Value: An Introduction to Alternative Structures and Transactions Involving MHS

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Value An Introduction to Alternative Structures
and Transactions Involving MHS

• Presentation to the City Assets Enterprises
  Sub-Committee of the Committee on Sustainable
  Funding

October 9, 2008 Presenter Larry McEvoy, M.D., CEO
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Deconstructing Value

• Financial
• Face-value of asset
• Economic engine of impact (5,000 jobs)
• Access to health care
• Long term benefit of mission-driven access vs.
  profit-driven access
• Community health status
• Economic
• Cultural
• Population
• Interests
• Local vs. Corporate
• Mission vs. Margin
• Safety net vs. highest quality
• Control
• Local? Franchised non-local?
• One-time Windfall vs. Sustainable Value
• Distribution Requirements

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Options Attributes
To be filled in
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The Question Were All Asking.

• How do we create the highest community value with
  regard to healthcare and its impact in Colorado
  Springs?

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The Answer

• Minimize risk
• Optimize value community impact
• Increase flexibility and competitive strength

Ensure care Protect the public Drive community
value
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Key Questions and Resources

• How have other communities explored and answered
  this question? For example,
• Hennepin County, Minnesota
• Carson City, Nevada
• Tampa, Florida
• What are the legal possibilities and implications
  regarding privatization, sale or other ownership
  options?
• What is the value of this asset?
• This is a very complex calculation. Please see
  appendix for more information on approach and
  methodology.

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Appendix- Valuation Analysis of a Health Care
Organization-Approach and Methodology- Assets
Cash Flow as of August 2008
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Valuation Approach

• A valuation analysis provides an indication of
  the fair market value, which is equivalent to the
  Business Enterprise Value ("BEV"), of a
  healthcare organization.
• BEV is defined as the most probable price that
  the net tangible and intangible operating assets
  (or business enterprise) of a business may bring,
  in a competitive and open market under all
  conditions requisite to a fair sale, with buyer
  and seller each acting prudently, knowledgeably
  and assuming the price is not affected by undue
  stimuli. Implicit in this definition is the
  consummation of a sale as of a specified date and
  the passing of title from seller to buyer under
  conditions whereby
• The buyer and seller are typically motivated
• Both parties are well-informed or well-advised,
  and each is acting in its own best interest
• A reasonable time is allowed for exposure in the
  open market
• Payment is made in terms of cash or in terms of
  financial arrangements comparable thereto and
• The price represents the normal condition for the
  enterprise sold unaffected by special or creative
  financing or sales concessions granted in
  connection with the sale or if so granted, the
  value of which is included.
• BEV generally includes a level of working capital
  sufficient to operate the business. However, it
  is not influenced by the capital structure or
  method of acquisition financing, although each
  will affect the net proceeds available to the
  seller.
• Equity Value is calculated by subtracting from
  BEV all long-term liabilities and adding /
  subtracting excess or deficient working capital
  amounts. (Equity Value represents the proceeds
  the sellers would expect to receive from a sale
  if the seller retained none of the liabilities
  associated with the enterprise, or the net
  proceeds to the seller after the repayment of
  liabilities.)

Source Kaufman Hall
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Valuation Methodology

• There are three generally accepted methodologies
  used to estimate the value of healthcare
  organizations. Specifically, these methodologies
  include
• Market approach
• Public market valuation of hospital management
  companies
• Comparison of acquisitions of comparable
  hospitals and health systems
• Income approach
• Discounted cash flow analysis
• No single valuation approach can fully express
  the value of the healthcare organization. In
  addition, adjustments must be made to each
  approach in order to reflect the valuation
  considerations that are specific to your
  healthcare organization. A combination of
  results will provide the most reliable estimate
  of fair market value of the enterprise.
• While our valuation analysis relies upon the
  valuation methodologies outlined above, we also
  consider the marketing process of your
  organization conducted in selecting a buyer and
  the final offers that may be received.
• Finally, the analysis assumes that the businesses
  and operations of the MHS organization shall be
  ongoing. Therefore, it does not evaluate or
  appraise the current physical assets used in
  these operations. This type of cost approach
  to valuation is of limited use when valuing
  healthcare operations, since these entities
  acquire value not from assets, but only when
  operated as businesses.

Source Kaufman Hall
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Assets
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Cash Flow