Physician Practice: A Healthy Investment. May 2017

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1 Physician Practice: A Healthy Investment May 2017

2 Overview Committed funds raised by private equity firms reached an all-time high in 2016, with undeployed reserves at almost $541.8 billion nationwide, up 12 percent from the previous year 1. The physician practice industry has become increasingly appealing to private equity firms. This document outlines the key reasons why more capital is being dedicated to this industry sector.

3 Investment Dynamics Thriving & Recession Resistant Market Increasing Cash Flow Consolidation Potential Active Private Equity Interest

4 Thriving & Recession Resistant Market There are 870,000 active physicians in the United States. 2 Sixty percent of these physicians are part of independently owned practices, 3 which generate million office visits per year. 4 This demand is only expected to increase as one-third of physicians prepare to retire, healthcare becomes more accessible, and obese and aging populations continue to grow. 4

Market Forecast Physician Shortage The Association of American Medical Colleges projects a shortage of 62,000-95,000 physicians by 2025.

5 Market Forecast Physician Shortage The Association of American Medical Colleges projects a shortage of 62,000-95,000 physicians by Practice consolidation and the use of improved technology leads to more efficient practice management, which can help combat physician shortages. Practices have started to look to private equity firms as financial and strategic partners to facilitate this transition.. PROJECTED PHYSICIAN SUPPLY & DEMAND 5 # of physicians (thousands) Supply Demand 5

In the next 10 years, over one-third of all active physicians will reach the age of 65.

6 In the next 10 years, over one-third of all active physicians will reach the age of The retirement decisions of this group are anticipated to have the largest impact on physician supply in the United States. % PHYSICIANS REACHING RETIREMENT AGE BY EXPECTED INCREASE IN PHYSICIAN DEMAND BY FACTORS DRIVING DEMAND PHYSICIAN RETIREMENT ACCESS TO HEALTHCARE INCREASING ELDERLY POPULATION INCREASING OBESITY RATE 6

7 Access to Health Care Current political and economic factors are contributing to positive trends in the health care market. The industry will continue to grow as access to affordable heathcare and insurance increases. Since 2010, 20.4 million Americans have gained access to health care. 6 The insured rate in the United States has increased from 83.7 to 91.2 percent in under seven years. 6 A 2016 survey by Deloitte found Americans are increasingly prepared to handle medical costs. In 2016, 34 percent of Americans felt prepared to handle future health care costs compared to 16 percent in Insured Rate 2014 Insured Rate 2017 Insured Rate 7

Increasing Obesity Rates In addition to the current political and economic climate, organic growth factors continue to affect the health care industry.

8 Increasing Obesity Rates In addition to the current political and economic climate, organic growth factors continue to affect the health care industry. While health care regulations change over time, data shows the obesity rate and the older population will continue to account for a large percentage of healthcare spending in the future Obesity Rate Obesity Rate 8 36% 50% $200 billion 8 Estimated health care spending directly tied to obesity by 2030 in the United States $4,870 $3,400 average weight 9 overweight 9 Annual cost of health care, Annual cost of health care, By 2030, obesity will cause or contribute to million 5 million 400,000 cases of diabetes cases of heart disease or stroke cases of cancer 8

Aging Population The percentage of Americans over the age of 65 is expected to double between now and 2060.

9 Aging Population The percentage of Americans over the age of 65 is expected to double between now and This growth of the elderly population will increase demand for Alzheimerʼs care, cancer treatment and many other health care services. While the older population is the smallest age group in the United States, it accounts for 34 percent of all healthcare spending. Individuals over the age of 65 spend five times more than the average American on health care. 11 PROJECTED POPULATION GROWTH,

10 Increasing Cash Flow Annual healthcare spending for physician and clinical services reached $634.9 billion in 2015, a 6.3 percent increase from the previous year. 12 The industry is projected to grow at an average rate of 6.6 percent per year from

Increasing Cash Flow According to the World Health Organization, the United States spends more than any other country on health care, with 17 percent of the countryʼs total GDP being spent on health

11 Increasing Cash Flow According to the World Health Organization, the United States spends more than any other country on health care, with 17 percent of the countryʼs total GDP being spent on health care. 11 $717 billion ESTIMATED PHYSICIAN & CLINICAL SERVICES SPENDING FOR % % NATIONAL HEALTH CARE SPENDING ON PHYSICIAN & CLINICAL SERVICES 11 COMPOUND ANNUAL GROWTH RATE (CAGR) OF PHYSICIAN & CLINICAL SERVICES SPENDING 13 FACTORS INCREASING CASH FLOW Alternative payment models : - Accountable Care Organizations (ACOs) - Patient-centered medical homes - Bundled payments - Pay-for-performance Out-of-pocket payment for cosmetic procedures or specialty products: - LASIK surgery - Plastic surgery - Specialty medication - Non-medical dermatology procedures 11

12 PHYSICIAN & CLINICAL SERVICES EXPENDITURES 13 12

13 Consolidation Potential The four largest firms in the primary care sector accounted for only 3 percent of industry revenue in It is becoming more difficult for small practices to navigate increasingly complex regulations. Additionally, the price of medical education, equipment costs and the time commitment of practice management are leading physicians to consider alternative options. These industry trends have substantially improved consolidation opportunities for financial and strategic investors in physician and clinical services. 13

Consolidation Potential In a largely fragmented physician practice market, opportunity for consolidation through acquisition is readily available.

14 Consolidation Potential In a largely fragmented physician practice market, opportunity for consolidation through acquisition is readily available. Consolidation allows standalone practices to form a larger group and streamline their operations for increased efficiency. The increased practice size facilitates growth by increasing ancillary revenue streams, so practices often see an immediate improvement in their processes. There are 230,187 physicians practices in the United States, 14 of which 60 percent are still independently owned. 3 PHYSICIAN PRACTICES IN THE UNITED STATES % 22.3% 19.8% 12.1% 6.3% 13.5% 7.5% 1 physician 2-4 physicians 5-10 physicians physicians physicians 50+ physicians Direct hospital employee 44% Independent physicians expecting to sell their practice by

15 The shift away from single or small physician group practices is caused by: Need for efficiency Consolidated administration can lessen allow physicians to spend more time with patients Complex regulations New regulations, value-based care incentives and insurance policy changes increase the administrative burden on physicians High costs Rising medical fees have resulted in increased compensation demand. Market position Small practices have little leverage compared to large hospital systems. Infrastructure improvements Upgrading to electronic billing and records systems can be complicated and time consuming. Access to capital Small practices are looking for ways to access additional capital to cover these costs. 49% Physicians often or always experiencing burn-out

The 2016 Survey of America s Physicians found complex regulations are the least satisfying aspect of medical practice for physicians.

enforce these new policies. What is value - based care?

The program is broken into two tracks known as: 1.) The Merit-based Incentive Payment System (MIPs) 2.

16 The 2016 Survey of America s Physicians found complex regulations are the least satisfying aspect of medical practice for physicians. 17 In 2016, the majority of physicians felt the implementation of new regulatory burdens detracted from the efficiency of their practice and required additional administrative work to study and enforce these new policies. What is value - based care? MACRA, the 2015 Medicare Access and CHIP Reauthorization Act, reimburses physicians based on the value and quality of care as opposed to the previous Fee-For Service plans. The program is broken into two tracks known as: 1.) The Merit-based Incentive Payment System (MIPs) 2.) Advanced Alternative Payment Models ICD-10 Explained ICD-10, or the International Classification of Diseases, Tenth Revision, is a classification list by the World Health Organization to catalog health-related procedures, symptoms, and diagnoses. The revisions increased the number of medical codes from 13,000 to 68,000 and increased the number of categories for coding as well. The modification is meant to provide better data for public health research, insurance reimbursements, and investigating health care fraud. 16

Physicians want to spend more time providing quality health care to their patients and less time on practice management. HOURS SPENT ON PAPERWORK & ADMINISTRATION 18 Average physician work week: 52.

17 Physicians want to spend more time providing quality health care to their patients and less time on practice management. HOURS SPENT ON PAPERWORK & ADMINISTRATION 18 Average physician work week: hours hours 5-9 hours 20+ hours <5 hours 38% 25% 19% 19% In order to accomplish this, physicians are seeking out strategic and financial partners to help them streamline their responsibilities. This is often accomplished by the consolidation of multiple small practices to form a larger practice group with centralized technology and administrative efforts. 17

18 What options do independent physicians have for improvement? Join a health system or hospital Join a nationwide physician group Grow their practice on their own Sell their practice Partner with a private equity firm 66.2 percent of physicians believe the employment of physicians by hospitals is a negative trend that will not enhance quality of care or decrease costs. 17 What is drawing physicians to private equity over other options? Ability to monetize partial equity while remaining involved in their practice Avoiding hospital employment, allowing for greater autonomy and input on the future of their practice Private equity deals yield a higher return Ability to focus on patient care while their practice realizes its full potential 18

19 Active Private Equity Interest Health care merger and acquisition activity was strong in January 2017, with $44.7 billion spent across all sectors, and $3.28 billion spent in physician medical groups alone. In 2016, a record breaking 120 physician medical group transactions closed. The number of physician medical group deals increased from six in January 2016 to 18 in January 2017, 12 percent of the total health care market

Current Private Equity Activity Steady Deal Flow While the future of health care policy was uncertain in January 2017, deal volume in the health services sector remained steady during Q1 at over 200

20 Current Private Equity Activity Steady Deal Flow While the future of health care policy was uncertain in January 2017, deal volume in the health services sector remained steady during Q1 at over 200 deals for the seventh quarter in a row. Additionally, private equity healthcare deals are expected to remain resilient due to current dry powder reserves and fund cycle timelines. Physician services represented 41 percent of the total value of health services deals in Q While deal value appears to have decreased in January, this is because many of the deals announced did not disclose value. HEALTH SERVICES M&A DEAL VOLUME & VALUE DEAL VALUE (BILLIONS) # OF DEALS Announced deal value Announced deal volume 20

The physician practice sector experienced the most growth in deal volume and value from January 2016 to January 2017. 20 +2,604.1% +108.

21 The physician practice sector experienced the most growth in deal volume and value from January 2016 to January ,604.1% % deal value deal volume Increasing Multiples EBITDA multiples continued to increase year-over-year. Due to positive trends in health care, private equity firms are continuing to show interest in physician practice. Multiples were up percent between January 2016 and March PHYSICIAN PRACTICE EBITDA MULTIPLES 21 MULTIPLE 21

Return Potential Private equity firms are hoping to replicate trends in the global healthcare market within smaller middle-market transactions.

22 Return Potential Private equity firms are hoping to replicate trends in the global healthcare market within smaller middle-market transactions. Data shows that, globally, health care has led all sectors in total returns to shareholders, at 15 percent. GLOBAL TOTAL RETURNS TO SHAREHOLDERS 22 Healthcare - 15% Consumer Staples - 13% IT - 11% Consumer Discretionary - 11% Telecom - 9% Industrials - 8% Financials - 7% Utilities - 6% Materials -2% Energy -1% *Based on global companies with revenues >$500 million 22

Jim Palazzo is the founder and president of Paragon Health Capital and has worked in the healthcare industry for nearly 30 years. Better deals, better options and a brighter future.

We are specialists like you. We are not advisory and transaction services generalists, working in many industries or even more broadly in the healthcare industry.

paragonhealthcapital.com info@paragonhealthcapital.com 800-408-3471 950 E.

23 Jim Palazzo is the founder and president of Paragon Health Capital and has worked in the healthcare industry for nearly 30 years. Better deals, better options and a brighter future. Paragon Health Capital is a firm of medical practice specialists bringing together a depth of experience and proven networks to advise physicians towards maximizing the value of their practices. We are specialists like you. We are not advisory and transaction services generalists, working in many industries or even more broadly in the healthcare industry. The mission of our firm is to facilitate activity between doctor groups and potential partners. We have a deep understanding of physician practice operation, governance, cash flow, and staffing. info@paragonhealthcapital.com E. State Hwy 114 Ste 160 Southlake, TX As both a physician group administrator and founder of a hospital & physician consulting, transaction, and interim management firm that was sold to a publicly traded healthcare consulting firm in 2011, he developed a deep understanding of the unique factors that lead to organizational success. These include: effective governance, strategic positioning, developing measurable clinical excellence, operational efficiencies, IT management, revenue cycle management, contracting, recruiting, and staffing. He has gained experience in many different markets across the United States working with doctors, hospitals, systems, payers, and government. His primary focus over the years has been in support of optimizing and bringing greater value to physician practices. Paragon Health Capital was founded to offer investment banking and business brokerage services focused on the physician practice, in addition to offering more traditional transaction and provider consulting services. Paragon takes great care in matching physician practices with the right kind of optimal outcome for practice owners, primarily with private equity firms through management recapitalization.

24 References 1 - Private Equity Capital Briefing. Ernst and Young, Nov "Total Professionally Active Physicians." The Henry J. Kaiser Family Foundation. N.p., 08 Nov "Data and Reports - Workforce - Data and Analysis - AAMC." Association of American Medical Colleges. N.p., n.d. 3 - Physician Practice Acquisition Study. Physician's Advocacy Institute, Sept "National Ambulatory Medical Care Survey." Encyclopedia of Epidemiology. Centers for Disease Control and Prevention < data/ahcd/namcs_summary/2013_namcs_web_tables.pdf>. 5 - "The Complexities of Physician Supply and Demand: Projections from 2014 to 2025." Association of American Medical Colleges. IHS Inc., 5 Apr < 6 - "Health Insurance Coverage: Early Release of Estimates from the National Health Interview Survey." Centers for Disease Control and Prevention. National Center for Health Statistics, Feb < 7 - "2016 Survey of US Health Care Consumers." Deloitte, < life-sciences-health-care/us-dchs-consumer-survey-hix.pdf>. 8 - "Half Of Americans Could Be Obese By 2030 Or We Could Invest in the Prevention Fund." Trust for America's Health. Healthy Americans, Web. < 9 - July 27, 2009, teleconference with: Thomas R. Frieden, M.D., M.P.H. director, U.S. Centers for Disease Control and Prevention; Eric Finkelstein, Ph.D., director, RTI Public Health Economics Program, Research Triangle Park, NC; William H. Dietz, M.D., Ph.D., director, Division of Nutrition, Physical Activity, and Obesity, U.S. Centers for Disease Control and Prevention, Health Affairs Colby, Sandra L. and Jennifer M. Ortman, Projections of the Size and Composition of the U.S. Population: 2014 to 2060, Current Population Reports, P , U.S. Census Bureau, Washington, DC, "NHE Fact Sheet." Centers for Medicare & Medicaid Services. 21 Mar < "National Health Expenditures 2015 Highlights." (n.d.): n. pag. Centers for Medicare and Medicaid Services Web. < "National Health Expenditure Projections " (n.d.): Centers for Medicare and Medicaid Services Web. < AVT, Inc. PR Newswire. N.p., 19 Aug Web. < Kane, Carol K. "Updated Data on Physician Practice Arrangements: Inching Toward Hospital Ownership." American Medical Association, Web. < Independent Physician Outlook. "Physician Migratory Patterns." Threats to Independence and Implications for the Future. Procare Systems Incorporated, < "2016 Survey of America's Physicians: Practice Patterns and Perspective." The Physician's Foundation. Merritt Hawkins, < "Medscape Physician Compensation Report 2017." Medscape. N.p., < HealthcareM&A.com, February "US Health Services Deals Insights Q " PwC. < "Healthcare Services Sector Update." Industry Insights (n.d.): n. pag. Duff and Phelps. January March < Clay Bischoff, Brian Fox, and David Quigley. "The next Act in Healthcare Private Equity." McKinsey & Company. Dec < 24

www.paragonhealthcapital.com info@paragonhealthcapital.

25 E. State Hwy 114 Ste 160 Southlake, TX 76092

AMN Healthcare Investor Presentation

AMN Healthcare Investor Presentation September 2017 The Innovator in Healthcare Workforce Solutions and Staffing Services Forward-Looking Statements This investor presentation contains forwardlooking statements