Building A Spine Surgery Center - Becker's ASC

Performance, Efficiency, Achievement, Knowledge Building a Spine Surgery Center Concept to Operations Becker’s ASC 23rd Annual Meeting – Oct. 2016 The Business and Operations of ASCs Kenny Hancock, President and Chief Development Officer Meridian Surgical Partners

Table of Contents Spine Market Market Drivers Essentials for Success Business Plan Operations Plan Operations 2 Key Considerations Recovery Inn

Spine ASC - The Market Drivers

Market Drivers – Spine ASCs Minimally Invasive “Mindset” Physicians Patients – internet search “Minimally Invasive” Industry – less invasive technology Technology Surgical - implants, instruments and techniques Anesthesia Ability to eliminate nausea Pain control Post-surgical Recovery Options Skilled facilities Home care Hotel with home care Insurance Company Acceptance 4 Safe to perform in an ASC setting Superior environment & less expensive than the hospital alternative High quality patient outcomes

ASC Spine Forecast 5

Growth Outlook Spine/Ortho Growth Outlook by Surgical Procedure (2014 – 2019) Spinal Decompression / Laminectomy 27% Vertebral Augmentation 25% Fusion Surgery 23% Orthopedic Out-Patient Surgery 16% 6 5% 10% 15% 20% 25% 30%

The Essentials for Success

The BIG Idea where do you go from here? 8

Develop a Detailed Business Plan Detailed Business Analysis Project Scope Surgical Case Volume & Mix Financial Analysis and Plan Partnership Structure Reimbursement - Managed Care Strategy Equipment Plan Operations Plan 9

Financial Analysis

Project Scope Determine the Scope of the Project The Scope Determines the Cost The Cost Determines the Investment Number of Physicians Case Volume Specialty Mix Scope Number of Square Footage ORs/Pre-Post Square Footage Working Capital Pre-Opening Expenses Construction Cost Equity Debt Equipment Costs Cost Investment

Summary Financial Analysis Surgical Case Analysis Determine Volume – Complete case data worksheets – Discount case volumes Determine Reimbursement per case – Market Specific Determine Revenue – Volume times Reimbursement 12 Use historical cost to build financial model

Spine and Pain Management Worksheet Spine 2014 2015 Neck spine disk surgery Low back disk surgery Neck spine disk surgery 0 0 0 0 0 0 63045 63047 63048 Removal of spinal lamina Removal of spinal lamina Removal of spinal lamina 0 0 0 0 0 0 Laminotomy 63040 63042 Laminotomy single cervical Laminotomy, single lumbar 0 0 0 0 Corpectomy 63081 63090 Remove vert body dcmprn crvl Remove vert body dcmprn lmbr 0 0 0 0 Vertebroplasty 22520 22521 Percut vertebroplasty thor Percut vertebroplasty lumb 0 0 0 0 Kyphoplasty 22523 22524 Percut kyphoplasty thor Percut kyphoplasty lumbar 0 0 0 0 Cervical Arthroplasty ACDF 22856 Cerv artific diskectomy 0 0 22551 22552 Neck spine fuse&remov bel c2 - Level 1 Addl neck spine fusion - Level 2 0 0 0 0 ALIF 22558 22585 Lumbar spine fusion - Level 1 Additional spinal fusion - Level 2 0 0 0 0 22612/22558 22612/22558 Lumbar spine fusion - Level 1 Spine fusion extra segment - Level 2 0 0 0 0 PLIF/TLIF 22630 22632 Lumbar spine fusion - Level 1 Spine fusion extra segment - Level 2 0 0 0 0 PLIF/TLIF 360 22633 22634 Lumbar spine fusion combined - Level 1 Spine fusion extra segment - Level 2 0 0 0 0 Posterolateral 22612 22614 Lumbar spine fusion - Level 1 Spine fusion extra segment - Level 2 0 0 0 0 Primary CPT DESC Discectomy 63020 63030 63075 Laminectomy ALIF & Posterolateral 13

Spine and Pain Management Worksheet Pain 14 Injections 27096 62310 62311 62319 64479 64483 64490 64493 Inject sacroiliac joint Inject spine cerv/thoracic Inject spine lumbar/sacral Inject spine w/cath lmb/scrl Inj foramen epidural c/t Inj foramen epidural l/s Inj paravert f jnt c/t 1 lev Inj paravert f jnt l/s 1 lev 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Discography 62290 62291 Inject for spine disk x-ray Inject for spine disk x-ray 0 0 0 0 Nerve Blocks 64421 64510 64520 N block inj intercost mlt N block stellate ganglion N block lumbar/thoracic 0 0 0 0 0 0 Facet 64633 64635 Destroy cerv/thor facet jnt Destroy lumb/sac facet jnt 0 0 0 0 Pain Stim 63650 63655 63661 63662 63663 63664 63685 63688 Implant neuroelectrode - Trial Implant neuroelectrodes Remove spine eltrd perq aray Remove spine eltrd plate Revise spine eltrd perq aray Revise spine eltrd plate Insrt/redo spine n generator - Perm Revise/remove neuroreceiver 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Summary Volume Volume Details Provider Gianikis Smith Eppley Jones Ray Dicks Factor Toms Makey Total Discounted Gianikis Smith Eppley Jones Ray Dicks Factor Toms Makey Total 15 Hand 11 6 3 2 19 41 Pain 19 14 64 26 16 200 339 Spine 26 188 166 275 114 164 418 417 143 1,911 -25% -50% -75% Hand 8 5 2 2 14 31 Pain 10 7 32 13 8 100 170 Spine 7 47 42 69 29 41 105 104 36 480 Total 26 218 180 345 143 182 637 417 143 2,291 Total 7 65 49 106 44 51 219 104 36 681

Revenue Assumptions Revenue Assumptions Case Volume Hand Pain Management Spine Total Reimbursement Hand Pain Management Spine Total Net Revenue Hand Pain Management Spine Total Net revenue in thousands 16 Year 1 21 106 300 427 Year 2 31 172 485 688 Year 3 32 173 490 695 Year 4 32 175 495 702 Year 5 32 177 499 709 Year 1 1,863 13,956 11,493 11,631 Year 2 1,900 14,236 11,723 11,903 Year 3 1,938 14,520 11,958 12,141 Year 4 1,977 14,811 12,197 12,384 Year 5 2,017 15,107 12,441 12,632 Year 1 39 1,479 3,448 4,967 Year 2 59 2,444 5,683 8,187 Year 3 61 2,518 5,855 8,434 Year 4 63 2,594 6,032 8,689 Year 5 65 2,672 6,214 8,952

Project Assumptions Project Assumptions Facility Size Square Feet Operating Rooms Procedure Rooms Debt Financing 12,000 3 1 Capital Expenditures Construction Costs Other Fees and Expenses Total Debt Financing Uses of Capital 2,800,000 2,160,000 4,960,000 Construction Costs Build-Out Costs per SqFt TI Allowance Build-Cost to Partnership Construction Costs 225 45 180 2,160,000 Capital Expenditures Medical Equipment Computers & Software Furniture & Fixtures Total Cap Ex 17 Debt and Lease Terms Debt 5.00% Building Rent Rate (per SF) Price pre Unit Available Units Total Equity Financing 2,800,000 1,246,250 253,750 2,160,000 6,460,000 Sources of Capital 8 Years 28.00 Investment Terms 2,500,000 150,000 150,000 2,800,000 Capital Expenditures Working Capital Pre-Opening Expenses Design and Construction Total Uses 15,000 100 1,500,000 Physicians 70% Corporate 30% Total Equity Financing Debt Financing Total Sources 1,050,000 450,000 1,500,000 4,960,000 6,460,000

Summary Financial Analysis Construct a free cash flow analysis is to view the opportunity from a realistic, yet conservative, set of assumptions Free Cash Flow Analysis These assumptions include: – Case Count – Reimbursement – Supply Cost – FTE Count – Other Operating – Capital Expenditures – Working capital and debt service Free Cash Flow (In Thousands) Year 1 4,967 982 1,615 336 298 367 1,369 (543) (740) 87 Net Revenue Salaries and Benefits Medical Supplies Rent Expense Management Fee Other Operating EBITDA Debt Service Capital Expenditures Changes in Working Capital Free Cash Flow Year 2 8,187 1,016 2,676 346 491 393 3,265 (754) (28) (479) 2,004 Year 3 8,434 1,052 2,770 356 506 404 3,346 (754) (42) (36) 2,514 Per Case Data Case Volume Revenue Salaries and Benefits Medical Supplies Year 1 427 11,631 2,299 3,782 Year 2 688 11,903 1,477 3,890 Year 3 695 12,141 1,514 3,988 Percent of Revenue Salaries and Benefits Medical Supplies Rent EBITDA Year 1 19.8% 32.5% 6.8% 27.6% Year 2 12.4% 32.7% 4.2% 39.9% Year 3 12.5% 32.8% 4.2% 39.7% Distribution Analysis (In Thousands) Free Cash Flow Beginning Cash Balance Minimum Cash Balance Distributions Year 1 87 1,276 (300) 1,063 Year 2 2,004 300 (100) 2,204 Year 3 2,514 100 (100) 2,514 Year 1 1,063 70.9% -29.1% Year 2 2,204 147.0% 117.8% Year 3 2,514 167.6% 285.4% 5-Year Investor Returns Analysis 18 (In Thousands) Investor Cashflow Annual Return Cumulative Return Year 0 (1,500)

Next Steps Develop Business Plan Project Scope » Initial project scope determined – 3 OR – 1PR 12,000 sq. ft. Surgical Case Volume & Mix » Surgical case volume by surgeon must be collected Financial Analysis and Plan » » » » Volume drives scope – scope drives cost – cost drives investment Revenue assumptions by market – determined by Managed Care Group Summary financial analysis Project assumptions -- may change as project is fully defined – but create a range Partnership Structure » » Set up LLC for Real Estate LLC Set up LLC for ASC Operating Entity Reimbursement - Managed Care Strategy – Finalize strategy Equipment Plan – Determine equipment needs with surgeons Operations Plan – Determine design and flow of ASC with surgeons. Staffing & HR plan, med-devices/products, financing plan, revenue cycle, marketing, etc. 19

Spine ASC & Real Estate Partnership Structure

Partnership Structure Real Estate Partnership 15 year lease ASC Partnership Real Estate Partnership Separate partnership is usually formed RE partnership captures land purchase, site, utilities, fees & permits, shell building and tenant construction allowance Includes physicians from the ASC partnership Investment: – Land ( 6.50 to 14.00 sq. ft.) – 1.54 acres ( 436- 939k) – Site Improvements/AE/soft costs - ( 30 sq. ft.) – Building Shell ( 110 to 125 sq. ft.) – TI construction cost allowance ( 45 sq. ft.) Investment Thesis: – 15 year lease term with personal guarantees (5-7yrs) – Investment: (MOB w/ASC) – 21 » Equity: 30% -- Debt: 70% » Guarantees pro-rata Cash-on-cash returns – 15% to 25% over 15 year term

Partnership Structure Real Estate Partnership ASC Partnership 15 year lease Surgery Center Partnership ASC partnership Physician owners management partner Investment includes: 22 – 12,000 sq. ft. – Interior construction cost » 180 sq. ft. ( 2.160M) WITH Allowance of 45 » TI allowance - 45 sq. ft.– ( 540k) (RE provides) – Equipment – Computers – FFE ( 2.8mm) – Working capital ( 1.5mm) Investment Thesis: – Total investment: 6.460mm – Equity: 1.5mm – 1% pro-rata 15K – Debt: 4.96mm – Guarantees -1% pro-rata - 49.6k – 15 year lease term – Cash-on-cash returns 90%

Development of Spine & Orthopedic ASC 23

Planning - Schematics 24

Spine & Orthopedic ASC 25

Spine & Orthopedic ASC 26

What Must be Considered?

Reimbursement – Make Sure You Get Paid! Reimbursement Getting paid is a critical step in the business plan Spine procedures historically not approved by Medicare – – 2015 – Medicare approved 9 spine codes – 2017 - Medicare approved 8 additional spine codes » 22551 – Neck spine fuse & remove belC2 » 20936 – Autograft for spine surgery » 22554 – Neck Spine fusion » 20937– Autograft for spine surgery only (morsel add-on) » 22612 – Lumbar spine fusion » 20938 – Autograft for spine surgery only (struct add-on) » 63020 – Neck spine disc surgery » 22552 – Arthrodesis, anterior interbody » 63030 – Low back disc surgery » 22840 and 22842 – Posterior non-segmental instrumentation » 63042 – laminectomy single lumbar » 22845 – Anterior instrumentation (two and three vertebral segments) » 63045 – Removal of spinal lamina » 22851– Application of intervertebral biomechanical devices » 63047 – Removal of spinal lamina » 63056 Decompress spinal cord 2016 – Medicare approved 4 spine codes » 0171T (Lumbar spine proces distrac) » 0172T (0172T (Lumbar spine process add) » 63046 (Remove spine lamina 1 thr) » 63055 (Decompress spinal cord thc) Must continue to convince the insurance companies these procedures are safe in an ASC Insurance companies are beginning to develop ASC fee schedules for spine and TJR This is a negotiation between the ASC and insurance companies Becomes a major problem if OON is prohibited – and you can’t get a contract 28

Implant Cost Implant Costs Addressing implant cost is essential Negotiate carve-outs Having solid cost data is important when negotiating with the payors Off-load implant cost to a third-party company 29