PAYER-PROVIDER CONVERGENCENORTHEAST OHIO CHAPTER HFMA SUMMER PROGRAM

BIOGRAPHIES – LISA HAN

Lisa Han focuses her practice on transactional and regulatorymatters for the health insurance and health care industries. Sherepresents publicly traded and privately held health insurancecompanies, employers, PEOs, TPAs, PBMs, and other entitiesproviding insurance support services in the health insurance andemployee benefits area. Lisa's experience includes mergers,acquisitions, and restructurings of insurance companies andmanaged care plans; negotiation of TPA, PBM, and other vendoragreements; insurance holding company system transactions;formation of insurance companies; Medicare Advantage andMedicaid managed care plans; and employers' and health plans'compliance with the Health Reform Law.

Lisa is a member of numerous professional organizations includingthe American Health Lawyers Association and Society of OhioHealthcare Attorneys. She also is a member of the Health Law andInternational Law Sections of the American Bar Association and theHealth Care Law Committees of the Columbus Bar Association andthe Ohio State Bar Association.

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BIOGRAPHIES – AARON MURSKI

Aaron Murski is a Managing Director at VMG Health. He focuses onproviding valuation, transaction advisory and consulting services tohealthcare businesses and healthcare investors across the UnitedStates. He regular works with for-profit and not-for-profit organizationslarge and small, in support of the planning and execution of mergersand acquisitions, service line spin-offs, joint ventures, syndications, denovo projects, professional services arrangements, and otherbusiness transactions. His experience spans the healthcare servicescontinuum, including everything from primary and specialty careclinics, retail medicine, surgical and ancillary services, diagnosticservices, acute and post-acute care, independent physicianassociations, and health plans and other risk-bearing entities andnetworks associated with population health management.

Aaron is involved with several healthcare and valuation industryorganizations, including the Healthcare Financial ManagementAssociation (HFMA) Lone Star Chapter, the National Association ofCertified Valuators and Analysts (NACVA), and the American BarAssociation Health Law Section. He maintains the Certified ValuationAnalyst (CVA) credential issued by NACVA.

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PPACA – “AFFORDABLE CARE ACT”

Creation of Accountable

Care Organizations

Reductions in Medicare

Reimbursements

Creation of Independent

Payment Advisory Board

Value-based Payments for

Hospital Services

Elimination of physician

owned hospitals

Increased Medicaid

Payments for Primary Care

Coverage Mandates

Elimination of Medicare Part D

“donut-hole”

Flexible Spending Accounts

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NOTABLE PROVISIONS

Accountable Care Organizations – MSSP and commercial

Decreasing Reimbursement for Hospitals – shift inpatient reimbursement to “at risk” – VBP, Re-admissions, HAC (6% in 2016)

Decreasing Reimbursement for Physicians – PQRI, Meaningful Use, VB Payment Modifier (5%-7% penalty)

Health and Human Service’s goal to shift 30% of FFS Medicare payments to Value Based by 2016, 50% by 2018

Coverage Mandate – Individual and Employer

Impact of election?

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MEDICARE ENROLMENT

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HORIZONTAL CONSOLIDATION

2011 2012 2013 2014 2015 2016

Major Provider Consolidations

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HORIZONTAL CONSOLIDATION

2015-Q3 2015-Q4 2016-Q1 2016-Q2

2015 - 2016

Announced Q3 2015 - $37B

Announced Q3 2015 $54B

Finalized August 1, 2015

Closed Q1 2016

Major Payer Consolidations

DOJ to block:

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CONVERGENCE – WHAT IS IT?

“Adversity makes strange bedfellows” in the healthcare value

chain

Upstream Downstream

Health Systems

Physician Groups

Payers

Managing Risk &

Triple Aim

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TRENDS

Population health management (instead of utilization management)

Increase in provider-sponsored health plans

Joint ventures for provider networks, population health management and payor affiliations

Payment reforms, including shared savings, bundled payment & P4P

State Medicaid reform (e.g., Medicaid expansion and direct contract with State Medicaid Agency)

Private payor accountable care programs

Public and private exchanges

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REASONS

Offensive

• Steerage of patients to increase volume to

health system

• Gain market intelligence / better understand

populations in potential new markets

• Increase reimbursement through reduced

payor margins

Defensive

Strategic

Providers Interested in Payors Payors Interested in Providers

• Hospital / physician alignment strategy

• Off-set potential exclusions from narrow

networks

• Response to other health system / payor

combinations

• Strategy of “arbitrage” and to capture value

from efficiency in care delivery and

management

• Aligning investment with future payment

methodologies (i.e. ability to manage

financial risk of value-based contracts)

• While consolidated margins may be lower,

top-line revenue is more stable

• Additional ability to steer patients to lowest

cost setting; develop collaborating

relationships

• Capture enrollment through health system

regional presence and brand

• Diversify sources of profit

• Protect margins from provider negotiating

leverage

• Avoid disintermediation (direct contracting

between employers and provider ACOs)

• Response to other health system / payor

combinations

• Greater ability to design attractive

insurance products

• Aligning investment with future payment

methodologies (i.e. ACO base structures)

• Limit underwriting risk with ability to better

manage health service utilization

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EXAMPLES

Ascension Health (a system owning more than 110 hospitals) purchased U.S. Health and Life Insurance Company

(based in Sterling Heights, Michigan, licensed in 20 states) for $50 million

Catholic Health Initiative set up own health plan with license in 6 states

Renaissance Medical Management Company joint venture with independence Blue Cross (first physician payor JV)

Cigna launched with Weill Cornell Physician Organization (850 member multi-specialty group practice in NYC)-

“Collaborative Accountable Care Initiative” in January, 2012

Cigna was reported to have engaged in at least 17 similar initiatives in 15 states, encompassing more than 17,000

Cigna customers and more than 1,800 PCPs

Wellpoint’s acquisition of CareMore Health Group, a Medicare Advantage Plan and Special Needs Plan in select CA,

Nevada and Arizona markets, covering 54,000 Medicare members

Highmark’s affiliation of West Penn Allegheny Health System

United Healthcare’s acquisition of the management arm of Monarch Healthcare

Humana’s acquisition of Concentra, Inc. ($800 million in cash; 42 states) and SeniorBridge (several hundred home

health centers)

Vivity, Anthem’s joint venture with seven hospital systems (L.A. and Orange Counties, CA)

Recent Activity

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TRANSACTION STRUCTURES

Acquisition Build Partner Lease / Outsource

Acquire an existing

plan / shell license

transaction

Stock or asset

purchase

Utilize plan’s existing

capabilities

Assignment of provider

network

Health plan

operational

capabilities

Regulatory approvals

Insurance & other state regulatory agencies

CMS novation;

State Medicaid

Agency

Run-out claims & post-

closing liabilities

Contract with experts /

vendors on health plan

capabilities must be

developed (e.g.,

insurer, TPA, PBM, etc.,

may provide back-

office functions)

Board of Director and

key management

capabilities

Minimum capital and

surplus, risk based

capital and hazardous

financial condition

standards

Separation of provider

from health plan (e.g.,

who negotiation

managed care

contracts for hospital

Separateness of plan

data from hospital

data)

Two models: Equity JV

& Contractual JV

(intermediary or plan

controlled risk pool)

New products / market

/ population

Separate but inter-

dependent collab. on

plan / provider

functions

Allocation of power

based upon seats on

the Board and

reporting relationship

of key management

Payor responsible for

claim administration

and other back office

functions

Cost based

accounting for

administrative

services

Insurance

accounting may

exclude healthcare

services pricing

Provider “rents” or

“leases” payor’s

license to offer

products.

Payor bears the

ultimate risk and will

provide health plan

functions.

No capital contribution

by provider, but

provider may pay a

fronting fee and make

other financial

commitments.

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PROVIDER SPONSORED HEALTH PLAN

Network

Agreements

&

Delegation

Agreements for

Medical

Management

and Other

Population Health

Management

Services

Large Group

Contracts

Small Group

Contract

ASO and

other Vendor

Contracts

ASO* and

other Vendor

Contracts

* “Administrative Services Only” – an arrangement where an employer engages an insurance company to handle administrative tasks for their employees.

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PROVIDER SPONSORED HEALTH PLAN

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EQUITY JOINT VENTURE

Co-Insurance Agreement

By Captive and NewCo

“ASO” Profit Sharing

AgreementBy Health

System and NewCo

Participating Provider

AgreementsBy Health

System Providers and

NewCo

Contribution AgreementBy Insurer

and NewCo

Pro

spec

tive

Share of Profitsand Losses

Lower Than Market Provider Rates(Offset by Shared Profits)

Exis

tin

g

Low Provider Rates = Competitive Premiums

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EQUITY JOINT VENTURE

Commercial JV

Formed Innovation Health (VA LLC): 50-50 joint venture

Insurance holding company system includes HMO and insurer

Innovation Health offers plans in the individual, small group, and self-insured markets

Inova developed provider network that includes affiliated and independent providers

Medicare Advantage JV

Formed Veritage, LLC (AZ LLC): 50-50 ownership

BCBS contributed cash/Banner contributed cash and stock in Banner MediSun, Inc. (nka MediSun, Inc. dba Blue Cross Blue Shield of Arizona Advantage)

Limited to a Medicare Advantage plan only

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VALUATION

Standard of Value - FMV / IRS Revenue Ruling 59-60

IRS Revenue Ruling 59-60 is a landmark ruling by the IRS that provides generalguidelines for the valuation of closely held companies. We define FMV asestablished by IRS Revenue Ruling 59-60 as “the amount at which property wouldchange hands between a willing seller and a willing buyer when neither is actingunder compulsion and when both have reasonable knowledge of all relevantfacts and circumstances.”

IRS Revenue Ruling 59-60 calls for examination of the following elements inconnection with the subject enterprise:

The nature and history of the enterprise from inception;

The economic outlook in general and the outlook for the specific industry inparticular;

The financial condition of the enterprise;

The earning capacity of the enterprise;

The dividend paying capacity of the enterprise;

The goodwill or other intangible value of the enterprise;

Prior sales of the stock and the size of the block of stock to be valued; and,

The market prices of corporations in the same or similar specialty areas.

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VALUATION

Three Approaches to Value

Cost Approach: tangible and intangible assets

Income Approach: projected cash flow of the business

Market Approach: Either Guideline Public Companies or ComparableTransactions

Primary Value Drivers

Profitability and growth prospects

Product mix (commercial, Medicare Advantage, Managed Medicaid)

Geographical issues, local relationships, and competition

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VALUATION

Public Companies

Source: S&P Capital IQ

Commercial: Cigna, Anthem, Aetna, and UnitedHealth

Managed Medicare: Humana

Managed Medicaid: Molina and WellCare

Supreme Court Ruling

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100%

150%

200%

250%

300%

350%

400%

10/11/2010 10/11/2011 10/11/2012 10/11/2013 10/11/2014 10/11/2015

Price Performance

VALUATION

Public Companies

Source: S&P Capital IQ21

Commercial: Cigna, Anthem, Aetna, and UnitedHealth

Managed Medicare: Humana

Managed Medicaid: Molina and WellCare

0

0.2

0.4

0.6

0.8

1

1.2

1.4

TEV / Revenue

Commercial Managed Medicare Managed Medicaid

VALUATION

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Transaction Multiples

Revenue multiples have trended within the range of Public

Companies

Enterprise Value /

Revenue

Enterprise Value /

EBITDA

Median 0.42x 9.24x

Mean 0.52x 9.80x

25th Percentile 0.15x 6.38x

75th Percentile 0.70x 13.45x

VALUATION: LARGE TRANSACTIONS

Source: S&P Capital IQ

$ Multiple

Revenue 15,602 0.39x

EBITDA 380 16.01x

Margin 2.4%

# of Members 6.1 $999

• $150 million in identified synergies in common markets

Centene acquires Health Net

• Combination creates #1 operator in fast growting Managed

Medicaid market

0

1

2

3

4

5

6

7

Centene /

Health Net

Anthem UnitedHealth Aetna

Medicaid Membership (millions)

0

10

20

30

40

50

Total Membership (millions)

$ Multiple

Revenue 36,644 1.29x

EBITDA 3,930 12.01x

Margin 10.7%

# of Members 15 $3,146

• Together, insurers represent 17% of the US population

• Cigna complements Anthem's company-funded health plan

Anthem acquires Cigna

$ Multiple

Revenue 52,131 0.65x

EBITDA 2,596 13.13x

Margin 5.0%

# of Members 21.6 $1,578

• Combination creates 2nd largest health plan in US

Aetna Acquires Humana

• Opportunity to rebalance Aetna portfolio using Humana's

growing Managed Medicare / Medicaid businesses

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HAS IT WORKED?

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“If the Secretary’s goal of having 50

percent of regular Medicare’s

payments come through “Alternative

Payment Methodologies” by 2018 is

to be met, that growth is unlikely to

come from either the Pioneers or the

larger Medicare Shared Savings

Program (MSSP).” June 2015

2010 2011 2012 2013 2014 2015 2016

Acquired $790 MMSold $1.0 B +

Pioneer ACO’s

32 active 2011-

2012

Pioneer ACO’s

9 active 2016

Next Gen ACO’s

18 Active 2016

(after 3 exits)

Early Adopter / Imprecise Fit

Changing Models

& Adoption

CHI intends sell

Operations

$97 mm losses,

nine months

3/31/2016

“The biggest learning that

you're going to face

initially is just the fact that

(we need to) take it a little

slow” Kevin Lofton, CEO

QUESTIONS?

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