Financial valuation Applications and Models phần 8 ppt

Valuation Methodologies The discounted cash flow method of the income approach typically is used as it cap- tures estimates of future volume, reimbursement, revenue, expenses, and capital cost assumptions. The guideline transaction method of the market approach often is not reliable because the following information is usually not available: • Assets and liabilities purchased (excluded assets such as working capital not reported) • Consideration (cash versus stock in the buyers company) • Modality and volume mix of the imaging center (MRI, CT, ultrasound, fluo- roscopy, mammography, X-ray, bone density, nuclear, etc.) as some modalities are far more profitable than others • Volume growth • Competition in service area • Payer mix • Global fee revenue versus technical fee only • Radiology relationship and/or contract • Maintenance agreement • Equipment manufacturer, age, and condition • Available capacity in the center • Need for large capital reinvestment The asset approach can be applied if the valuation of the business on an income approach is similar to or less than the estimated net asset value. Engagement of spe- cialized equipment appraisers is probably necessary given the unique type and use of the assets. Specific Issues to Address Capital expenditures as a percent of operating earnings for diagnostic imaging cen- ters is higher than in other healthcare businesses. Equipment in a diagnostic imag- ing facility is very expensive: MRI machines can cost $1.6 to $2.0 million, and CT machines can cost as much as $1.2 million. In addition, the technological obsoles- cence in imaging technology is very rapid, resulting in more frequent equipment pur- chases. There has also been a continual downward pressure on reimbursement of diagnostic imaging procedures over the last 10 years, with that trend expecting to continue. These major economic influences result in valuation multiples that are often lower than those in other healthcare businesses. Dialysis Centers Background Patients who suffer from end-stage renal disease (ESRD) are required to have dial- ysis treatments approximately 12 to 13 times per month. Regardless of age, patient ESRD is the only program that is reimbursed by the Medicare program. Patients who are diagnosed with ESRD qualify for the Medicare program 24 months after Valuation Issues for Specific Healthcare Industry Niches 709 having been diagnosed. As a result, Medicare is always a very large payer for dial- ysis services. Medicare’s heavy participation in the dialysis business creates the risk that HCFA will change reimbursement levels for a significant percentage of the business. With the government as a major payer, the regulatory requirements in the business are significant. Purpose of the Valuation • Sales and buy-ins • Disputes • Regulatory issues • Antikickback statutes, Stark II, IRS private inurement Valuation Methodologies The DCF method of the income approach typically is used, as it captures estimates of future volume, reimbursement, revenue, expenses, and capital cost assumptions. The guideline transactions method of the market approach can be utilized in the valuation of dialysis facilities, unlike most other healthcare entities. The unifor- mity of utilization (volume by patient) and payer mix (Medicare) allows careful use of transaction data. Price per patient can be used very carefully as a check on the results established in the income approach. The quality and depth of information is also important. Availability of total purchase price, consideration paid, assets and liabilities included, number of patients, and payer mix are desirable to rely on this approach. In some cases that data can be found in the Irvin Levin Healthcare M&A database and public company SEC reports. Typically the asset approach to value is not relied on in the valuation of a dial- ysis facility unless the facility is financially underperforming. Each dialysis machine costs between $20,000 and $30,000, so for a 30-station facility, the machines could cost almost $1 million. In addition, special water purification systems used in the dialysis process must be installed in each facility. The underlying cost of the facility, including equipment, tenant improvements, working capital, and other intangible assets, should be considered during the valuation process. To the extent that the valuation under an income and market approach falls below that of the asset approach, the underlying net assets should be considered as an appropriate indication of value. Specific Issues to Address The volume of patient treatments is very predictable based on the number of patients treated at the dialysis center. However, the risk associated with competition from the patients’ primary physician (the nephrologist) is very high. Nephrologists who are responsible for the patients in a dialysis center can direct patients from cen- ter to center. As a result, nephrologists typically are subject to medical directorship agreements that include strong covenants not to compete. The lack of covenants not to compete with the nephrologists treating patients in a dialysis center would increase the risk of the cash flow stream dramatically. The medical directorship pay- ment should also be evaluated. 710 VALUATION OF HEALTHCARE SERVICE BUSINESSES PUBLICLY TRADED HEALTHCARE SERVICES COMPANIES BY NICHE The following healthcare entities are some of the best known within their niche. Public information about these companies and information disclosed in their public filings can assist the analyst in understanding the dynamics influencing the economic performance of the particular niche. Hospitals Clarent Health Corporation (formerly Paracelcus Healthcare Corporation) Community Health Systems, Inc. HCA The Healthcare Corporation Health Management Associates, Inc. Iasis Healthcare Corporation (public debt) Lifepoint Hospitals, Inc. Province Healthcare Select Medical Corporation Tenet Healthcare Corporation Triad Hospitals, Inc. Universal Health Services Corporation Surgery Center Companies Amsurg Corp HealthSouth Corporation SSI Surgical Services, Inc United Surgical Partners International, Inc. Dialysis Providers DaVita, Inc. Dialysis Corporation of America Fresenius Medical Care Gambro AB RenalCare Group, Inc. Physician Organizations Novamed Eye Care, Inc. Pediatrix Medical Group Phycor Publicly Traded Healthcare Services Companies by Niche 711 Understanding the dialysis center’s relationship with the nephrologist is critical in assessing risk. ValTip ProMedco (delisted) US Oncology Diagnostic Imaging Insight Health Services Corporation Medical Alliance Primedix Health Systems, Inc. Raytel Medical Corporation US Diagnostics, Inc. Pharmacy Benefit Management Caremark RX Postacute Care Advocat Alterra Healthcare Corporation ARV Assisted Living, Inc. Assisted Living Concepts Balanced Care Corporation Beverly Capital Senior Living Corp Diversified Senior Services, Inc. Emeritus Corporation Extendicare Inc Genesis Health Ventures Group Greenbriar Corporation Integrated Health Services, Inc Integrated Health Systems InterWest Medical Corporation Kindred Healthcare, Inc. Mariner Post Acute Care Network National Healthcare Corporation Regent Assisted Living Inc. Sunrise Assisted Living Facilities Behavioral Health Companies Integra, Inc. Horizon Health Corporation Magellan Health Services NextHealth, Inc. PMR Corporation Ramsay Youth Services, Inc. Res-Care, Inc. Dental Services Castle Dental Centers 712 VALUATION OF HEALTHCARE SERVICE BUSINESSES InterDent, Inc. National Dentex Corporation Orthodontic Centers of America Disease Management American Healthways, Inc. Specialty Hospital Companies American Kidney Stone Management Lithotripsy Providers MedCath Medstone Prime Medical Services, Inc. Home Health Care Almost Family Amedisys American Home Patient American Homepatient, Inc. Apria Healthcare Group Contincare Corporation Coram Healthcare Corporation Lincare Holdings, Inc National Home Health Corporation New York Health Care Option Care, Inc. Transworld Healthcare Inc. Lab Companies American Medical Laboratories Ameripath, Inc. Dianon Systems, Inc. IMPATH, Inc.LabOne, Inc. Laboratory Corporation of America Quest Specialty Laboratories, Inc, Urocor, Inc. Publicly Traded Healthcare Services Companies by Niche 713 ADDENDUM 1—TARA SURGERY CENTER, L.P. The Engagement Background It is early 2001. Tara Surgery Center (Tara or center), L.P., is a freestanding, multispe- cialty surgery center located in a metropolitan area in the southern part of the United States. The center has three operating rooms and two procedure rooms and accommo- dates the following specialties: ear, nose and throat; general surgery; gastrointestinal; gynecology; neurology; orthopedic; pain management; plastic; podiatry; urology; and vascular surgery. Over the past three years, Tara Surgery Center has increased its total volume from 2,038 cases in 1998 to 6,038 total cases in 2000. As a result, the part- nership has almost tripled its EBITDA from approximately $500,000 to $1.4 million. The center is not reliant on a hospital network or affiliation for its case vol- umes. It is heavily reliant on the individual surgeons currently performing the cases at the center. Hence external forces, such as the development of a new center, can cannibalize these cases when surgeons perform their cases elsewhere. A new competing surgery center Rhett Surgery Center (Rhett) is in the final phase of construction approximately two blocks away. Rhett will have four operat- ing rooms, two treatment rooms, and will immediately become a serious competi- tor. Some of the physicians currently utilizing Tara own an interest in Rhett. Rhett has attracted some of the Tara Surgery Center’s younger, nonshareholder surgeons to perform their cases at the new facility upon completion. In addition, two of the Tara’s surgeons have informed the center’s administrator, Joe Scarlett, of their inten- tions to retire next year. Scarlett has engaged Mission Critical Valuation (MCVal) to provide a fair market value opinion of a 1 percent limited partnership interest in the center so that the partnership can transact limited partnership interests in the sur- gery center for the purpose of purchasing the two retiring surgeon’s interests and offering units to other younger incoming surgeons. Note: Some of the numbers do not foot or tie due to rounding. Exhibit 19.4 Case Facts Name of Center: Tara Surgery Center, L.P. Purpose of Valuation: Tara is planning on a sale of 1 percent limited partnership units to young surgeon investors and buying out the interests of two retiring surgeons. Standard of Value: Fair market value Valuation Date: 12/31/2000 Information Request As with most valuation consulting engagements, time is of the essence. To expedite the information-gathering process, MCVal used a preliminary information request form that included the following: • Descriptions of all of the competing surgery centers, including exact location, number of operating rooms, estimated number of cases performed, reputation in the community, hospital affiliations, etc. 714 VALUATION OF HEALTHCARE SERVICE BUSINESSES • Annual financial statements (income statements and balance sheets) for the last three fiscal years, 1998 through 2000 • Interim financial statements, year-to-date 2001 and the same period 2000 • A summary of Tara’s history, including dates of formation, growth record, and addition of specialties • Operational reports, by specialty and physician, for the three years prior to the valuation date and the most recent year-to-date period, including: • Cases performed by specialty (and physician if available) • Charges and net revenues by specialty • Top 10 cases by specialty • Top 10 payers by charges • Copies of actual bills associated with the top 10 cases along with their respec- tive explanation of benefits (EOBs) for each of the last four months and a sampling of five bills per month over the last 12 months • Information regarding the current and projected status of physician-surgeons using the facility • Managed care contracts and an overall discussion of payer mix by volume (Medicare, Medicaid, private insurance and managed care) • Information regarding the average insurance reimbursement as a percentage of Medicare • A list and description of the outstanding accounts receivable as of the valuation date, including an aged accounts receivable report • A list and description of prior stock transactions and details of any offers to buy assets or interests in the center • A list of employees: • Name • Compensation • Average hours worked per week • Benefits • Responsibility/position description • Tenure • Detailed information concerning facility leases including: • Square footage • Rental rates • Terms of lease • A detailed list of fixed assets including: • Original acquisition cost • Date of acquisition • Depreciation (if available) • A summary of any outstanding contingencies or liabilities not described in the financial statements • A copy of the partnership agreement and/or operating agreement • List of the current shareholders and number of shares owned • A copy of the center’s relevant accreditation and licensing information (or sum- mary) • A copy of any market research or demographic data for the center’s service area • A copy of documents related to any future expansion plans, expected capital expenditures, anticipated staffing changes, or other significant change in the operations of the center Addendum 1 715 Information Receipt Upon receipt of the requested information, often it is found that information is miss- ing or incomplete. Consider this example of incomplete or unusable data. (Note: It is only one of many possible examples). The gross charges, adjustments, and net charges for Tara Surgery Center (see Exhibit 19.5) are not broken out by specialty but are grouped together for the center. Exhibit 19.5 Tara Surgery Center Net Charges 1998 1999 2000 _________ _________ _________ Gross Charges $5,461,021 $6,714,955 $7,031,506 Adjustments ($3,429,500) ($2,788,081) ($2,895,326) _________ _________ _________ Net Charges $2,031,521 $3,926,874 $4,136,180 Since the information is needed by specialty to accurately project the net rev- enues per case for each respective specialty, MCVal contacted Joe Scarlett and requested the additional breakdown of data, as shown in Exhibit 19.6. Exhibit 19.6 Tara Surgery Center: FYE 2000 Gross Net Specialty Charges Adjustments Receipt _______ _________ ___________ ________ GI 2,059,354 864,227 1,195,127 ENT 1,669,127 714,745 954,382 Genera 481,836 195,463 286,373 GY 2,330 966 1,364 Neurology 135,977 62,348 73,629 Orthopedic 299,047 118,282 180,765 Pain Management 864,540 337,539 527,001 PIastic 244,342 115,820 128,522 Podiatry 175,427 84,631 90,796 Urology 960,976 340,599 620,377 Vascular 138,550 60,706 77,844 ________ ________ ________ Total 7,031,506 2,895,326 4,136,180 All of the other articles of information were received as requested. MCVal reviewed the partnership agreement (Exhibit 19.7) next to get a more complete understanding of Tara’s operations. Choice of Valuation Approach On first glance at the center’s profit and loss statement, it appears that the income approach was the preferred valuation method. However, MCVal considered the benefits and determinants of each of the three approaches to value before making a final selection. 716 VALUATION OF HEALTHCARE SERVICE BUSINESSES Reminder The asset approach considers the cost of replicating a comparable asset, secu- rity, or service with the same level of utility. In a general sense, the asset approach is considered when the value derived exceeds the value generated from the income or market approach. To the extent that the asset approach value does not exceed either of the other two approaches, it is not heavily relied upon. The market approach estimates value by comparing the value of similar assets, securities, or services (hereinafter collectively referred to as the guide- lines) traded or transacted in a free and open market. The value of the subject can be estimated by adjusting the market value of the guidelines for qualita- tive and quantitative differences. The income approach estimates value by analyzing the historical financial information and estimating the future level of cash flows to be generated by the subject company. Once an appropriate rate of return is estimated for the subject company, its benefit stream is discounted or capitalized back to pres- ent value, which represents value to an investor in the subject. Addendum 1 717 Exhibit 19.7 Tara Surgery Center Partnership Agreement Clauses Term: The term of the partnership agreement is effective from September 24, 19XX, to September 24, 20XX, unless extended or sooner liquidated in accordance with the Agreement. Name of Partnership: Tara Surgery Center, L.P., a limited partnership. Status of General Partner: The General Partner, a Hospital Corporation, has the exclusive authority to manage the operations of the business of the Partnership under state law. The Partnership has entered into a Management Agreement with Joe Scarlett in which Joe manages the day-to-day operations of the Center for 5.0% of gross operating revenues less allowances. Status of Limited Partners: No limited partner is granted the right to participate in the management or control of the Partnership’s business. These powers and/or rights are reserved for the General Partner. Consequently, no Limited Partner will have any personal liability, to the Partnership, another Partner or to the creditors of the Partnership. Distributions: Except otherwise noted, available cash is distributed on a quarterly basis to the Partners according to the percentage ownership of each Partner. Available cash is defined as the excess cash, or profit, remaining after all overhead costs have been paid. Buy/Sell Agreements: Except as otherwise provided in the agreement, no limited partner has the right to sell or transfer units without the consent of the General Partner. Before any such unit is sold or transferred, the General Partner has the first right of refusal to acquire the interest. Any limited partner may sell his/her units to the General Partner at a price and terms agreed-upon by both parties. The purchase price for these units shall be payable in cash to seller, or to the holder of a promissory note if one is available. Agreed-Upon Value of Partnership Interests: The agreed upon value of an interest in the Partnership will be determined based on a formulaic approach equaling trailing 12 months EBITDA multiplied by 4.0 less interest-bearing debt. If the General Partner determines that a third-party valuation is required for regulatory purposes because of dramatic changes in the financial performance of the business, they may elect to engage a third-party valuation firm. Ambulatory Surgery Center Industry An ambulatory surgery center (ASC) is usually established as a freestanding inde- pendent surgery center or as a hospital-owned facility where outpatient surgery is performed. ASCs are also referred to as freestanding outpatient surgery centers (FOSCs) or surgicenters. Several factors differentiate ASCs from other businesses in the healthcare field. ASCs provide the physician and patient a location outside the hospital setting for surgical procedures to be performed at a considerable discount. As a result, Medicare, Medicaid, and private insurers now allow over 2,200 procedures to be performed in an ASC setting. The fact that healthcare costs have increased at rates in excess of inflation is considered the primary factor in the development and increased utilization of sur- gery centers. Procedures performed on an outpatient basis generally cost between 30 percent and 60 percent less than the same procedures in a hospital setting. A study done by Blue Cross/Blue Shield of (certain state) demonstrated that a 47 percent drop in surgery costs is attributable to ASCs. While cost containment was the initial driver in the growth of ASCs, current growth in the industry also is driven by advantages to both patients and physicians. In a survey completed by the U.S. Department of Health and Human Services Office of the Inspector General (OIG), those Medicare beneficiaries who underwent pro- cedures in ASCs strongly preferred ASCs over hospitals. Reasons cited include less paperwork, lower cost, more convenient location, better parking, less waiting time, better organization, and friendlier staff. The study also determined that the ASC provides an environment that is as safe as a hospital and that postoperative care is also comparable to a hospital. In addition to increased patient satisfaction, physi- cians prefer performing surgeries in an ASC because they are able to achieve larger volumes and greater economies of scale. Typically, ASCs provide faster operating room turnover time, and cases do not get transferred to emergency rooms as often as they do in acute care hospitals. Technological advances also have contributed to substantial growth in the ASC segment. Advances such as laser, endoscopy, and arthroscopic procedures have allowed for less invasive procedures that fit well in an ASC setting. Medicare payment rates for freestanding ASC procedures are expected to undergo significant changes. These changes are expected to be implemented in 2002. Based on the 20 highest-vol- ume ASC procedures (based on national averages), these payment rates include increases as well as decreases and impact all surgery specialties. The impact of these price changes will be reflected in the surgery case mixes selected by surgery centers. Due to the timing and impact of uncertain fee schedules of the proposed new payment methodology, MCVal decided not to adjust reimbursement for the new rules. Site Visit By now, MCVal had gained a solid understanding of the nature of the business, the industry, and the center’s financial and operating history. A site visit came next. Fifteen of the key issues MCVal was seeking to better understand were: 1. The facility’s hours of operations to analyze scheduling issues and capacity levels 2. Major competitors 718 VALUATION OF HEALTHCARE SERVICE BUSINESSES [...]... $3,926 ,87 4 2000 _ $4,136, 180 19 98 _ 100% 1999 _ 100% 2000 _ 100% 2,695 4,956 6,034 n/a n/a n/a $753.74 $792.35 $ 685 . 48 n/a n/a n/a 467,656 144,244 66,0 48 492,040 34,799 16,391 322,7 38 _ 1,543,916 901,230 21,620 77,779 702,362 62,717 26,295 81 8,733 _ 2,610,737 1,056,796 61,131 83 , 986 514,075 67 ,89 6 38, 541 88 3,694 _ 2,706,1 18 23.0% 7.1% 3.3% 24.2% 1.7% 0 .8% 15.9% _ 76.0% 23.0% 0.6%... Ended December 31, 19 98 1999 2000 _ _ _ $1, 986 ,079 $2,024,409 $2,051,545 $1, 987 ,930 $2,023, 082 $1 ,88 4 ,81 3 _ _ _ $3,974,009 $4,047,491 $3,936,3 58 Current Liabilities Long-term Debt $ 82 6,215 $ 87 9,512 $ 774,261 $ 793,660 $1,392,463 $ 6 98, 760 Total Equity $2,2 68, 282 $2,479,570 $1 ,84 5,135 Liabilities and Shareholder’s Equity $3,974,009 $4,047,491 $3,936,3 58 Income Approach—Developing... Limited as to Use Net Property, Plant, and Equipment Investments Other Assets As of 12/31/00 $ 39,126, 085 $ 18, 579, 788 $ 50,155,773 $ 6,314 ,85 9 $ 3 ,83 8,604 As of 12/31/01 $ 39,3 38, 153 $ 17,317,0 78 $ 50,530,326 $ 12,191,622 $ 3,046,641 Total Assets $1 18, 015,109 $122,423 ,82 0 Total Current Liabilities Long Term Debt $ 10,154,491 $ 52,367,154 $ 11 ,88 2,7 48 $ 47 ,81 7,509 Total Liabilities Net Assets... _ $ 92,212,620 40,073,310 4,312,173 6,645 ,85 2 3,937,569 5, 986 ,923 3,554,613 10 ,89 1,296 1,690 ,86 0 10, 986 ,135 13,4 48, 703 _ $101,527,434 33.0% 2 .8% 5.9% 3.3% 4.2% 2 .8% 9.4% 1.5% 11.1% 13.1% _ 87 .1% 35.0% 3 .8% 5 .8% 3.4% 5.2% 3.1% 9.5% 1.5% 9.6% 11.7% _ 88 .7% ValTip Assets limited as to use and investments are considered here “excess assets” and are added back to the resulting DCF value to... _ $105 ,84 3 ,82 8 70,700 1,497 FYE 2001 _ $114, 488 , 780 75,336 1,520 FYE 2000 _ 100% n/a n/a FYE 2001 _ 100% n/a n/a Major Operating Expenses: Salaries Contract Labor EmpIoyee Benefits Professional Fees Purchased Services Drugs Supplies Utilities Other Operating Expense Bad Debts Total 34,923,060 2,951 ,84 6 6,245, 180 3,534,247 4,473 ,88 9 2,941,417 9,930,106 1,604,097 11,709 ,83 1 13 ,89 8,947 ... (Total Invested Capital Level) (20, 687 ) 496,494 (21,599) 520 ,86 2 (22, 387 ) 545,122 (23,375) 569,371 0.5 Present Value Factor (mid-point convention) 21 ,82 4 514,067 1.5 2.5 3.5 4.5 ( 18, 1 18) 505,047 3,156,543 4.5 0.9166 98 0.770335 0.647340 0.543 983 0.457129 0.457129 471,245 382 ,467 337,175 296,537 260,276 1,442,9 48 1,747,700 1,442,9 48 _ 3,190,6 48 _ _ *Excess depreciation runs out The value conclusion... 312,553 333, 982 355,411 376 ,83 9 150,000 (150,000) (150,000) (150,000) (150,000) (150,000) (150,000) 21 ,82 4 514,067 (20, 687 ) 496,494 (21,599) 520 ,86 2 (22, 387 ) 545,122 (23,375) 569,371 0.5 1.5 2.5 3.5 4.5 3,156,543 4.5 Present Value Factor (mid-point convention) 0.9166 98 0.770335 0.647340 0.543 983 0.457129 0.457129 Present Value of Cash Flows 471,245 382 ,467 337,175 296,537 260,276 1,442,9 48 Terminal Value... 10,191 2.0% 23,164 -3.0% 5.33 54,290 Year 3 10,497 2.0% 23,164 0.0% 5.33 55,919 75,336 76, 589 77,454 79, 083 $ 1,495 .86 _ _ $ 1,525.77 1.0% $ 1,541.03 1.0% $ 1,556.44 1.0% $112,691 ,83 2 $116 ,85 7,615 $119,3 58, 974 $123, 087 ,550 1,796,949 1,796,949 1,796,949 1,796,949 114, 488 , 781 Inpatient Admissions Annual Growth % 0utpatient Days Annual Growth % ALOS Patient Days Adjusted... Case* Total Medical Supplies Restated 1999 _ 4,956 $104. 98 $520,263 _ Restated 2000 _ 6,034 $47 .84 $ 288 ,652 _ Normalized Base Year _ 6,034 $47 .84 $ 288 ,652 _ Projections Year 1 6,062 $49.27 $2 98, 692 *Excludes Associated Drug Costs The medical supply costs per case (excluding associated drug costs) is approximately $ 48 in FYE 2000 The decrease in medical supply per-case rate... unit assuming 225 units) ( 18, 1 18) 505,047 1,747,700 1,442,9 48 _ 3,190,6 48 _ _ 6 98, 760 3.7 x year 1 EBITDA 2,491 ,88 8 $ 11,075 Market Approach: Guideline Company Transaction Method The guideline company transaction method involves the selection of pricing multiples of individual transactions in similar companies in the marketplace Information on these transactions and their multiples is obtained . 2,059,354 86 4,227 1,195,127 ENT 1,669,127 714,745 954, 382 Genera 481 ,83 6 195,463 286 ,373 GY 2,330 966 1,364 Neurology 135,977 62,3 48 73,629 Orthopedic 299,047 1 18, 282 180 ,765 Pain Management 86 4,540. 4,956 6,034 6,034 6,062 Estimated Supply Cost per Case* $104. 98 $47 .84 $47 .84 $49.27 Total Medical Supplies $520,263 $ 288 ,652 $ 288 ,652 $2 98, 692 _______ _______ _________ __________ *Excludes Associated. 26,295 38, 541 0 .8% 0.7% 0.9% General & Administrative 322,7 38 8 18, 733 88 3,694 15.9% 20 .8% 21.4% _________ _________ _________ _____ _____ _____ Total 1,543,916 2,610,737 2,706,1 18 76.0% 66.5%