Ambulatory Surgery Center Business Planning And .

Ambulatory Surgery Center BusinessPlanning and Organization FormationASC Ownership Considerations forHospitals and Health SystemsChristian EllisonSVP, Corporate DevelopmentHealth InventuresAugust 15, 20121

AgendaIntroductionsMarket dynamicsFuture role of surgery centersOwnership alternativesEvaluating alternativesKey success factors2

About Health Inventures17 year old privately held company based in Denver, COA surgical services and practice management companycreating high performing physician-hospital partnerships forimproved clinical and financial outcomesHistorical core business is to develop and operate ambulatorysurgery centers (ASCs) in joint partnership with hospitals anddoctorsHave developed over 100 ASCs, and currently have 30managed facilities across the United StatesAll are physician-hospital joint ventures (“JVs”)3

HI Services4

MARKET DYNAMICS5

Freestanding ASC GrowthSource: Centers for Medicare & Medicaid Services610/31/2012

Physicians Available to Invest in ASCsA Barrier to ASC Growth: Number of ASCEligible Surgeons per ASC in the USSource: “Ambulatory Surgery Centers: Annual Survey Shows Growth Continues to Slow,” Deutsche Bank, February 4, 20087

ASC Ownership8

Drivers of ConsolidationMature, slow growth, marketMotivated physician sellersUncertain futurePoor economyAging physician ownersHigh ASC valuationsReimbursement pressuresIncreased competition9

Drivers of ConsolidationMotivated hospital buyersEliminate a competitorIncrease/regain market shareGain needed OR capacity at more reasonable costImprove physician relationsPhysician recruitment and retentionKeep new competitors out of the marketMotivated management company buyersSlow de novo growthDemand for servicesTurnaround opportunities10

Market SummaryFlat growthExcess capacityConsolidationHigh ASC valuationsIncreased hospital-physician partnershipsLong-term volume growthReimbursement pressuresQuality reporting requirements11

FUTURE ROLE OF SURGERYCENTERS12

Changing Requirements1310/31/2012

ASCs Well-PositionedLow cost delivery modelOn average 40% less than hospital settingASCs save Medicare 2BN annuallyLow capital cost in time of competing demandsHigh quality outcomesHigh patient, surgeon, and staff satisfactionNon-institutional care settingAvailable operating room capacityOne of the few remaining vehicles for physicianpartnership opportunities1410/31/2012

Significant Stakeholder Value15

OWNERSHIP ALTERNATIVES16

ASC Development ScenariosHospital buys into existing physician owned ASCHospital develops new ASCPhysicians buy into existing Hospital OutpatientDepartment (“HOPD”)17

Ownership AlternativesDepartment of a hospital (HOPD)Hospital owned, licensed as a freestanding ASCHospital owned and co-managed with physicians (couldinclude corporate operator)Physician-hospital joint venture (could include corporateoperator)Hospital-corporate operator joint venturePhysician owned, part of hospital delivery network18

Joint Venture CharacteristicsLicensed as an ambulatory surgery centerLegal structureLimited Liability CompanyLimited PartnershipOwnersHospitalPhysiciansManagement CompanyGoverned by a BoardHospital appoints membersPhysicians elect membersDistributions of profit based on ownership shareOwners taxed based on individual owners’ tax status19

Sample Joint Venture StructurePhysicianPhysician(x%)[PhysicianMD Group(x%)Hospital(x%)ManagementCompany(x%)] Surgery Center, LLCManagement ContractWith Management Company20

JV ConsiderationsValuation requirementsEligible physiciansHospital employeesIndependentsSpecialtiesOwnership percentagesPayor contractingFinancial impactAvailable physician capitalCapitalizationDebtEquityUnit pricing21

Clinical Co-Management ModelClinical Co-Management Agreement compensatesphysicians for assisting in the management of a hospitalservice line.Contract is between the hospital and a physician practiceor multiple practices or a separate management companyformed for the purpose of providing the clinical comanagement services.Contract typically provides for fixed and incentivecompensation. Incentive component is contingent onmeeting quality and other permissible metrics.Contract term is typically one to three years, renewable bymutual consent, with compensation adjusted annually.22

Sample Co-Management StructurePhysicianGroupPhysicianGroupPerformance Improvement ServicesHospitalLLCFixed and incentive compensationBoard ofManagersOperationsCommitteeQualityCommittee23

Financial TermsClinical co-management agreement will provide for fixedand incentive compensation.Maximum total compensation will be determined based onvaluation opinion.Time reporting required to the extent necessary todocument fair market value (e.g., if valuation methodologyis based on assumption of a minimum number ofadministrative hours) and for medical director services.24

Financial TermsHospital will pay fixed compensation in monthlyinstallments.Fixed compensation should be sufficient to reflect value ofJOC, committee and medical director services.Incentive compensation will relate to a limited set ofmeasures; not all duties will be measured by incentivecompensation.Hospital will pay incentive compensation quarterly orannually.25

EVALUATING ALTERNATIVES26

ConsiderationsReimbursementFinancial impact to hospitalMarket share gain and/or loss potentialAbility to create ASC culture/operational performance inone model or anotherPhysician expectationsCompetitive dynamicsPhysician recruitment/retentionBusiness disruptionCapital costs27

Strategic FitVariablesHospital OwnedHOPD w/CoManagementJoint VentureHospital controlLevel of physician engagementFit within accountable care structureASC cultureFinancial benefit to hospitalFinancial benefit to physiciansStrength of partnershipPrice competitivePhysician satisfaction28

Government ReimbursementASC Reimbursement as a % of HOPD Rates62.7%200962.1%2010Source: Centers for Medicare and Medicaid Services61%201129

Financial ImpactAssess surgical volume impact of alternativesFive year financial projections for ASCCapital requirements of facility complianceService disruptionReimbursement differences/changesProject cash flow impact of alternativesRental incomeOwnership percentageTotal value of lost physiciansCompare present value of alternatives30

KEY SUCCESS FACTORS31

Strong Physician LeadershipSteering committee should have physicians who areleaders among their peers and can represent the interestof your target physiciansPhysicians have to be committed to the ventureAppropriate non-competes have to be in place (in JV scenario)Meaningful investment requirementVested physicians are the best sales people among theirpeersThe entity’s operations must be physician led in order tomaximize the ASC’s performance and meet thephysicians’ efficiency goals32

Committed Hospital PartnerHospital should be active in governance but leave theoperational management to the management company andphysiciansHospital should acknowledge physician leadershipHospital representatives on the steering committee/Boardmust be key leaders who are empowered to make decisionsfor the hospitalShows commitment to the venture by the hospitalBest relationship building opportunity with key physiciansHospital needs to show commitment to the success of theventure and demonstrate that it is in this for the right reasonsHospital needs to do what it can to facilitate the ASC’ssuccessPayor contracting support, vendor relationships, marketing,physician recruitment33

Contact InformationChristian Ellison, Senior Vice Presidentcellison@healthinventures.comDD: (720) 304-8948M: (720) 273-744934

Historical core business is to develop and operate ambulatory surgery centers (ASCs) in joint partnership with hospitals and doctors Have developed over 100 ASCs, and currently have 30 managed facilities across the United