2018 New York Metro ASC Symposium November 2, 2018 New York Marriott Marquis

Current Valuation Trends in ASC Transactions

Panelists Max Reiboldt, CPA, President/CEO, Coker Group Holdings, LLC Nicholas J. Janiga, ASA, Partner, HealthCare Appraisers, Inc. Curtis Bernstein, CPA/ABV, CVA, ASA, CHFP, MBA – Principal, Pinnacle Healthcare Consulting

With the shift toward value- based care, surgery volume in an outpatient setting is expected to increase, potentially resulting in a lift in ASC values. But still, much uncertainty exists. 1

Dynamics Affecting ASC Values* Reimbursement rates for hospitals are typically 40 to 70 percent higher for hospital-based surgery than for procedures completed in an ASC. Additionally, patient total out-of-pocket expenses are lower in an ASC. A study published in 2013 at the University of California-Berkeley, found that ASCs saved Medicare $7.5 billion over the four-year period from 2008-2011. Going forward, savings from ASCs could exceed $57.6 billion over the next decade. On average, Medicare programs and  beneficiaries save approximately $2.6 billion per year from procedures performed at ASCs, according to ASCA. *Both now and in the future

Dynamics Affecting ASC Values* Control of costs by payers; reduce costs (reimbursement) and increase value through performing services at ASCs. With improvements in technology and medical techniques, more and more procedures are being shifted to lower costing ASCs. Aging populations increase volumes in general. As of 2017, more than half of outpatient surgeries were performed in ASCs, up from 32 percent in 2005. Proportion of cataract surgeries performed at surgery centers increased from 44% in 2001 to 73% in 2014. Increased demand may improve the utilization of ASC facilities, which may potentially positively impact their values. *Both now and in the future

Certain procedures such as orthopedic and spine surgeries will largely migrate from inpatient to outpatient settings. 2

Five Major Trends to Expect in Spine Surgery Innovations in minimally invasive surgery Motion preservation vs. fusion surgery Artificial intelligence and neuronavigation Outpatient spine centers outlasting hospitals The possibilities of independent spine surgery centers All of these will affect ASC valuations.

Non-provider investors such as private equity firms and insurance companies are showing an increased interest in ASCs. Their entrance to the market will increase the competition (these investors are not necessarily subject to FMV requirements) and potentially drive higher valuation multiples.  3

Private Equity and Insurance Firms Increase Market Share As reimbursement pressures continue throughout the healthcare industry, ASCs become more attractive due to the ability to provide similar services at the same or improved quality, at a lower cost as compared to a hospital setting. Median EBITDA margin for ASCs is approximate 22 percent; range from 12 percent to 34 percent for 25th to 75th percentile (VMG Health's 2018 Multi- Specialty ASC Benchmarking Study). The high margins for ASCs contributes to the attractiveness of these businesses. PE and insurance companies are purchasing ASCs to add to portfolio of other healthcare entities, creating potential synergies between purchased entities to be packaged and sold at higher premiums.

Private Equity and Insurance Firms Increase Market Share UnitedHealth Group, Inc., acquired Surgical Care Affiliates, Inc. (SCA) for $2.3 billion in 2017. SCA operated 205 surgical facilities in more than 30 states, and was combined with Optum. KKR acquired Covenant Surgical Partners, Inc. in 2017. CSP operated 37 facilities at the time of the transaction. KKR acquired Envision Healthcare for $9.9 billion in cash and assumed debt, closed in October 2018. Envision operates 261 ASCs. Bain Capital purchases stake in Surgery Partners, Inc. in 2017. KKR Acquired Envision Healthcare for $5.5 Billion Announced June 2018 – Closed in Q4 2018 Private Equity - Financial Buyer 9.7x EBITDA UnitedHealth's Optum acquired Surgical Care Affiliates for $2.3 billion Closed March 2017 Vertical Integration 12.3x EBITDA Tenet Healthcare Corporation (NYSE:THC) acquired additional 15% ownership interest in United Surgical Partners International Inc. for $630 million April 2018 Originally acquired 50.1% in 2015 Increases ownership from 80% to 95% Purchase 54.19% ownership interest in Surgery Partners by Bain Capital from H.I.G. Capital Closed August 2017 Implied 11.1x LTM MVIC/EBITDA multiple Horizontal Integration - Transaction in conjunction with Surgery Partners purchase of National Surgical Healthcare

Key Trends - Payers Shifting patients from inpatient to outpatient settings of care Denying reimbursements for ED care that payers feel should have gone to urgent care Policy changes for UnitedHealthcare and Aetna Not reimbursing for imaging services provided at a hospital: Physicians call Anthem's new imaging reimbursement guidelines 'arbitrary and unwise': 5 takeaways. Becker’s Healthcare Review, October 10, 2017 Insurance companies are now willing to cover outpatient total joints. 14 key points on total joint replacements in ASCs for 2018. Becker’s Healthcare Review, February 12, 2018 Denials pushing more joint procedures into outpatient setting. Fear of denials could be pushing more joint procedures into outpatient setting. Modern Healthcare, October 18, 2018

Key Trends - Valuation HealthCare Appraisers’ 2018 ASC Valuation Survey Minority Interest Multiples for Multi-Specialty ASCs

Key Trends - Valuation HealthCare Appraisers’ 2018 ASC Valuation Survey Controlling Interest Multiples for Multi-Specialty ASCs

Factors Contributing to Higher Valuations Macro Level - Positive Payer Trends and Market Conditions Enterprise Level - Economic Benefit (free cash flow), Rate of Return (perceived risk in investment) & Long-term Growth Rate (anticipated growth into perpetuity) Growth in Cases and Reimbursement Increasing Complexity of Case Mix Growth in EBITDA Increasing OR Utilization Attractive Market Effective Expense Management Diversification of Surgeons – majority of cases not done by a single surgeon High % of cases performed by owners History and expectation of continued distributions Barriers to entry

Reduction in corporate tax rates potentially results in higher valuations of ASCs. However, other factors will partially offset, and rule of thumb multiples may not be accurate comparisons without adjustments. 4

Tax Cuts and Job Act of 2017 Brings a Number of Key Changes (not a complete list) Lower corporate tax rate to 21% (flat rate) New 20% Qualified Business Income Deduction (QBID) – Eligible deduction equal to 20% of domestic “qualified business income” from pass-through entities (sunsets December 31, 2025) Increased expensing of capital expenditures – up to $1 million of tangible personal property New limitation on business interest deduction - only applies to businesses with >$25 million average gross receipts Business entertainment expenses are no longer deductible

The New Tax Law Will Potentially Result in Varying Impact on Business Values (positive and negative) Increased after-tax earnings and cash flows Increased capital expenditures Increased labor costs (due to competitive pressure) Increased cost of debt (i.e. interest rates) Changes in capital structure (equity vs. debt) As such, historically observed market transaction multiples (or rules of thumb) may no longer reflect the current market conditions.

Continuing movement to site neutral payments may increase utilization of ASCs (non-HOPD). 5

The CMS Effect In 2017, CMS implemented site-neutral payment provisions, where certain off-campus provider- based departments that began billing HOPD after November 2, 2015, would no longer be reimbursed at HOPD rates beginning January 1, 2017. Reimbursement would be at 40% of HOPD rates. Current commentary for 2019 rates would reduce outpatient clinic visits to 40% of HOPD rates, regardless of whether the outpatient department was grandfathered by the same legislation, as well as for services in new clinical families of services that was not previously offered. Anthem has implemented policies to possibly no longer pay for MRIs and CT scans performed on an outpatient basis. Bipartisan Budget Act of 2015 – Section 603 Effective Jan. 1, 2017 Revisions to Act in late 2016 Focused on acquisition and conversion to HOPD 21st Century Cures Act Revised Site-Neutral Payment Policy in Section 603 Addresses newly built off-campus outpatient departments that were poised to accept patients before Nov. 2, 2015; and submitted proper attestation to CMS Provides some clarification to questions surrounding Section 603 Excepted Off-Campus Provider Based Departments Service expansion Relocation Changes in ownership