May 3, 2010

Health System Partnerships

2

Changing Landscape: Health Systems

• Physician Challenges:– Waning out of network model– Poor reimbursement– Expense pressures– Reduced margins,

distributions and valuations

• Affiliation Goals:– Access to capital– Stability– Growth– Contracting leverage– Management effectiveness– Partial liquidity event

Hospital/Corporate

Partner25%

Physicians Only75%

Hospital/Corporate

Partner37%

Physicians Only63%

2006

2008

3

Health System Perspective on ASCs

• Build a leading network of ASC JVs

• Recapture, grow ambulatory surgery volumes

• Access efficient, convenient and high quality facilities

• Free up hospital-based OR capacity

• Align with high quality physicians

• Leverage scarce capital across wide network

• Expand brand name and market presence

• Grow other IP, OP, and ancillary services

• Earn strong financial returns

• Prepare for Accountable Care Organization structure

4

Structuring Health System Partnerships

1. Build a scalable strategic plan

2. Know what you’re going after

3. Maximize physician ownership and commitment

4. Contract on behalf of your network

5. Control does not require 51%

6. Partner for the long term

7. Access partner capital

8. Negotiate effective non-competes

9. Negotiate effective buy-back provisions

10. Be flexible in approach to physician integration

5

Changing Landscape: ASC Industry

• “Flip This House” strategy – buy low, then sell to larger ASC company at high price

• “Build It, And They Will Come” strategy

• Out-of-network as corner-stone of strategy

• Larger companies inhibited by accounting consolidation from making minority investments

• Larger companies open to full range of deal structures – including minority investments

• Sellers looking for long-term operating partner, who can bring sustained value

• Economies of scale more important than ever

• Reimbursement + cost pressure consolidation accelerating

Past Today + Future

6

SCA Overview

• 126 facilities

• Strong clinical results

• 5,000 teammates

• 2,000 physician investors

• $700 million revenue

• Strong financial results

• Significant capital

• Flexible deal structures– Acquisitions

– New builds

– Hospital partnerships

7

SCA Operating Model

• Focus on clinical quality and patient safety

• Commitment to serving physicians and creating value

• Investment in recruiting and developing leaders

• Data driven processes and disciplined execution

• Economies of scale

• Best practice sharing

• Clinical Excellence

• Advocacy

• Supply Savings

• Volume Growth

• Payer Contracting

• Benchmarking

• Training

• Labor Management

How We Work Value To Our Centers

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SCA Performance

Prior Company New Company

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SCA Health System Experience

Health System/Hospital LocationSutter Health Sacramento, Santa Rosa, & Auburn, CA

California Pacific Medical Center San Francisco, CA

University of California San Diego San Diego, CA

Redlands Community Hospital Redlands, CA

Loyola University Oakbrook Terrace, IL

Baylor University Houston, TX

Holy Spirit Camp Hill, PA

Mainline Health Paoli, PA

Baptist Health System Memphis, TN

Vanderbilt University Nashville, TN

Shands Hospital Jacksonville, FL

Florida Hospital Winter Park, FL

Owensboro Health System Owensboro, KY

Northeast Georgia Medical Ctr Gainesville, GA

Muskogee Regional Med Ctr Muskogee, OK

Norman Regional Hospital Norman, OK

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SCA Perspective

• Three areas of focus:– Provide outstanding patient care + clinical outcomes

– Create measurable value for physicians

– Recruit + develop outstanding leaders

• Actively acquiring centers– Private equity partner with interest to invest more capital

– Make both majority and minority investments

– Both physician/SCA and physician/hospital/SCA structures

– Open to out-of-network centers, at appropriate price

• Built to last – a stable partner for the long-term

• Active corporate citizen for our teammates + communities

ASC Strategies for the Foreseeable Future:

National Landscape as Viewed Through the ASC Prism

Brent W. Lambert, MD, FACSPrincipal and Founder

Luke M. Lambert, MBA, CFA, CASCChief Executive Officer

Ambulatory Surgical Centers of America

The ASC industry is no longer growing.

We will see as many closing ASCs this year as new openings.

The pool of surgeons is not growing, but rather

contracting as a function of the

population.

Maturation of ASCs where there are

inadequate or no evergreen provisions

in the documents.

Consolidation of payers.

Elimination of OON.

Private equity fervor for the ASC industry

declining.

Minority model gaining acceptance with private

equity investors.

ASC industry is weak politically vis-a-vis

the hospital industry.

This is changing with the ASC Association Advocacy Committee, comprised of corporate industry leaders

and the ASC Association.

The Squeeze is On

• Now reaping the effects of dramatic cost inflation.

• Reimbursement has been flat or down over the course of many years for most centers.

• Large numbers of centers are not delivering positive returns.

Capital Driven Growth Will Disappoint

• Capital is relatively abundant compared to good management.

• Companies and capital providers that ignore accounting presentation in favor of business logic will prevail, others are handicapped.

• Good operators don’t need capital.

Keys to Future Success: Efficiency

• Schedule consolidation delivers good old fashioned labor productivity and margin improvement.

• Surgeon preference drives supply cost.• With financial returns threatened surgeons

willing to make hard decisions.

Payer Contracting

• Accept what you’re offered and you’ll struggle financially.

• Surgeon direction of surgical venue key to negotiating success.

• Hospital partnerships can enable centers to maintain profits while going in network.

Physician Recruitment

• Dwindling numbers of available physicians – musical chairs.

• It’s becoming uncommon to find physicians that aren’t bound by non-competitive covenants.

• Hospital employment is a significant limiting trend.

Minority Model will Continue to Deliver Superior Results

• Level of surgeon participation impacts: schedule, supply costs, and recruitment.

• Accounting driven business models compete with one arm tied behind their back.

• Corporate partners do deliver value with expertise and assistance

• As in the past, there will be many more happy minority model investors than majority.

THINK PROFITS

Brent W. Lambert, MD, FACSPrincipal & Founder

Luke M. Lambert, CFS, CASCChief Executive Officer

Ambulatory Surgical Centers of America

www.ascoa.com

Question and Answer Session

Hospitals and Surgery Centers Key Thoughts on Strategic

Planning

David FleischPartner Healthcare PracticeBain & CompanyDavid.fleisch@bain.com312.629.4070

Andrew HayekChief Executive OficerSurgical Care AfiliatesAndrew.hayek@scasurgery.com 205.545.2755

Scott Becker, JD, CPAPartnerMcGuireWoods, LLPSbecker@mcguirewoods.com 312.750.6016

Luke LambertChief Executive OfficerAmbulatory Surgical Centers of AmericaLlambert@ascoa.com 781.826.6610

Brent LambertPresident & OwnerAmbulatory Surgical Centers of AmericaBlambert@ascoa.com781.258.1533