November 2010 Hospital Mergers & Acquisitions: Opportunities...

November 2010

Hospital Mergers & Acquisitions: Opportunities and Challenges

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An independent HealthLeaders Media Survey supported by

by Karen Minich-Pourshadi

NOVEMBER 2010 | Hospital Mergers & Acquisitions: Opportunities and Challenges | pAge 2

WWW.HEALTHLEADERSMEDIA.COM/INTELLIGENCE | ©2010 HealthLeaders Media, a division of HCPro, Inc.

Foreword

ARE WE BETTER TOGETHER? The healthcare industry currently runs nearly one-fifth of

the nation’s economy through an amazing variety of independent organizations that operate hospitals, clinics, and

other care settings. Depending on your perspective, this free market system delivers either average or substandard

results. The passage of the Patient Protection and Affordable Care Act has focused attention on the shortcomings

of this structure in an era of change, but is the industry prepared to accept the premise that we are better pre-

pared for what lies ahead if we band together into a more rational (and consolidated) structure?

The benefits of consolidation are apparent, particularly in the areas of integration and scale. As we move

from an industry that produces interventions and is driven to produce top-line growth to one that focuses on the

best quality at the lowest cost, providers and hospitals must, at the very least, collaborate to reduce duplication

and treat problems at the earliest opportunity. Emerging ACO models demand something more: integration. Given

the regulatory limitations on collaboration between independent organizations—Stark and antitrust being just

two—formal business combinations may offer the most favorable environment to successfully integrate across

the continuum. The specter of Medicare reductions, value-based purchasing, and increasing carve-outs for defects

(readmissions and hospital-acquired conditions) for the foreseeable future all point to the need to not simply man-

age costs but to fundamentally challenge our cost structure. The economic advantages of scale—well recognized

in other industries—are apparent and offer considerable value for organizations that join together and do the hard

work of applying scale to business support, clinical leadership, and technology support functions.

This timely survey of more than 200 healthcare leaders provides useful insight into the industry’s state of

consciousness regarding the likelihood of new business models and possible consolidation. Some of the conclusions

aren’t surprising (86% expect merger activity in the acute care sector to increase), and others are a little less pre-

dictable (28% of respondents currently employ a dedicated M&A team), but taken as a whole, the survey provides

strong evidence that industry leadership is self-aware on the subject and prepared to meet the challenge.

Dennis Dahlen

Senior Vice President of Finance and CFO

Banner Health, Phoenix

Lead Advisor for this Intelligence Report



perspective

UNDERSTANDING THE M&A TRENDS The increases in acute care hospital M&A

activity and hospital/physician transactions in the first nine months of 2010 support the expectations of the respon-

dents in the 2010 Hospital Mergers & Acquisitions Survey. According to the results, 86% of respondents expect

M&A activity in the acute care hospital sector to increase over the next 12 months, and 92% of respondents expect

acute care hospital/physician transactions to increase over the same period. Nearly nine out of 10 respondents (87%)

believe that the enactment of healthcare reform legislation has driven the increase in healthcare M&A transactions.

We agree.

We believe that the new payment models—such as bundled payments, medical homes, and accountable care

organizations—are primarily responsible for M&A activity for hospitals and physicians. In addition, a range of fac-

tors is responsible for the increased hospital M&A activity: reimbursement cuts; internal cost cutting; bad debt prob-

lems resulting from uninsured and underinsured; increasing copays and payer mix issues; and, for the not-for-profits,

scrutiny of the “community benefit” provided as well as increased reporting requirements.

We also expect, as do a majority of the respondents to the survey, that these pressures will continue to drive

some facilities into financial distress. Half of the respondents have already engaged in or considered the acquisition

of distressed assets. As noted above, we have seen an increase in M&A activity during 2010, mostly by buyers with

strong balance sheets and existing lines of credit. Although auctions of facilities are common in our experience, auc-

tions are not common among the respondents (only 10%), which we attribute to the fact that our client base includes

several acquisitive companies.

Access to capital is another major concern of respondents. Almost half of the respondents told us that access

to capital has resulted in the termination of a proposed transaction in the last 12 months, and a majority (65%)

believe that access to capital will be the most challenging issue in the M&A process over the next 12 months. These

concerns remain despite the recent easing of the credit crisis.

Finally, only 12% of respondents have elected to obtain a new provider number in an acute care hospital

acquisition because of regulatory compliance issues discovered in due diligence. We believe that this approach will

become more common because of buyers’ understandable concerns about regulatory risks, which healthcare reform

legislation has enhanced. Whether or not obtaining a new provider number becomes commonplace will be impacted

by whether or not CMS will cooperate with buyers to avoid delays in reimbursement.

Reggie Hill

Partner

Waller Lansden Dortch & Davis LLP, Nashville



Table of Contents

Foreword 2

Perspective 3

Methodology 5

RespondentProfile 6

Title, Place of Employment, Type of Organization, Part of Mergers & Acquisitions AssessmentsTeam . . . . . . . . . . . . . . . . 6

Analysis 7

SurveyResults 12

Expectation of M&A Activity Over the Next 12 Months . . . . . . . . . . 12

Acute Care Hospitals’ M&A Activity by Sector Over the Next 12 Months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Increase in M&A Activity by Physician Specialty . . . . . . . . . . . . . . . . 13

Impact of Patient Protection and Affordable Care Act . . . . . . . . . . . 13

Access to Capital Over the Next 12 Months . . . . . . . . . . . . . . . . . . . . . 13

Likelihood of Transaction Type Impacting Acute Care Hospitals Over the Next 12 Months. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Likelihood of Transaction Type Between Acute Care Hospitals and Other Providers of Service Over the Next 12 Months . . . . . . . 14

Issues Resulting in M&A Termination of Proposed Transaction in the Last 12 Months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Challenge of M&A Issues over the Next 12 Months . . . . . . . . . . . . . . 15

Rely on Outside Advisors for M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Employ Dedicated Team to Manage M&A Function . . . . . . . . . . . . . . 16

Engaged In/Considered the Acquisition of Distressed Assets in Their Market or Another Attractive Market Segment . . . . . . . . 16

Impact of Auction on Acquisition Sale Price . . . . . . . . . . . . . . . . . . . . 17

Aspects of Auctions That Can Be Improved . . . . . . . . . . . . . . . . . . . . . 17

Obtainment of New Provider Number in Acute Care Hospital Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Financing Approaches as a Means to Finance Acquisitions in the Next 12 Months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Terms and Structures in Commitment Letters for Prospective Financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19



Methodology

The Hospital Mergers & Acquisitions: Opportunities and Challenges Study was conducted by the HealthLeaders Media

Intelligence Unit. It is part of a series of monthly Thought Leadership Studies. In September 2010, an online survey was

sent to HealthLeaders Media Council members and select members of the HealthLeaders Media audience. For the purpos-

es of this study, respondents were screened to ensure that they work in a hospital or health system setting. A total of 208

completed surveys are included in the analysis. A margin of error for a sample size of 208 is +/- 6.8 percentage points

at the 95% confidence interval.

About The HealthLeaders Media Intelligence UnitThe HealthLeaders Media Intelligence Unit, a division of HealthLeaders Media, is the premier source for executive healthcare business research. It provides analysis and forecasts through digital platforms, printed publications, custom reports, white papers, conferences, roundtables, peer networking opportunities, and presentations for senior management.

Intelligence Report Editor KAREN [email protected]

PublisherMATTHEW [email protected]

Editorial DirectorRICK [email protected]

Managing EditorBOB [email protected]

Intelligence Unit Director ANN [email protected]

Senior Director of SalesNortheast/Western Regional Sales ManagerPAUL [email protected]

Media Sales Operations ManagerALEX [email protected]

Copyright ©2010 HealthLeaders Media, 5115 Maryland Way, Brentwood, TN 37027 • Opinions expressed are not necessarily those of HealthLeaders Media. Mention of products and services does not constitute endorsement. Advice given is general, and readers should consult professional counsel for specific legal, ethical, or clinical questions.

Upcoming Intelligence Report Topics

Reform Readiness

Electronic Health Systems

Planned Capital Expenses

HealthLeaders Media Industry Survey

ADvISORS fOR THIS INTEllIGENcE REpORTThe following healthcare leaders graciously provided guidance and insight in the creation of this report.

Evan Ray, FACHEChief operating officerEast Cooper Medical CenterMount Pleasant, SC

Paul M. Doelling, MHA, CMPEDirector of specialty clinicsGateway Regional Medical CenterGranite City, IL

Dennis DahlenSenior vice president of finance and CFOBanner HealthPhoenix



Respondent profile

Respondents represent titles from across the various functional areas including senior leaders, clinical leaders, operations

leaders, financial leaders, marketing leaders, and information leaders. More than one-half of the respondents have senior leader

titles. They are from a mix of small, medium, and large hospital (58%) and health system (42%) settings. More than three-fourths

of the organizations are nonprofit. Approximately 60% of the respondents have personally been part of a team to assess an

M&A opportunity.

| Title

0

10

20

30

40

50

60

1% Information

Leaders

5%Marketing

Leaders

4% Financial Leaders

16% Operations

Leaders

17% Clinical Leaders

55%Senior Leaders

Senior Leaders | Administrator, Chief Compliance Officer, Chief Executive Officer, Chief Financial Officer, Chief Information Officer, Chief Medical Officer, Chief Operations Officer, Executive Dir., Partner, Board Member, President, Other VP

Clinical Leaders | Chief of Oncology, Chief of Orthopedics, Chief of Radiology, Chief Nursing Officer, Dir. Of Clinical Services, Dir. of Emergency Services, Dir. of Inpatient Services, Dir. Of Intensive Care Services, Dir. of Nursing, Dir. of Rehabilitation Services, Service Line Director, Dir. of Surgical/Perioperative Services, VP Clinical Quality, VP Medical Affairs (Physician Mgmt/MD), VP Nursing

Operations Leaders | Asst. Administrator, Dir. of Purchasing, Dir. of Quality, VP/Dir. Compliance, VP/Dir. Human Resources, VP/Dir. Operations/Administration

Marketing Leaders | VP/Dir. Marketing/Sales, VP/Dir. Media Relations

Financial Leaders | VP/Dir. Finance, Dir. of Revenue Cycle

Information Leaders | VP/Dir. Technology/MIS/IT

Base = 208

Base = 120 (Hospitals)

| Number of Beds

1–50 15%

51–199 41%

200–499 27%

500–999 13%

1,000+ 4%

| Place of Employment

Hospital 58%

Health system (IDN/IDS) 42%

Base = 208

| Number of Sites

1–5 23%

6–20 42%

21–49 14%

50+ 22%

Base = 88 (Health systems)

| Part of M&A Assessment Team

39% No

61% Yes

Base = 208

| Type of Organization

22% For

profit

78% Nonprofit

Base = 208



Many healthcare finance leaders acknowledge that while the worst of the recession is over,

fallout from it will continue for several more years, sparking the likelihood for greater mergers

and acquisition activity in 2011. The 2010 Hospital Mergers & Acquisitions Survey shows that 86%

of healthcare leaders expect that 2011 will hold more mergers and acquisitions in the acute care

hospital sector with only 1% of respondents expecting an M&A slowdown.

While M&A activity may be expected, the number of facilities interested in distressed facilities

is something new. In better economic times, distressed acquisitions are viewed as a no-no in

most financial circles, especially as a mechanism for growth. However, the economic dip put a

lot of previously stable organizations onto shaky ground, opening up the market for stronger

organizations to swoop in and grab

a great bargain.

Survey respondents felt that more

than half (56%) of acquisitions will

involve distressed acute care hospi-

tals and 54% believe distressed ac-

quisitions will take place with other

providers of services (e.g., ambula-

tory surgery centers). Interestingly,

non-distressed acquisitions scenarios

stacked up nearly equally; 60% of re-

spondents expect acquisitions involv-

ing healthy hospitals or other provid-

ers of services to occur.

“I think there will be a lot of dis-

tressed organizations looking for

homes,” says Dennis Dahlen, senior

vice president of finance and CFO for

Hospital Mergers & Acquisitions: Opportunities and Challenges

What Healthcare Leaders Are Saying“ There just isn’t the money available for capital for infrastructure, let alone the capital for acquisitions. So those that have it will continue to acquire what they need to be an accountable care organization.” —Vice president, large nonprofit health system

“ There will be incentives to merge because small hospitals cannot financially keep up with new technology requirements and thus their aging infrastructure will drag down their competitive capabilities. There will be tax incentives, opportunities to spread.”

—CIO, large nonprofit health system

“ The financial performance of healthcare as a whole is going in the toilet and it will get worse as the reform legislation is implemented. The cost to implement will be three times what has been projected.” —CEO, small nonprofit hospital

“ Although reimbursement, uncompensated care, and an aging popu-lation will all adversely affect margins, ACOs and the possibility of bundled payments related to value-based purchasing will place demands to expand integration strategies to survive.”

—Chief medical officer, large nonprofit health system

“ Hospitals with good ratings will be able to borrow money as it provides a relatively safe haven for investors in these turbulent times in the market.”

—CFO, midsize nonprofit hospital

AnAlySiS



AnAlySiS (continued)

the 23-hospital, Arizona-based Banner Health. “In many cases you find a distressed organization

and there’s somebody who can make something out of it. In a general sense, no one wants to

take on a distressed problem...but you can use it to build market coverage and strengthen

your network.”

Paul M. Doelling, MHA, CMPE, is director of specialty clinics for the 382-bed Gateway Regional

Medical Center in Granite City, IL. He also believes that distressed acquisitions make sense for

larger health systems that are already

financially stable and looking to grow

their market share. “They can get a

good hospital for pennies on the dol-

lar and possibly turn it around quick-

ly,” he says. “And the result is better

for the distressed hospital and the

community [if it prevents a closure].”

Evan Ray, FACHE, chief operating

officer at East Cooper Medical Center,

a 140-bed Tenet Healthcare facility

in Mount Pleasant, SC, agrees. “As

we try to deal with changes from healthcare reform, hospitals will look to create synergies that

strengthen both operations. I think you’ll see historical competitors come together in joint

ventures and the stronger [hospital or health system] will take advantage [of distressed facilities]

regardless of their tax status.”

The survey also indicates that 92% of healthcare leaders expect physician practices to make up

the lion’s share of mergers and acquisitions over the next 12 months, while 64% of respondents

expect to see both diagnostic imaging centers and ambulatory surgery centers changing hands

in 2011.

Which of the following issues in the M&A process has resulted in termination of a proposed transaction at your organization in the past 12 months?

Agreement on valuation 50%

Access to capital 48%

Political considerations 44%

Community consideration 36%

Medical staff issues 31%

Resolution of regulatory compliance issues 19%

Integration 17%

Identifying the target 5%



The reasons behind a hospi-

tal system’s desire to grow is

generally the need to spread

fixed costs for technology

and administration over a

large revenue base while for-

tifying its market penetra-

tion, and adding key service

lines and physicians. There

is an emerging secondary objective, however; as the payment system shifts to bundled payments

and accountable care organizations, healthcare leaders will need to gather the right pieces (be it

a hospital or a physician practice) to help them build on value, not volume.

Physicians who once were keen

on blazing their own trail are now

more interested in joining with

larger or more financially stable

hospitals or practices to help re-

duce costs. The hospital-physician

practice merger scenario is already

taking shape in 2010 and will likely

continue next year.

“What we see happening is hospi-

tals are preparing for new payment

models, like ACO and bundled payments, so they want to align themselves with physicians …

plus the emphasis on quality and efficiency and the EMR will drive physician practices to be

more open to employment arrangements and acquisitions,” says Reggie Hill, partner at Nash-

ville-based Waller Lansden Dortch & Davis LLP, the largest national healthcare law firm that

provided support for this independent HealthLeaders Media survey.


Has your organization engaged in or considered the acquisition of distressed assets in your market or in another attractive market segment (geographic or operational)?

50%Yes

50% No

How likely do you expect each of the following transaction types between acute care hospitals and other providers of services, such as ambulatory surgery centers, diagnostic imaging, home health and hospice, will be over the next 12 months?

Top 2

Extremely likely, Likely

Extremely likely

Likely

NeutralNot very

likelyNot at all

likely

Acquisitions 59% 24% 35% 26% 13% 1%

Distressed acquisition 54% 18% 36% 31% 13% 3%

Mergers of equals 26% 7% 19% 31% 37% 6%



With practices topping the “most likely to merge” list, nearly

three-quarters of the respondents see hospitalists (70%), primary

care (69%), and cardiology group practices (66%) as the most likely

candidates to couple with acute care hospitals. Interestingly, just

33% expect to see imaging or radiology mergers.

“The non-hospital imaging centers are seeing a steady decrease in

reimbursements, whereas the hospitals are not; so this becomes a

growth opportunity for hospitals because our reimbursements are

maintaining themselves,” says Ray. This is a scenario that he and

his South Carolina hospital know well; in September they acquired

the nonprofit Charleston Breast Center an outpatient, breast

imaging center.

“There was some distress there, which created a good value for

us,” he says. “And it was a new market for us so market share and

growth played into this as well.”

Hospitals and group practices will be keeping a watchful eye on their competitors not only for

the opportunity to buy, but also the opportunity to sell. Interestingly, the need to merge may be

in sharp contrast to the ability for many to financially do it. The survey results showed that 65%

of respondents believe access to

capital to be the most challeng-

ing aspect of an M&A process,

perhaps because 76% of survey

takers believe the ability to access

capital will remain the same or

decline in 2011.

Despite the financial woes

brought on by the drop in the


Do you anticipate access to capital for acquisitions will improve, decline, or stay the same over the next 12 months?

25% Improve

38% Decline

38% Remain

the same

In which of the following physician specialties do you expect acute care hospitals’ M&A activity to increase in the next 12 months?

0 10 20 30 40 50 60 70 80

Hospitalists 70%

Primary care 69%

Cardiology 66%

Orthopedics 57%

Cardiovascular 54%



bond market during the recession, 63% of healthcare leaders would still look to tax-exempt

bonds or debenture to finance an acquisition, and 27% would look to taxable bonds. Traditional

bank financing came in a distant second choice as a funding source at 50%.

Moreover, if finding the money to make the purchase isn’t challenging enough, once the merger

or acquisition process had begun, as many as 50% of respondents had problems reaching an

agreement on valuation and a number of healthcare leaders felt that medical staff issues (31%)

and integration (17%) posed a challenge.

“Everyone always thinks their business has a higher value than it really does,” says Doelling.

“You really have to take a hard, objective look … get a third party to evaluate the operation and

finances, so you can know the cold, hard truth.”

Karen Minich-Pourshadi is senior finance editor for HealthLeaders Media.




Survey Results

FiGURE1 | Expectation of M&A Activity Over the Next 12 Months

Q | In the acute care hospital sector, do you expect M&A activity to increase, decrease, or remain the same over the next 12 months?

Base = 208

0

20

40

60

80

100

13%

Increase Decrease Stay the same

86%

1%

FiGURE2 | Acute Care Hospitals’ M&A Activity by Sector Over the Next 12 Months

Q | Do you expect acute care hospitals’ M&A activity in the following sectors to increase, decrease, or remain the same over the next 12 months?

Base = 208

Increase Decrease Stay the same

Physician Practice Acquisition and Employment 92% 2% 6%

Diagnostic Imaging 64% 8% 28%

Ambulatory Surgery Center 64% 7% 29%

Insurance/Payer Plans 49% 16% 35%

Home Health 46% 14% 40%

Long-Term Acute Care Hospital 40% 9% 51%

Rehabilitation 38% 11% 51%

Hospice 33% 12% 55%

Nursing Home 32% 17% 51%

Dialysis 27% 17% 56%

Psychiatric Hospital 14% 24% 62%



Survey Results (continued)

FiGURE3 | Increase in M&A Activity by Physician Specialty

Q | In which of the following physician specialties do you expect acute care hospitals’ M&A activity to increase in the next 12 months?

0 10 20 30 40 50 60 70 80

Hospitalists 70%

Primary care 69%

Cardiology 66%

Orthopedics 57%

Cardiovascular 54%

Oncology 45%

General surgery 43%

Women’s health 38%

Imaging/radiology 33%

Emergency medicine 29%

Anesthesia 28%

Neurosurgery 28%

Neuroscience 27%

Pediatrics 27%

Geriatrics 25%

Neonatology 14%

Base = 208 Multi Response

FiGURE5 | Access to Capital Over the Next 12 Months

Q | Do you anticipate access to capital for acquisitions will improve, decline, or stay the same over the next 12 months?

25% Improve

38% Decline

38% Remain

the same

Base = 208

Q | Do you expect that enactment of the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 and the emphasis on Accountable Care organizations will result in an increase in the number of M&A transactions?

13% No

87% YesBase = 208

FiGURE4 | Impact of Patient Protection and Affordable Care Act




Base = 208

FiGURE6 | Likelihood of Transaction Type Impacting Acute Care Hospitals over the Next 12 Months

Q | How likely do you expect each of the following transaction types between or impacting acute care hospitals will be over the next 12 months?

Top 2


Extremely likely

Likely

NeutralNot very

likelyNot at

all likely

Acquisitions 60% 26% 34% 32% 6% 1%


Joint venture with another acute care hospital 43% 14% 29% 37% 18% 2%


Private equity purchase 23% 7% 16% 34% 34% 9%

FiGURE7 | Likelihood of Transaction Type Between Acute Care Hospitals and Other Providers of Service over the Next 12 Months

Q | How likely do you expect each of the following transaction types between acute care hospitals and other providers of services, such as ambulatory surgery centers, diagnostic imaging, home health and hospice, will be over the next 12 months?

Base = 208

Top 2


Extremely likely

Likely

NeutralNot very

likelyNot at all

likely

Acquisitions 59% 24% 35% 26% 13% 1%






FiGURE9 | Challenge of M&A Issues Over the Next 12 Months

Q | How challenging do you anticipate each of the following issues in the M&A process will be over the next 12 months?

Base = 208

FiGURE8 | Issues Resulting in M&A Termination of Proposed Transaction in the Last 12 Months

Q | Which of the following issues in the M&A process has resulted in termination of a proposed transaction at your organization in the last 12 months?

43%Not applicable

57% Applicable

Base = 208 Base = 118 (Among applicable)Multi response

Percent

Agreement on valuation 50%

Access to capital 48%

Political considerations 44%

Community consideration 36%

Medical staff issues 31%

Resolution of regulatory compliance issues 19%

Integration 17%

Identifying the target 5%

Top 2

Extremely challenging,

Very challenging

Extremely challenging

Very challenging

Challenging

Not very challenging

Not at all challenging

Access to capital 65% 28% 37% 31% 3% 0%

Agreement on valuation 54% 16% 38% 38% 8% 0%

Medical staff issues 54% 18% 36% 32% 13% 1%

Integration 54% 17% 37% 36% 10% 0%

Political considerations 48% 18% 30% 37% 14% 1%

Competition for targets 46% 10% 36% 40% 13% 1%

Community considerations 41% 9% 32% 37% 22% 0%

Resolution of regulatory compliance issues 38% 13% 25% 46% 16% 0%

Identifying the target 22% 3% 19% 39% 36% 2%




FiGURE10| Rely on Outside Advisors for M&A

Q | Does your organization rely on outside advisors for M&A? If yes, in what areas?

26% No

74% Yes

Base = 208

FiGURE11 | Employ Dedicated Team to Manage M&A Function

Q | Does your organization employ a dedicated development team to manage the M&A function?

28%Yes

72% No

Base = 208

FiGURE12 | Engaged In/Considered the Acquisition of Distressed Assets in Their Market or Another Attractive Market Segment

Q | Has your organization engaged in or considered the acquisition of distressed assets in your market or in another attractive market segment (geographic or operational)?

50%Yes

50% No

Base = 208

0 10 20 30 40 50 60 70 80

Legal 80%

Financial advisory 65%

Investment banking 39%




FiGURE14 | Aspects of Auctions That Can Be Improved

Q | What aspects of auctions or other structured processes can be improved?

0 10 20 30 40 50

Access to due diligence 48%

Transparent bid process 42%

Adherence to timeline 27%

Electronic data room management 21%

Base = 208 Multi response

FiGURE13 | Impact of Auction on Acquisition Sale Price

Q | If you have participated in an auction process for an acquisition, do you think the auction resulted in a better price for the seller or about the same price as would have been obtained without an auction?

Base = 208

90%

Better price for the seller

About the same price as what would have

been obtained without an auction

Not applicable

3% 7%




FiGURE15 | Obtainment of New Provider Number in Acute Care Hospital Acquisitions

Q | Have you elected to obtain a new provider number in an acute care hospital acquisition because of regulatory compliance issues discovered in due diligence?

88%No

12% Yes

Base = 208

FiGURE16 | Financing Approaches as a Means to Finance Acquisitions in the Next 12 Months

Q | Which of the following financing approaches would your senior management team seriously consider as a means to finance acquisitions in the next 12 months?

69%Applicable

31% Not

applicable

Base = 208

Percent

Tax-exempt bond or debenture financing 63%

Traditional bank financing (senior secured) 50%

Healthcare specialty lending (senior secured) 45%

Intercompany financing (through parent or system) 31%

Taxable bond financing (convertible or high yield) 27%

Private equity investment 20%

Divestiture of other assets 17%

HUD 242 loan financing 9%

REIT mortgage financing 8%

Seller financing 6%

Mezzanine financing or subordinated debt 6%

Public sale of equity securities 4%

Second lien financing 2%

Base = 143 (Among applicable)Multi response




FiGURE17 | Terms and Structures in Commitment Letters for Prospective Financings

Q | In the last six months, which of the following terms and structures have you seen in commitment letters for prospective financings?

Base = 56 Multi response

27%Applicable

73% Not

applicable

Base = 208

Percent

Interest rate floors greater than 1.5% 39%

Collateral securing all obligations of borrower, including bank products (such as cash management services, interest rate swaps, etc.)

38%

Performance-based pricing (grid pricing) 30%

Equity cures for covenant defaults 23%

Fully underwritten credit facilities 18%

Defaulting lender language, including ability to replace 13%

Senior leverage ratios in excess of 4.0:1.0 11%

Fixed charge coverage ratios less than 1.25:1.0 11%

Excess cash flow sweeps greater than 50% 9%

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