Performance, Efficiency, Achievement, Knowledge Spine and Orthopedic ASC Development October 22, 2015 22nd Annual Meeting The Business and Operations of ASCs Kenny Hancock, President and Chief Development Officer Meridian Surgical Partners
Market Drivers for Spine & Orthopedics
Market Drivers Spine & Ortho ASCs Minimally Invasive Mindset Physicians Patients internet search Minimally Invasive Industry less invasive technology Technology Surgical - implants, instruments and techniques Anesthesia Ability to eliminate nausea Pain control Insurance Company Acceptance Safe to perform in an ASC setting Superior environment & less expensive than the hospital alternative High quality patient outcomes 3
Migration of Spine to ASC Spine Surgery Shift to Outpatient 2015 Shift of Spine to ASCs 45% Driven by Technology, Anesthesia, Physician Mindset and Insurance Acceptance Insight from Spine Investments MSP Estimated Migration of Spine Surgery from Inpatient to Outpatient 600,000 Inpatient Outpatient Spine Surgery 2005 2010 2015 CAGR Inpatient 523,629 417,770 348,150-4.0% 400,000 Outpatient 27,559 179,044 284,850 26.3% Total 551,188 596,814 633,000 1.4% 200,000 % Outpatient 5.0% 30.0% 45.0% - 2005 2010 2015 Source: NeuroSource Inc. 2005 4
Migration of TJR to ASC Total Joint Replacement Surgery Shift to Outpatient Trends TJR currently performed in hospitals Same clinical considerations as spine Appears to be moving faster than spine Significant market opportunity» 600,000 knees in 2012» 350,000 hips in 2012» TJR projected to 2 million cases in US by 2015 (Source Arthritis Care & Research)» CMS fee schedule for uni-knees CMS may include fee schedule in 2015 for TJR» Fee schedule for uni-knees now 5
The Essentials for Success
Develop a Detailed Business Plan Detailed Business Analysis Project Scope Surgical Case Volume & Mix Financial Analysis and Plan Partnership Structure Reimbursement - Managed Care Strategy Equipment Plan Operations Plan 7
Project Scope
Project Scope Determine the Scope of the Project The Scope Determines the Cost The Cost Determines the Investment Number of Physicians Case Volume Specialty Mix Scope Number of Square Footage ORs/Pre-Post Square Footage Working Capital Pre-Opening Expenses Construction Cost Equipment Costs Cost Equity Debt Investment
Surgical Case Volume and Mix
Case Build Analysis by Physician Surgical Case Analysis Determine Volume Complete case data worksheets Discount case volumes Determine Reimbursement per case Market Specific Determine Revenue Volume times Reimbursement Use historical cost to build financial model 11 Spine Worksheet Cases Cases Cases Cases CPT Description 2013 2014 2015 YTD 2015 Annl. 63020 Cervical Disc Foraminotomy Post 63045 Cervical Laminectomy 22523 Thoracic Kyphoplasty 22524 Lumbar Kyphoplasty 63030 Lumbar Laminectomy / Micro Discectomy 63047 Decompressive Lumbar Laminectomy 22558 ALIF 1 Level 22633 PLIF - 1 Level Lumbar Spine Fusion Combined 22633 PLIF - 2 Level Lumbar Spine Fusion Combined 22551 ACDF - 1 Level Spine Fusion 22551 ACDF - 2 Level Spine Fusion 63042 Laminotomy Single Lumbar Totals 0 0 0 0 avg per month 0 0 0 0 Pain Worksheet Cases Cases Cases Cases CPT Description 2013 2014 2015 YTD 2015 Annl. 27096 Injection Sacroiliac Joint 62290 Lumbar Discography Injection 62291 Cervical Discography Injection 62310 Epidural Injection Cervival/Thoracic 62311 Epidural Injection Lumbar/Sacral 64470 Facet Injection Cervical/Thoracic 64472 Facet Injection Cervical/Thoracic 2nd joint or 3rd block 64475 Facet Injection Lumbar/Sacral 64476 Facet Injection Lumbar 2nd joint or 3rd block 64479 Injection Foramen Epidural Cervical / Thoracic 64480 Injection foramen Epidural Cervical/Thoracic 2nd level 64483 Injection Foramen Epidural Lumbar/Sacral 64484 Injection Foramen Epidural Lumbar 2nd level 64622 Destruction Facet Joint Nerve Lumbar/Sacral 64623 Destruction Facet Joint Nerve Lumbar/Sacral add on 64626 Destruction Facet Joint Nerve Cervical/Thoracic 64627 Destruction Facet Joint Nerve Cervical/Thoracic add on Totals 0 0 0 0 avg per month 0 0 0 0
Case Build Analysis Physician Build Name Spec Cases Discount Base Thomas ORT 180 20.0% 216 Smith ORT 150 20.0% 180 Jones ORT 200 20.0% 240 Tulloch ORT 200 20.0% 240 Wilson-Hand HAND 200 20.0% 240 Uden-TJR HAND 200 20.0% 240 Smith TJR 75 20.0% 90 Gupta TJR 75 20.0% 90 Morris PAIN 400 20.0% 480 Guion PAIN 600 20.0% 720 Kowalski PAIN 600 20.0% 720 Samuelson-SP SPINE 75 20.0% 90 Bruce SPINE 75 20.0% 90 0 0-0.0% - 12 Specialty Build Spec Count Cases Discount Base Ramp Year 1 Year 2 Year 3 Year 4 Year 5 Case Mix ENT - - - - - - - - - - 0% GI - - - - - - - - - - 0% GEN - - - - - - - - - - 0% GYN - - - - - - - - - - 0% OPT - - - - - - - - - - 0% Hand 2 400 20.0% 480 (160) 320 353 432 480 488 14% ORT 4 730 20.0% 876 (292) 584 646 789 876 890 25% PAIN 3 1,600 20.0% 1,920 (640) 1,280 1,411 1,729 1,920 1,951 56% POD - - - - - - - - - - 0% URO - - - - (60) (60) 180 180 180 180 0% Spine 2 150 20.0% 180 (60) 120 132 162 180 183 5% T otal 11 2,880 20.0% 3,456 (1,212) 2,244 2,722 3,292 3,636 3,692 100%
Financial Analysis and Plan
Net Revenue by CPT Net Revenue Determination By Sub-Specialty - (Spine) (Pain) (Ortho) NeuroSpine - Surgeon 1 CPT Description Rev/Case Cases Net Revenue 63020 Cervical Disc Foraminotomy Post $3,996 0 $0 63045 Cervical Laminectomy 5,993 22 131,835 22523 Thoracic Kyphoplasty 3,380 0 0 22524 Lumbar Kyphoplasty 3,380 2 6,759 63030 Lumbar Laminectomy / Micro Discectomy 4,796 11 52,315 63047 Decompressive Lumbar Laminectomy 5,195 100 521,477 22558 ALIF/XLIF 19,937 71 1,413,035 22630 PLIF 18,755 12 218,808 63042 Laminotomy 4,296 5 21,480 63056 Transpedicluar approach with decompression of spinal 5,195 40 205,419 22554 ACDF - 22551 28,221 62 1,759,109 22850 1 level hardware removal 4,805 7 33,634 22852 2 or more levels hardware removal 4,288 0 0 22856 Artificial Disc replacement 6,437 5 32,183 Totals 337 $4,396,054 Net revenue per case - surgeon 1 $13,056 NeuroSpine - Surgeon 2 CPT Description Rev/Case Cases Net Revenue Net revenue per case - surgeon 2 $8,963 Total blended net revenue per case $12,083 14
Revenue Assumptions by Sub-Specialty Revenue Assumptions Case Volume Year 1 Year 2 Year 3 Year 4 Year 5 Orthopedic 584 646 789 876 890 Pain Management 1,280 1,411 1,729 1,920 1,951 Hand 320 353 432 480 488 Total Joint 120 180 180 180 180 Spine 120 132 162 180 183 Total 2,424 2,722 3,292 3,636 3,692 Reimbursement Year 1 Year 2 Year 3 Year 4 Year 5 Orthopedic 2,601 2,640 2,680 2,720 2,761 Pain Management 950 964 979 993 1,008 Hand 1,592 1,616 1,640 1,665 1,690 Total Joint 11,000 11,000 11,000 11,000 11,000 Spine 9,245 9,384 9,524 9,667 9,812 Total 25,388 25,604 25,823 26,045 26,271 Net Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Orthopedic 1,519 1,704 2,114 2,383 2,457 Pain Management 1,216 1,361 1,692 1,907 1,967 Hand 509 570 709 799 824 Total Joint 1,320 1,980 1,980 1,980 1,980 Spine 1,109 1,241 1,544 1,740 1,795 Total 5,674 6,857 8,039 8,809 9,023 Net revenue in thousands 15
ASC Scope Global Project Assumptions ASC Construction 8,500 sq. ft. facility 2 operating rooms 1 procedure room Lease rate $24.00 per foot Equity raise $15,000 per 1% - Units 100 Design and construction $1.360 million Capital expenditures $1.975 million 16
Project Assumptions Project Assumptions Facility Size Debt Financing Uses of Capital Square Feet 8,500 Capital Expenditures 1,975,000 Capital Expenditures 1,975,000 Operating Rooms 2 Construction Costs 1,360,000 Working Capital 1,259,685 Procedure Rooms 1 Other Fees and Expenses 160,000 Pre-Opening Expenses 240,315 Total Debt Financing 3,495,000 Design and Construction 1,520,000 Construction Costs Total Uses 4,995,000 Build-Out Costs per SqFt 200 TI Allowance 40 Debt and Lease Terms Sources of Capital Build-Cost to Partnership 160 Debt 5.00% 7 Years Physicians 70% 1,050,000 Construction Costs 1,360,000 Building Rent Rate (per SF) $24.00 Corporate 30% 450,000 Total Equity Financing 1,500,000 Capital Expenditures Investment Terms Debt Financing 3,495,000 Medical Equipment 1,750,000 Price pre Unit $ 15,000 Total Sources 4,995,000 Computers & Software 100,000 Available Units 100 Furniture & Fixtures 125,000 Total Equity Financing 1,500,000 Total Cap Ex 1,975,000 17
Financial Projections Financial Projections Free Cash Flow (In Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Net Revenue 5,674 6,857 8,039 8,809 9,023 Salaries and Benefits 1,270 1,292 1,517 1,772 1,834 Medical Supplies 1,702 2,067 2,436 2,683 2,761 Rent Expense 204 210 216 223 230 Management Fee 284 343 402 440 451 Other Operating 556 595 658 711 746 EBITDA 1,658 2,350 2,810 2,980 3,000 Debt Service (419) (593) (593) (593) (593) Capital Expenditures - (20) (30) (40) (49) Changes in Working Capital (825) (172) (170) (110) (30) Free Cash Flow 415 1,565 2,017 2,237 2,329 Per Case Data Year 1 Year 2 Year 3 Year 4 Year 5 Case Volume 2,424 2,722 3,292 3,636 3,692 Revenue 2,341 2,519 2,442 2,423 2,444 Salaries and Benefits 524 475 461 487 497 Medical Supplies 702 760 740 738 748 18 Returns Analysis Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investor Cashflow (1,500) 1,505 1,665 2,017 2,237 2,329 Annual Return 100.3% 111.0% 134.5% 149.1% 155.2% Cumulative Return 0.3% 111.3% 245.8% 394.9% 550.2%
Summary Financial Analysis Construct a free cash flow analysis is to view the opportunity from a realistic, albeit conservative, set of assumptions Free Cash Flow Analysis These assumptions include: 19 Case count Reimbursement Supply cost FTE count Other operating Capital expenditures Working capital and debt service Free Cash Flow (In Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Net Revenue 5,674 6,857 8,039 8,809 9,023 Salaries and Benefits 1,270 1,292 1,517 1,772 1,834 Medical Supplies 1,702 2,067 2,436 2,683 2,761 Rent Expense 204 210 216 223 230 Management Fee 284 343 402 440 451 Other Operating 556 595 658 711 746 EBITDA 1,658 2,350 2,810 2,980 3,000 Debt Service (419) (593) (593) (593) (593) Capital Expenditures - (20) (30) (40) (49) Changes in Working Capital (825) (172) (170) (110) (30) Free Cash Flow 415 1,565 2,017 2,237 2,329 Per Case Data Year 1 Year 2 Year 3 Year 4 Year 5 Case Volume 2,424 2,722 3,292 3,636 3,692 Revenue 2,341 2,519 2,442 2,423 2,444 Salaries and Benefits 524 475 461 487 497 Medical Supplies 702 760 740 738 748 Percent of Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Salaries and Benefits 22.4% 18.8% 18.9% 20.1% 20.3% Medical Supplies 30.0% 30.2% 30.3% 30.5% 30.6% Rent 3.6% 3.1% 2.7% 2.5% 2.5% EBITDA 29.2% 34.3% 34.9% 33.8% 33.3% Distribution Analysis (In Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Free Cash Flow 415 1,565 2,017 2,237 2,329 Beginning Cash Balance 1,290 200 100 100 100 Minimum Cash Balance (200) (100) (100) (100) (100) Distributions 1,505 1,665 2,017 2,237 2,329 5-Year Investor Returns Analysis (In Thousands) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investor Cashflow (1,500) 1,505 1,665 2,017 2,237 2,329 Annual Return 100.3% 111.0% 134.5% 149.1% 155.2% Cumulative Return 0.3% 111.3% 245.8% 394.9% 550.2%
Partnership Structure
Partnership Structure Real Estate Partnership 15 year lease ASC Partnership Real Estate Partnership Separate partnership is formed RE partnership captures land purchase, site, utilities, fees & permits, shell building and tenant construction allowance Includes physicians from the ASC partnership Investment: Land ($6.50 to $14.00sf.) 1.54 acres ($436-$939k) Site Improvements/AE/soft costs - ($30sf.) Building Shell ($100 to $110sf.) TI construction cost allowance ($45sf.) Investment Thesis: 15 year lease term with personal guarantees (5 yrs) Total investment: (ASC freestanding or w/mob)» Equity: 30% -- Debt: 70%» Guarantees pro-rata Cash-on-cash returns 14% to 20% over 15 year term 21
Partnership Structure Real Estate Partnership 15 year lease ASC Partnership 22 Surgery Center Partnership ASC partnership Physician owners + management partner Investment includes: 8500 sf. Interior construction cost» $1.36mm ($160 sf.)» TI allowance - $40 sf. ($340k) (RE provides) Equipment ($1.750mm) Working capital ($1.5mm) Investment Thesis: Total investment: $4.995,000 Equity: $1.5mm 1% pro-rata $15K Debt: $3,495,000 Guarantees -1% pro-rata - $35k 15 year lease term Cash-on-cash returns 40% +
23 Planning - Schematics
24 Ambulatory Surgical Center
What Must be Considered?
Reimbursement Make Sure You Get Paid! Reimbursement Getting paid is a critical step in the business plan Spine procedures historically not approved by Medicare Medicare 2015 approved 9 spine codes» 22551 Neck spine fuse & remove belc2» 22554 Neck Spine fusion» 22612 Lumbar spine fusion» 63020 Neck spine disc surgery» 63030 Low back disc surgery» 63042 laminotomy single lumbar» 63045 Removal of spinal lamina» 63047 Removal of spinal lamina» 63056 Decompress spinal cord Only uni-condylar knees are recognized by Medicare MC Bundle Program may lead to fee schedule for TJR Must convince the insurance company these procedures are safe in an ASC Insurance companies are beginning to develop ASC fee schedules for spine This is a negotiation between the ASC and insurance companies Becomes a major problem if OON is prohibited and you can t get a contract 26
Implant Cost Implant Costs Addressing implant cost is essential Negotiate carve-outs Having solid cost data is important when negotiating with the payors Off-load implant cost to a third-party company 27
Equipment Considerations Equipment Costs Hire an experienced equipment planner to assist Expense up to $500-700k per operating room Microscope - $80-120k C-arm - $150k Drill set - $30,000 Spine instrument trays cervical and lumbar $50k+ Lumbar table $35k 28
Operations Staffing Staffing Hire a staff that has spine/tjr experience Hire a staff that has worked with your surgeons Understanding the challenges and needs of the patients pre and post-operatively will make a significant difference in success out of the gate 29
Operations Patient Discharge Plan Home Care Develop a program with Home Care Patient plan after discharge to home Pain protocol developed Physical therapy plan developed Develop a process that produces high patient satisfaction Skilled Nursing Discharge patient to rapid recovery center Hotel-like amenities Licensed as a skilled or immediate care facility Transportation Pain protocol developed Physical therapy plan developed Develop a plan of that produces high patient satisfaction 30
31 Rapid Recovery
32 Rapid Recovery
Summary Spine & TJR Ortho surgeons are evaluating opportunities to develop/join ASCs Driven by desire to control their surgical environment Increase productivity, simplify their lives and increase income No change in what you do --- just where you do it Incremental cash Advancements in technology drive spine & TJR into an outpatient setting MIS product and instrument design Improvements in anesthesia and pain control Evolution of surgeon acceptance and comfort in an outpatient setting Planning is essential for a successful outcome Careful business plan development is critical Seek assistance from professionals with specific experience 33
Thank You! Kenny Hancock President & Chief Development Officer Meridian Surgical Partners 615-301-8142 khancock@meridiansurg.com www.meridiansurgicalpartners.com @meridiansurg 34