The document summarizes The Walden Group's Q2 2012 Strategic Healthcare M&A Report. It discusses the impact of the Supreme Court upholding the Affordable Care Act individual mandate while invalidating Medicaid expansion requirements. This weakens the ACA's effectiveness in expanding coverage and addressing rising costs and quality issues. It argues that for real reform, patients need more responsibility, providers must adhere to standards, prevention should be rewarded, and FDA regulation balanced. The changes will pressure providers and medtech companies to focus on innovative, higher-margin technologies that improve outcomes and efficiencies.

1. The Walden Group
Q2 2012 Strategic Healthcare M&A Report
At a glance …
The Walden Group®, Inc.
 The impact of the Supreme Court's Decision on Healthcare Reform … and what it Strategic Healthcare
means for the industry Investment Banking and Consulting
 Valuation Metrics and Operating Performance of Leading Healthcare Companies Main Office
560 White Plains Road
 Notable Deals of the quarter -- summaries Tarrytown, New York 10591
www.waldenmed.com
 Top Deals of Q2 2012 > $100m in Transaction Value
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 Analysis of more than 85 M&A Transactions announced or closed in Q2 2012
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The Strategic Healthcare M&A Report analyzes important merger, acquisition and strategic transactions taking place in the healthcare industry. A complimentary copy of the
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© 2012 The Walden Group®, Inc. No part of this report may be reproduced without written permission of The Walden Group, Inc. All rights reserved.

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1. The impact of the Supreme Court's Decision on Healthcare Reform … and what it means for the industry
In June, the Supreme Court upheld the most controversial provision of the Affordable Care Act (the "ACA") -- the individual mandate -- while invali-
dating requirements that States adopt the new Medicaid coverage regime of the federal government. As a result (a) people in the U.S. must pay a
penalty if they fail to carry approved health insurance and (b) States may extend Medicaid coverage as specified in the ACA, but if they don’t, none
of the funds for previously eligible Medicaid enrollees will be in jeopardy. All other provisions of the ACA stand.
By a vote of 5 to 4, the Court rejected the federal government’s argument that the mandate can be based on its power to regulate interstate com-
merce – thus suggesting a new restrictiveness on Congressional power. Instead, it validated the mandate on Congress' power to a tax those who
don’t carry such insurance. However, the penalty for not obtaining insurance is so modest that that the ACA's incentive to get insurance is extremely
weak. The charge for most people can be collected only from over-withheld income taxes. It does not apply to many people -- for example, those for
whom the cost of insurance would exceed a certain share of income.
Even before the ruling, the ACA was limited in its purpose and laden with sweeping policy prescriptions that are not realistic to work out as planned
in the marketplace. After the decision, the ACA's effectiveness is weakened further and given the political climate, major changes in healthcare
reform are still needed.
While the ACA purported to expand healthcare coverage to the uninsured, given the uncertainty of States' adopting the new Medicaid provisions
and individuals obtaining insurance on their own, it is not clear how many uninsured will be covered. Moreover, the ACA did not directly address
two other major problems: the unsustainable rise in healthcare costs and improving outcomes. The fundamental structure of how we obtain
healthcare and how it is paid for provide little incentive to contain costs and there are too few safeguards in terms of the quality of care. The ACA
does provide for certain pilot projects addressing these issues but there is no system aligning healthcare costs with quality.
The Missing Links -- What Needs to be Done
Health spending in the U.S. neared $2.6 trillion in 2010 - 10 times the $256 billion spent in 1980. The Institute of Medicine estimates that in 2009,
the most recent year for which data are available, the country spent about $210 billion on unnecessary medical services. This means that the U.S.
spends about $8,000 per person annually on health care – 50% percent more than Norway and Switzerland. In the U.S. hospital stays are far more
expensive than those in other countries, averaging about $18,000 per discharge, compared with less than $10,000 in Sweden, Australia, New Zea-
land, France and Germany.
To improve care and outcomes and lower costs, the following measures, among others, are necessary:
 Patients need to have more "skin in the game", meaning they need to be directly involved, to some extent, in their care and paying for it,
with appropriate qualifications and safeguards. Divorced from the payment scheme, which is a chaotic maze that needs simplification, pa-
tients have little interest to limit costs.
The Walden Group®, Inc.
Strategic Healthcare Investment Banking and Consulting
560 White Plains Road, Tarrytown, NY 10591 * 914-332-9700 fax: 914-332-0020
www.waldenmed.com * email: office@waldenmed.com

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 Providers need to adhere to certain standards of care in prescribing medications and imaging tests and in treating patients. Unnecessary
treatments are not only costly, but can harm patients. Tort reforms are necessary so that physicians are not loading on care to protect
themselves from frivolous lawsuits, and flexibility needs to be built-in to permit physicians to use creative judgment within limits.
 The U.S. healthcare system needs to reward efforts to promote wellness and prevention, not just treat medical problems after they develop -
- a far more expensive undertaking.
 The FDA needs to strike a better balance between protecting the public, on the one hand, and creating streamlined and effective regulatory
tests, on the other, so that patient safety is served and valuable medical innovations can be brought to market quicker and less expensively.
How it Impacts the Industry
No matter what happens, hospitals will be under cost pressures and will continue to demand lower prices from manufacturers and distributors. It will
be harder to support higher margin products without demonstrating tangible value in terms of better outcomes, ease-of-use, safety and other identi-
fiable measures. Comparative effectiveness standards will increasingly highlight those technologies that are worthwhile and supported by clear clin-
ical evidence.
Technologies that lower infection rates and surgical risk, hasten procedure and recovery times, and improve outcomes will prevail. Minimally inva-
sive techniques will continue to make inroads in cardiovascular, orthopedic, urological, neurosurgery and spine applications, among others.
Payments for healthcare will continue to move from a “fee for service”, a la carte model – which incentivizes more procedures and tests – to a condi-
tion management model that shifts the burden of healthcare costs onto the providers, with appropriate protections for quality and outcomes. Pro-
viders will need to become more efficient, which will put pressure on margins of medtech companies, as well as highlight their need to support new
technologies factually.
Many companies are positioning themselves to benefit from the new system. Private insurers, for instance, recognize that reform objectives include
affordability of coverage and access to quality care. Consistent with the ACA, most insurers are taking a multi-pronged approach to help transform
the healthcare system, using technology to drive down medical costs. By investing in electronic health records, for instance, insurers and hospitals
are helping physicians to better coordinate care, eliminating costly duplication of services and combating medical errors.
Many employers are using financial incentives and penalties to promote employee wellness – something that the ACA hopes to encourage. A recent
survey found that 35% of large employers are using rewards and penalties to discourage smoking.
Recognizing that reimbursements are vulnerable for many procedures that have become standards -- like hip and joint replacements, many
medtech companies are redirecting their efforts toward higher growth, higher margin areas. Covidien is a good example. Commonly thought to be a
relatively staid company, it has demonstrated nimbleness in navigating the terrain. It has ably focused on niches in which to offer innovative tech-
nologies where it can gain significant market share. For the quarter ended June 30, 2012, Covidien's results included:
The Walden Group®, Inc.
Strategic Healthcare Investment Banking and Consulting
560 White Plains Road, Tarrytown, NY 10591 * 914-332-9700 fax: 914-332-0020
www.waldenmed.com * email: office@waldenmed.com