Hospital Feasibility AnalysisOrange County, TexasOCTOBER, 2015

1

2

Table of Contents

➢Opening Comments – Healthcare Financial Trends

➢Demographics

➢Baptist Orange Hospital – Closure Announcement

➢Project cost

➢Financial Projections – New Acute Care Hospital

➢Physician Investment Opportunities

➢Conclusion

Demographics

Source: GEOMarket Solutions 2014

3

4

5

6

7

8

9

10

11

12

Baptist Orange Hospital – Closure Announcement

13

Baptist Orange Hospital - discontinues inpatient services –

Why?

1. Continued decline in patient demand over the past decade.

.

2. Continued reductions in Medicare and Medicaid reimbursements. .

3. The loss of Orange Disproportionate Share funding (DSH)

4. Lack of medical specialists

5. Unable to qualify as a Rural Health Hospital or a Critical Access

Hospital

14

Financial Projections – New Acute Care Hospital

15

Project Cost

16

New Hospital AssumptionsTotal Work Site- 20 acres

Hospital Facility: 62,500 SF

Services: 25 beds, 2 OR's, 1 Radiology Rm, 1 CT, 1 Fluoro, 1 Mobile MRI, ER, Ancillaries

Integrated Clinic Facility - 5-6 Physicians, 8500 SF

Location: Recommend consideration for the facility to be in a more centralized location such as 1442 and I10 or Highway 62 and I10 due to the necessity of building referral synergies for a new hospital provider. A more comprehensive study for the project location could be done at a later date, however, a healthcare provider prospers through quality, location and convenience.

17

New Hospital Project CostConstruction $25,000,000

◦ Bed size – 25

◦ OR - 2

Furniture, Fixtures and Equipment 3,500,000

Technology 500,000

Professional Fees 2,000,000

Administration 500,000

Land 5,000,000

Working capital

◦ Start-up $10,000,000

◦ Fund Losses $5,000,000 15,000,000

Medical Staff Development 5,000,000

◦ Two General Surgeons

◦ Four Internists

◦ Two Pulmonologists

◦ Two Ortho pods

Contingency $2,500,000

Total Project Cost $59,000,000

18

Financial Projections - Summary

New Hospital Orange Texas

Projected Income Statement -

2017

Total Net Revenue $ 20,380,232

Operating Expenses

Patient Clinical Services $ 10,529,683

Administrative & Other Costs 7,880,572

Capital related Costs 1,833,333

Total $ 20,243,588

Net Income $ 136,644

19

Financial Projections A S S UMP T I ONS :

1. Revenues

A. Rates are per discharge based on M/Care expected rates for 2017

B. Other rates and volumes are estimated at % of Medicare

C. Rates for OP ae per procedures at Medicare rates appropriately adjusted.

2. Expenses

A. Departmental expenses are estimated to be generally the same

as 2014 Orange Hosp. Income statement with the following adjustments

B. Admin and General costs reduced $1M for estimated Home Office costs

C. Employee Benefits costs educed 10% for start up hospital.

C. Capital based on new $25M Building depreciated at 30 years

and $7M for MME depreciated at 7 years

3. Volumes

A. IP volume estimated to be ADC of 18.7

B. OP Volume estimated to be 2000 procedures per year or 5.5 per day

4. Ratio's

A. Payer Mix estimated on general averages as follows:

Payer percentages %

Medicare 40%

Medicaid 25%

Managed Care 20%

Self Pay 10%

other 5%

Total 100%

B. Rates based on % of Medicare reimbursements as follows:

Revenues per admit--2017 est

Medicare $ 8,922.25 100%

Medicaid $ 8,386.91 94%

Managed Care $ 10,706.70 120%

Self Pay $ 892.22 10%

other $ 9,456.69 106%

Total $ 7,672.95

Notes ;

1. Average Daily Census same as 2013 Actual. this is thought to be before business was shifted to Beaumont

2. IP vs. OP Revenue percentage slightly low, but for start up hospital details for diagnostic usage is thought to be conservative.

3. Other cost savings may be possible in a new facility with modern design applications.

4. All items are for full year of normal operations. Ramp up for new facility will need to be presented separately, with additional details, when available

20

Financial Projections – Prior Years IP Volume History

BAPTIST ORANGE HOSPITAL

Departmental Costs

Provider Number 450005 450005

8/31/2014 8/31/2013 8/31/2012

Total Days 4,143 6,838 7,755

ADC 11.4 18.7 21.2

21

Market Share Projection – 3rd Year3rd Year

Expected Need by Specialty

Expected Market Share Salary each' Quantity

Circulatory 945 378 40% Internal Med 300k 4

Respiratory 766 460 60% Pulmonology 350k 2

Labor and Delivery 635 - 0%

NICU 630 - 0%

GI 583 292 50% GI 350k 2

Ortho 530 212 40% Ortho 450k 2

Nuro 390 78 20% Nuro Contract - Telemedicine

Uro 322 129 40% Uro 300k 2

Nutritional 290 145 50% IM 300k 4

All Other 1314 329 25% Surgical 450k 2

6405 2,021 32%

Days 9,905 OB 450k 2

ADC 27.14

50 Percent Market Share

318 Annual Births

0.87 Average births per day

$ 1,111,250 Payments at Mcaid Rate (including anesthesia)

$ (742,520) 3 staff members 24/7 plus manager

$ (900,000) CRNA - 1 24/7

$ (531,270) Annual Subsidy Needed

22

Physician Investment Opportunities

23

Physician Investment Opportunities

( I) REAL ESTATE – TBD

( I I) DIAGNOSTIC EQUIPMENT - CT SCAN(1) Investment – Five physicians invest $5K apiece and finance cost of CT Scan ($250K) over 4 years

(2) Structure – physician group forms a LLC (NewCo) for the purpose of leasing medical equipment

(3) Hospital – executes lease agreement with NewCo to lease CT Scanner for 4 years. Hospital agrees to pay Newco $150 per Outpatient CT scan.

(4) NewCo break even – to cover the $4K per month note – approximately 27 scans per month

(5) Monthly distributions per investor27 scans – none – break even

50 scans - $3,500 or $700 per physician

100 scans - $15,000 or $3,000 per physician

150 scans - $22,500 or $4,500 per physician

24

Conclusion

➢ Market Demographics - indicate that the previous Orange County inpatient facility captured only a 28% market share and an ADC of 11. There is significant patient outmigration that could be served by a new local quality provider. The financial projections indicate a breakeven ADC of 18. By year 3, the market share capture is projected to be 35% and an ADC of 27.

➢ Medical Staff Development – new hospital management would emphasize medical staff recruitment for specialties such as General Surgery, Internal Medicine, Pulmonology, Orthopedics and GI.

➢ Local management commitment and philosophy - the distinction between the previous provider and a new provider would be substantially different. Rather than placing primary interest upon feeding a larger facility in the next county, the new hospital’s management would be focused on maximizing local services to local needs. However, the ultimate project’s success is significantly dependent on recruiting quality physician specialists that are supported by Orange County primary care physicians.

➢ Competition – strong - Baptist Beaumont historically receives 16 – 20% of Orange County’s market share and continues to operate an ER and outpatient facility , Christus and the draw to the Houston Medical Center

➢ Service mix - includes heavy emphasis on marketing outpatient services such as diagnostics and outpatient surgery.

➢ Community Benefits – a new hospital would add 100 – 115 jobs, serve as the economic cornerstone for ancillary services surrounding the campus and create a positive impact on local sales tax receipts .

Appendix

October, 2015

26

27

28

29

30

31

32

33

34

35

36

37

Orange Texas POPULATION (Census Bureau)

Orange County Population

Estimate 2014: 83,433

Estimate 2013: 82,980

Estimate 2012: 82,951

Estimate 2011: 82,328

Census 2010: 81,837

Census 2000: 84,966

Population of the County Seat (Orange)

Census 2010: 18,595

Census 2000: 18,643

38

39

40

41