. The informationcontained herein is believed by Harris Williams to be reliable but Harris Williams makes no representation as to the accuracy or completeness ofsuch information. Harris Williams and/or its affiliates may be market makers or specialists in, act as advisers or lenders to, have positions in andeffect transactions in securities of companies mentioned herein and also may provide, may have provided, or may seek to provide investmentbanking services for those companies. In addition, Harris Williams and/or its affiliates or their respective officers, directors and employees mayhold long or short positions in the securities, options thereon or other related financial products of companies discussed herein. Opinions,estimates and projections in this report constitute Harris Williams’ judgment and are subject to change without notice. The financial instrumentsdiscussed in this report may not be suitable for all investors, and investors must make their own investment decisions using their own independentadvisors as they believe necessary and based upon their specific financial situations and investment objectives. Also, past performance is notnecessarily indicative of future results. No part of this material may be copied or duplicated in any form or by any means, or redistributed,without Harris Williams’ prior written consent.Copyright 2015 Harris Williams & Co., all rights reserved.7

Source: Health Market Science, Company websites. Source: MedPac. (1) 2013 estimated based on agencies outstanding on June 6, 2014. Despite continued industry consolidation, the number of home health agencies is at an all-time high 95% of home health businesses generate less than 5 million of annual Medicare revenue

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