1. Credit Implications of Physician Integration Strategy under PPACA Emily Wadhwani, Director October 8, 2014 HFMA: Physician Group Practice Executive Council

2. 1 www.fitchratings.com Agenda Overview of Fitch Healthcare Physician Integration Structure Case Example Credit Implications of PPACA Industry Outlook 10/8/14

3. OVERVIEW OF FITCH HEALTHCARE 10/8/14

4. 3 www.fitchratings.com Fitch’s Public Finance Healthcare Group AnalyticalLocationPhoneE-mail Michael BurgerSan Francisco, CA1-415-659-5470Michael.burger@fitchratings.com Dmitry FeofilaktovNew York, NY1-212-908-0345Dmitry.feofilaktov@fitchratings.com Adam KatesChicago, IL1-312-368-3180Adam.kates@fitchratings.com Jennifer KimNew York, NY1-212-908-0740Jennifer.kim@fitchratings.com James LeBuhnChicago, IL1-312-368-2059James.lebuhn@fitchratings.com Dana RingerChicago, IL1-312-368-3215Dana.ringer@fitchratings.com Gary SokolowNew York, NY1-212-908-1186Gary.sokolow@fitchratings.com Eva TheinNew York, NY1-212-908-0674Eva.thein@fitchratings.com Emily WadhwaniChicago, IL1-312-368-3347Emily.wadhwani@fitchratings.com Emily WongSan Francisco, CA1-415-732-5620Emily.wong@fitchratings.com Relationship MgmtLocationPhoneE-mail James MitchellSarasota, FL1-941-921-4823James.mitchell@fitchratings.com 10/8/14

5. 4 www.fitchratings.com Fitch 2014 Median Ratios 10/8/14 Median‘AA’‘A’‘BBB’‘BIG’ Sample Size24360996915 Total Operating Revenue ($ Mil.)575.71,866.7 572.4 414.6141.7 Days Cash on Hand193.9277.1199.2145.074.8 Days in Accounts Receivable49.3 49.848.848.3 Cushion Ratio (x)16.426.517.010.55.3 Days in Current Liabilities64.867.961.567.363.4 Cash to Debt (%)127.7178.5131.293.655.7 Operating Margin (%)2.23.92.51.1(1.4) Op EBITDA Margin (%)9.211.0 9.57.97.3 Excess Margin (%)3.77.3 4.1 2.4(0.5) EBITDA Margin (%) 10.913.1 11.09.27.6 Personnel Costs as % of Total Operating Revenue55.052.855.057.460.9 Bad Debt as % of Patient Revenue5.85.5 6.1 6.45.8 EBITDA Debt Service Coverage (x)3.55.43.82.61.8 OP EBITDA Debt Service Coverage (x)3.04.43.12.31.6 Maximum Annual Debt Service as % of Revenues3.12.63.13.64.0 Debt to EBITDA (x)3.62.93.63.94.6 Debt to Capitalization (%)37.831.136.344.952.7 Average Age of Plant (Years)10.69.910.511.111.4 Capital Expenditures as % of Depreciation Expense115.7149.5119.999.468.1 EBITDA – Earnings before interest, taxes, depreciation, and amortization. BIG – Below Investment Grade. Source: Fitch Internal Data

6. 5 www.fitchratings.com 10/8/14 Ratings Distribution As of July 2014 *Reflects median portfolio of 243 rated entities. Source: Fitch Internal Data % of Total Median Portfolio

7. 6 www.fitchratings.com 10/8/14 Rating Criteria – An Overview Key Rating Drivers Management and Governance Operating Profile Operational Effectiveness Sufficiency of Financial Resources

8. PHYSICIAN INTEGRATION STRUCTURE 10/8/14

9. 8 www.fitchratings.com 10/8/14 Organization Structure Items for Consideration Obligated vs. Non-Obligated Group Pledged revenues Integration Models Incentive barriers Level of engagement Capital commitments Credit Implications Disclosure Transparency Non-Obligated ≠ non-critical Cash flow implications Value-Added Market scale Clinical footprint

10. 9 www.fitchratings.com 10/8/14 Organization Structure Areas of Risk Stark Law Compliance Electronic Health Records Quality Reporting Credit Implications Lawsuits Community Response Compliance

11. CASE EXAMPLE 10/8/14

12. 11 www.fitchratings.com 10/8/14 Case Study – Beloit Health System (WI) Balance Sheet Based on disclosed Audited Financial Data. Source: Fitch Internal Data

13. 12 www.fitchratings.com 10/8/14 Case Study – Beloit Health System (WI) Profitability Based on disclosed Audited Financial Data. Source: Fitch Internal Data

14. 13 www.fitchratings.com 10/8/14 Case Study – Beloit Health System (WI) Debt-Related Based on disclosed Audited Financial Data. Coverage = MADS debt service coverage. Source: Fitch Internal Data

15. 14 www.fitchratings.com Case Study – Beloit Health System (WI) Rating Outcome: Affirmed at ‘A-/Stable’ in 2010. Affirmed at ‘A-/Stable’ in 2012, again in 2014. “Fitch Ratings believes Beloit Health System’s acquisition of the Beloit Clinic, a 65-physician multispecialty practice, provides sufficient long-term strategic value to offset the immediate weakening of certain liquidity and debt measures” “Despite the immediate impact to BHS’s expense base and liquidity metrics, Fitch believes this acquisition and integration will ultimately bolster its market position, provide a stable physician supply, and create a clinically integrated platform which should position BHS well for healthcare reform” Demonstrable value (market share, quality, cash flow) and preservation of credit profile over intermediate term. 10/8/14

16. IMPLICATIONS OF PPACA 10/8/14

17. 16 www.fitchratings.com Utilization Trends – Use Rate per 1,000 10/8/14 Change, Year-Over-Year Source: Kaiser Family Foundation, US Census Data

18. 17 www.fitchratings.com Utilization Trends – Use Rate per 1,000 10/8/14 Change, Year-Over-Year Source: Kaiser Family Foundation, US Census Data

19. 18 www.fitchratings.com Value-Based Reimbursement Capitation Shared Risk Bundled Payment Medical Home Shared Savings P4P 10/8/14 Level of risk Credit Implications Level of financial risk Data transparency, sophistication Quality Control & Accountability

20. INDUSTRY OUTLOOK 10/8/14

21. 20 www.fitchratings.com Significant Headwinds: A Sector in Transition Greater volatility in year over year financial performance. Growing consumerism due to an increasing shift to high deductible health plans. Continued pressure on reimbursement from managed care and Medicare payors. Providers in Medicaid expansion states seeing early benefit from expanded coverage with reductions in bad debt expense. The impact from non-Medicaid enrollees through the health insurance exchanges on volumes and profitability is uncertain at this time. Increasing consolidation and widening credit gap 10/8/14

22. 21 www.fitchratings.com Related Research & Sector Upgrade/Downgrades Chart Seeking Value: Direct Contracting Strategies; May 20, 2014Seeking Value: Direct Contracting Strategies; May 20, 2014 2014 Median Ratios for Not-for-Profit Children’s Hospitals: Children’s Hospital Median Ratios Display Improvement; May 6, 20142014 Median Ratios for Not-for-Profit Children’s Hospitals: Children’s Hospital Median Ratios Display Improvement; May 6, 2014 U.S. Public Finance Rating Actions 1Q 2014; April 17, 2014U.S. Public Finance Rating Actions 1Q 2014; April 17, 2014 2014 Outlook: US Nonprofit Hospitals and Health Systems; December 11, 20132014 Outlook: US Nonprofit Hospitals and Health Systems; December 11, 2013 2013 Median Ratios for Not-for-Profit Hospitals and Healthcare Systems, August 13, 20132013 Median Ratios for Not-for-Profit Hospitals and Healthcare Systems, August 13, 2013 10/8/14

23. 22 www.fitchratings.com Fitch: Year-to-date Rating Actions 10/8/14 *Through July 18, 2014 Source: Fitch Internal Data

24. 23 www.fitchratings.com People in pursuit of answers 10/8/14

25. 24 www.fitchratings.com 10/8/14 Disclaimer Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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