1. Healthcare Services Industry Update
Robert A. Hauptman, CFA – rhauptman@srr.com
David V. Weisberg – dweisberg@srr.com
Regulatory reforms in the past several years are expected to promotes an integrated approach to medical care by making
dramatically affect the delivery of healthcare services in the U.S. providers jointly financially accountable for the health costs of
these reforms provide incentives to promote the coordination their patients through strong incentives to cooperate and reduce
of care among healthcare providers through the development of costs by avoiding unnecessary tests and procedures.2
accountable care organizations (“ACos”) as well as encourage
the increased usage of information technology (“It”) within the Under the traditional fee-for-service payment system, most
healthcare field. Buoyed by these regulatory changes and an payers compensate individual doctors, hospitals, and other
improving economy, merger and acquisition (“M&A”) activity in providers for each service provided to a patient. Critics assert
both the healthcare It and services sectors continues to increase. that a fee-for-service system creates incentives for providers to
furnish or order more services than are medically necessary and
the emergence of Accountable leads to duplicative or conflicting treatments due to the failure to
Care organizations n n n coordinate patient care activities.
the system by which healthcare providers are compensated the Medicare shared savings program for ACos is scheduled to
has long been a subject of debate. Regulators desire a payment begin in 2012. the Centers for Medicare and Medicaid Services
system that encourages providers to work together, rewards high- (“CMS”) has proposed rules that define ACos and the shared
quality healthcare, and discourages provider-induced demand. savings program in which ACos will participate. Although
ACos are considered to be a healthcare delivery model that the final version of the rules will likely vary, the proposed rules
accomplishes these goals. ACos, which entered the spotlight provide CMS’s initial vision of program. A Medicare ACo must be
in March 2010 when the Patient Protection and Affordable Care responsible for the medical care of a population of at least 5,000
Act (“PPACA”) authorized the Medicare program to contract with Medicare patients and agree to manage all of the respective
ACos, are networks of providers (e.g., primary care physicians, patients’ healthcare needs for a minimum of three years.3
specialists, and health systems) that share responsibility for Patients will be attributed to the Medicare ACo from which they
providing total care to patients.1 the emergence of ACos receive most of their primary medical care. CMS will gather data
2
Gold, Jenny. “Accountable Care organizations, explained. Kaiser Health News and NPR.
18 January 2011. <http://www.npr.org>.
1
“Accountable Care organizations.” Health Affairs. 27 July 2010. <www.healthaffairs.org>. 3
Ibid.
1 ©2011

2. on patient quality of care and treatment costs. A Medicare ACo Impact of HIteCH on
would receive bonuses for identified cost savings and for meeting Providers and Hospitals n n n
specific quality benchmarks.4 Failing to meet certain benchmarks
could put a Medicare ACo at risk of missing bonuses or even the Another trend in the healthcare services sector is the continued
loss of its contract with CMS, and sanctions may be imposed if it integration of information technology into the practice of medicine.
is determined that it is avoiding patients. Initial public feedback
5 the most notable regulatory development in this area was the
with regards to CMS’s proposed rule has been mostly critical and Health Information technology for economic and Clinical Health
may limit participation in the Medicare shared savings program. Act (“HIteCH Act”), which was part of the American Recovery and
Concerns relate to the anticipated significant up-front costs Reinvestment Act of 2009 (“ARRA”). ARRA provides substantial
related to forming an ACo vs. modest incentive payments offered funding to encourage investment in heath It infrastructure and to
by Medicare as well as the inclusion of down-side risks to the ACo encourage physicians and hospitals to invest in electronic health
if costs increase beyond levels projected by CMS. Additionally, record (“eHR”) technology.8 eHRs are generally defined as a
providers argue that the retrospective assignment of patients to an repository of information regarding the health of a subject of care
ACo by CMS hinders an ACo’s ability to proactively manage and in a format that can be processed by a computer. It is important to
coordinate patient care. note that eHRs are not simply paper records viewable in electronic
form, but store information in a format that can be easily analyzed.
Despite concerns related to the initial proposed shared savings
rules, the trend towards coordination of services has led to Switching from traditional paper patient charts will benefit both
increased provider consolidation. Hospital systems are pursuing patients and healthcare providers. eHRs can provide physicians
acquisitions of physician practices and contemplating mergers with instantaneous access to complete and accurate patient
with other health systems in an effort to control the majority of information, which will reduce the chances of medical errors and
providers participating in an ACo. Due to hospitals’ access to ordering unnecessary tests as well as allowing treatment to begin
capital markets, they may possess a greater ability to finance immediately rather than waiting for the arrival of a paper chart.
the initial investment required by an ACo than independent Because patients now have the ability to receive electronic copies
physician groups, which may incentivize doctors to partner with of their medical records, eHRs will empower patients to become
health systems. Some economists fear that the race to form ACos more active in their medical care.9 Additionally, electronic records
could lead to significant consolidation, leaving fewer independent may be less costly to create and maintain than traditional paper
hospitals and doctors. the creation of even larger health systems charts. over the long term, digital records may make it possible
would shift leverage in the hospital’s favor in negotiations with to analyze data for large patient populations to identify the most
insurers, potentially driving up health costs. Consolidation in effective treatments or potentially dangerous drug interactions.10
the industry has also raised concerns of antitrust and anti-fraud
An estimated $27 billion was allocated to incentivize physicians and
violations, partly due to the fear that ACos, particularly in rural
hospitals to adopt eHR through additional Medicare and Medicaid
markets, could increase to a size in which they would employ the
incentive payments.11 Beginning this year, eligible professionals
majority of the providers in a region.6
may receive additional payments of up to $44,000 over the next
Although largely undefined, the ACo concept continues to five years under Medicare by becoming a “meaningful user” of
draw the attention of many within the healthcare industry. While certified eHR technology. Adopters of eHR can receive up to
the development and implementation of these organizations $63,750 over a six-year period under Medicaid beginning in
could prove to be complex, political support could lead to 2011.12 What starts out as a Medicare “carrot” will eventually turn
further experimentation and implementation in the near future. If into a “stick.” Beginning in 2015, penalties will begin for those who
successful, ACos will have a positive impact on the provision of have not yet adopted and begun to “meaningfully use” a certified
healthcare services through increased coordination of care and eHR system. Physicians who have not implemented an eHR
cost containment as the Congressional Budget office estimates system by 2015 will be penalized by a reduction of 1% of Medicare
that ACos could save Medicare approximately $5 billion through payments, increasing to 3% over three years.13
2019.7
Regulators continue to develop “meaningful use” requirements
of an eHR system. “Meaningful use” is a standard that permits
providers to be eligible for incentive payments. In July 2010, CMS
4
“Accountable Care organizations.” Health Affairs. 27 July 2010. <http://www.healthaffairs.org>.
5
Gardner, Deborah K. and Sexton, Michael F. “the time that Are A-Changing: ACos and Payment Reform.” Ropes & Gray. 9 March 2011.
6
Gold, Jenny. “Accountable Care organizations, explained. Kaiser Health News and NPR. 18 January 2011. <http://www.npr.org>.
7
Ibid.
8
“economic Stimulus Package: Policy Implications of the Financial Incentives to Promote Health It and New Privacy and Security Protections.” 20 February 2009. McDermott Will & emory.
9
“electronic Health Records and Meaningful Use.” U.S. Department of Health and Human Services. <http://www.hhs.gov>.
10
Lohr, Steve. “Carrots, Sticks and Digital Health Records.” New York times. 26 February 2011. <http://www.nytimes.com>.
11
Ibid.
12
“eHR Incentive Programs: overview.” U.S. Department of Health & Human Services: Centers for Medicare & Medicaid Services.” 2010. <http://www.cms.gov>.
13
“overview of Medicare Incentives in the Centers for Medicare & Medicaid Services Final Rule on Meaningful Use of Certified electronic Health Records.” American Medical Association.
©2011 2

3. Healthcare Services and Technology Transactions
In Millions of U.S. Dollars 2006 2007 2008 2009 2010 2011 [a]
1 Healthcare technology transactions 16 27 31 20 23 13
2 Healthcare Services transactions 61 91 50 28 67 22
3 Total Transactions 77 118 81 48 90 35
4 total transaction Value $ 63,877 $ 29,124 $ 11,995 $ 8,795 $ 20,380 $ 10,123
Source: Capital IQ
Note: transactions include mergers and acquisitions with total transaction value greater than $10 million and in which the target company was located in the U.S. Healthcare services includes companies classified as being in the
healthcare services or managed care industries.
[a] through June 30, 2011.
announced the Stage 1 criteria for incentive payments for eligible With less than an estimated 30% of physicians nationwide
professionals, eligible hospitals, and critical access hospitals that currently using eHRs17, the healthcare It industry can be expected
meaningfully use certified eHR technology. In addition, providers to expand rapidly over the next five years as physicians and
who adopt, implement, and upgrade eHR technology will be eligible hospitals implement eHR systems to lower costs and improve
for Medicaid incentive payments during the first year of Stage 1. quality as well as to meet the meaningful use requirements set in
According to CMS, the Stage 1 criteria, which begins in 2011, place by the HIteCH Act in order to capture stimulus dollars and
“focuses on electronically capturing health information in a coded avoid the penalties associated with not having a system in place
format and using that information to track key clinical conditions by 2015.
and to communicate the information to better coordinate care.”
overall, the Stage 1 criteria features 25 objectives / measures for Merger and Acquisition Activity n n n
eligible professionals (24 for eligible hospitals), which are divided
After strong merger and acquisition activity in 2007, the number
into a “core” set and a “menu” set. the core set will contain 15
of healthcare services and healthcare technology deals dropped
objectives for eligible professionals and 14 objectives for eligible
precipitously from 118 in 2007 to 48 in 2009 as the U.S. endured
hospitals that are requirements. Professionals and hospitals will
one of the worst recessions in decades.18 Healthcare technology
select five of the 10 menu objectives to meet. In this way, the
deals did not suffer as sharp a decline as in the services sector
meaningful use criteria will provide some flexibility.14
due in part to the benefits of the HIteCH Act. Due to the economic
Any flexibility that may be allowed in Stage 1 may be eliminated recovery, the expansion of the healthcare It industry, and the
when CMS rolls out its Stage 2 meaningful use criteria. In Stage consolidation of healthcare service providers, transaction activity
2, many anticipate the addition of new objectives, with all of the gained momentum in 2010. total transaction value also recovered
Stage 1 objectives becoming requirements without the option for in 2010 equaling $20.4 billion up from $8.8 billion in the prior year.
deferral of some of the menu set items, although commentators
over the past two years, the industry has witnessed a number
have recommended delaying Stage 2 by one year for those
of significant transactions. Five transactions in the healthcare
attesting to Stage 1 in 2011. Stage 2 is expected to expand upon
services sector topped $1 billion. Healthcare technology has also
the initial criteria in areas such as disease management, clinical
witnessed a number of significant transactions since early 2010,
decision support, medication management, quality measurement,
though the majority involved a deal size below $1 billion.
and research. A final rule on the Stage 2 criteria is expected by
June 2012, with the start date set for 2014.15 expected to take n IMS Health Incorporated, a provider of information,
effect in 2015, Stage 3 presumes the full implementation of eHR analytics, and consulting services to the pharmaceutical
systems and an even more stringent set of requirements. In and healthcare industries worldwide, was acquired by
addition to focusing on achieving improvements in quality, safety, private equity firms TPG Capital and Leonard Green &
and efficiency, Stage 3 is also expected to concentrate on patient Partners, L.P. and the Canadian Pension Plan Investment
access to self-management tools, decision support, and access Board in February 2010. The implied enterprise value
to comprehensive patient data, with the overall target of improving was approximately $5.1 billion, representing a 10.4x
population health outcomes.16 latest 12-month (“LTM”) EBITDA multiple.
14
“CMS finalizes definition of meaningful use of certified eHR technology.” 16 July 2010. U.S. Department of Health & Human Services: Centers for Medicare & Medicaid Services.” 2010.
<http://www.cms.gov>.
15
Manos, Diana. “Federal panel votes to delay Stage 2 meaningful use by a year.” 8 June 2011. Healthcare It News. <http://www.healthcareitnews.com>.
16
“CMS finalizes definition of meaningful use of certified eHR technology.” 16 July 2010. U.S. Department of Health & Human Services: Centers for Medicare & Medicaid Services.” 2010.
<http://www.cms.gov>.
17
Lohr, Steve. “Carrots, Sticks and Digital Health Records.” New York times. 26 February 2011. <http://www.nytimes.com>.
11
the universe of transactions includes mergers & acquisitions of healthcare services and technology companies located in the U.S. that were closed with total transaction value greater
than $10 million.
3 ©2011

4. Recent Healthcare Services and Technology Transactions
Enterprise EV /
Target Acquirer Value ($Mill) Filing Date EBITDA
Healthcare Technology
IMS Health Incorporated CPP Investment Board; Leonard Green & Partners, L.P.; tPG Capital $ 5,071.93 2/26/2010 10.4x
eclipsys Corporation Allscripts-Misys Healthcare Solutions, Inc. 1,169.81 8/24/2010 21.6x
Phase Forward Inc. oracle Corp. 591.11 8/11/2010 19.5x
Medicity, Inc. Aetna Inc. 500.00 1/3/2011 n/a
Anthelio Healthcare Solutions Inc. Actis Capital, LLP; Conjoin Group 250.00 10/29/2010 n/a
Logibec Groupe Informatique Ltee oMeRS Provate equity; Societe Generale de Financement du Quebec 248.38 7/16/2010 10.5
AMICAS, Inc. Merge Healthcare Incorporated 174.74 4/23/2010 26.5x
Carefx Corporation Harris Corp. 155.00 4/4/2011 n/a
Vital Images, Inc. toshiba Medical Systems Corporation 151.26 6/15/2011 nmf
Healthcare Services
MultiPlan, Inc. BC Partners; Silver Lake Partners $ 3,100.00 8/26/2010 n/a
emergency Medical Services Corporation Clayton, Dubilier & Rice, Inc. 2,968.36 5/25/2011 9.5x
US oncology Holdings McKesson Corporation 2,114.90 12/30/2010 9.4x
Rehabcare Group Inc. Kindred Healthcare Inc. 1,265.55 6/1/2011 7.7x
inVentiv Health, Inc. thomas H. Lee Partners, L.P. 1,189.03 8/4/2010 8.7x
Genzyme Genetic Laboratory Corp. of America Holdings 915.90 11/30/2010 n/a
odyssey Healthcare, Inc. Gentiva Health Services Inc. 900.79 8/17/2010 10.5x
the Broadlane Group, Inc. MedAssets, nc. 850.00 11/16/2010 n/a
Rex Healthcare, Inc. WakeMed Raleigh Campus 750.00 5/12/2011 n/a
Source: Capital IQ
n Allscripts-Misys Healthcare Solutions, Inc., completed transport as well as outsourced emergency department
its acquisition of Eclipsys Corporation, an information staffing. The enterprise value was approximately $3.0
technology provider for hospitals and clinicians, for billion, implying a 9.5x LTM EBITDA multiple.
an enterprise value of $1.2 billion as part of a stock n US Oncology Holdings, Inc., a provider of medical
deal. The deal, which closed on August 24, 2010, makes oncology, cancer centers, pharmaceutical, and research
Allscripts one of the leading players in the healthcare services, was acquired by McKesson Corporation on
software industry, increasing its user base to 180,000 December 30, 2010. McKesson paid $2.1 billion for US
physicians, 1,500 hospitals, and 10,000 Oncology, representing a 9.4x LTM EBITDA multiple.
post-acute organizations.
n Oracle Corporation purchased Phase Forward Inc.,
a provider of an integrated clinical research suite of equity Valuations n n n
enterprise-level software products and services used in Due to the growth of the healthcare It industry from the continued
clinical trial and drug safety monitoring. The transaction adoption of technology, we focus on trends in the valuations of
was compiled at an implied LTM EBITDA multiple companies expected to benefit from the incentive payments of
of 19.5x. the HIteCH Act. As the equity markets began to decline in late
n BC Partners and Silver Lake Partners completed their 2007, healthcare It multiples dropped from 16.0x LtM eBItDA in
acquisition of Multiplan, Inc., an independent PPO, for a the third quarter of 2007 to 13.1x LtM eBItDA in the first quarter
$3.1 billion enterprise value. of 2008. Multiples have generally recovered from the 2008 lows,
increasing to 17.6x LtM eBItDA in the second quarter of 2009 and
n Financial sponsor Clayton, Dubilier & Rice, Inc., completed
up to a five-year high of 19.3x in the second quarter of 2011 after
its acquisition of Emergency Medical Services Corporation
dipping in the second and third quarters of 2010.
(“EMSC”), an operator in the ambulance and facility-based
physician services market in the U.S. EMSC provides
emergency and non-emergency ambulance
©2011 4

5. Conclusions for the Healthcare
Services Industry n n n Trailing EV to EBITDA Multiples
22.0x
20.0x
the healthcare services and It industries are poised for change
18.0x
over the next few years as new legislation and various government 16.0x
incentives come into play. the emergence and evolution of ACos 14.0x
will continue to change the manner in which patient care is 12.0x
delivered and may contribute to increased provider consolidation. 10.0x
Due to the large market opportunity and regulatory tailwinds, 8.0x
6.0x
healthcare It displays great upside potential and should exhibit
4.0x
strong growth for the foreseeable future.
2.0x
0.0x
Robert A. Hauptman, CFA, is a Director in the Valuation & Q3 ‘06 Q1 ‘07 Q3 ‘07 Q1 ‘08 Q3 ‘08 Q1 ‘09 Q3 ‘09 Q1 ‘10 Q3 ‘10 Q1 ‘11
Financial opinions Group at Stout Risius Ross (SRR). Mr. Heathcare It Composite Five-Year Average
Hauptman has significant experience in valuing healthcare-
related entities. Mr. Hauptman can be contacted at
+1.216.373.2997 or rhauptman@srr.com. Long-Term Relative Performance
300
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100
50
0
Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
Heathcare It Composite S&P 500 Index
5 ©2011