M&A in California

1. M&A in California OR Where Have All the Buyers Gone? Eric Tuckman, President Advisory Health Management Group

2. Hospital Acquisition Environment • Recent History – California viewed as “challenging”/unfavorable market • Difficult regulatory environment • Union penetration • Excessive construction costs • Seismic compliance/uncertainty • Significant managed care penetration

3. Managed Care Penetration Provider Overview NH WA VT VT ME ME ND MT MT ND OR MN MN MA MA ID NY NY SD WI WI RI WY MI CT CT IA IA PA PA NE NE NJ NJ NV OH IL IL UT IN DE DE CO CO WV WV CA MD MD KS KS VA VA MO MO KY KY DC DC NC TN TN AZ AZ OK OK AR AR SC NM NM GA AL AL MS MS TX TX LA LA FL HI AK ____________________ Source: Competitive Edge Reports, HealthLeaders-2005 11

4. Atmosphere Beginning to Change • Health care reform likely (uninsured/bad debt solution) • Seismic relief • Managed care parity • Demographics favorable Bottom line – top-line growth possible; expense side within norms

5. Growth in Total Population expected by 2015 NH WA VT VT ME ME ND MT MT ND OR MN MN MA MA ID NY NY SD WI WI RI WY MI CT CT IA IA PA PA NE NE NJ NJ NV OH IL IL UT IN DE DE CO CO WV WV CA MD MD KS KS VA VA MO MO KY KY DC DC NC TN TN AZ AZ OK OK AR AR SC NM NM GA AL AL MS MS TX TX LA LA FL HI AK Demographic Overview ____________________ Source: U.S. Census Bureau, Population Division, Population Projections Branch. 4

6. Growth in Population of age 65 and over expected by 2015 NH WA VT VT ME ME ND MT ND OR MN MN MA MA ID ID NY NY SD WI WI RI WY MI CT CT IA IA PA PA NE NE NJ NJ NV OH IL IL UT UT IN DE DE CO CO WV WV CA MD MD KS KS VA VA MO MO KY KY DC DC NC TN TN AZ AZ OK OK AR AR SC NM GA AL AL MS MS TX TX LA LA FL HI AK Demographic Overview ____________________ Source: U.S. Census Bureau, Population Division, Population Projections Branch. 5

7. Concentration of For-Profit Beds NH WA VT VT ME ME ND MT MT ND OR MN MN MA MA ID NY NY SD WI WI RI WY MI CT CT IA IA PA PA NE NE NJ NJ NV OH IL IL UT IN DE DE CO CO WV WV CA MD MD KS KS VA VA MO MO KY KY DC DC NC TN TN AZ AZ OK OK AR AR SC NM NM GA AL AL MS MS TX TX LA LA FL HI AK Provider Summary ____________________ Source: Kaiser Henry J Foundation 2004 10

8. Buyers on the Horizon • Financial Buyers – Hospital sector viewed as attractive mid- to long-term • Distressed debt/restructuring firms see upside in recent depressed operating performance • Start-ups • Physician-owned/managed entities • Syndication opportunities • Strategic Buyers – Opportunity to add to network quickly • Buy vs. build makes economic sense • Implementation of new operating strategy • Managed care play – instantaneous net revenue fix

9. Valuation • California hospital values generally below national norms • EBITDA/net revenue multiples • Comps often not correct • Bankers generally have same data so valuationmetrics are similar • Sophisticated buyers (financial and strategic) normally use DCF model • Generally, cannot financially justify a deal for defensive purposes • Real estate value has driven many recent deals

10. Metrics Used by Investment Bankers

11. Tenet Divestitures – Before and After 2002 • 140 hospitals nationwide • 40 California hospitals2003 • Outlier “problem”/Redding controversy/Alvarado litigation • Business strategy no longer viable • Nameplate damaged • California viewed as the locus of the problems • Short-term operating upside evaluated as high-risk/non-existent

12. Tenet California Divestiture Tenet Healthcare says it will sell 27 hospitals Wednesday, January 28, 2004 Los Angeles – Tenet Healthcare, the hospital chain that grew through aggressive acquisitions before becoming mired in federal investigations, is planning to sell more than a quarter of its hospitals in an effort to reverse its declining fortunes. Tenet, which is based in Santa Barbara, will announce today that it intends to sell 27 hospitals, leaving it with only 69 in 13 states, its chief executive, Trevor Fetter, said. Among those to be sold are 19 in California, accounting for more than half of the hospitals it owns in the state. • Largest single-market divestiture in history • Only one of 21 hospitals with positive cash flow • Public commitment made to preserve hospitals

13. Tenet California Divestiture Factors driving the divestiture decision • Significant seismic estimates • Union agreements/successor clauses/organizing rights • Large complement of DSH Hospitals • Compliance/Fraud and Abuse overhang • Prosecution status unclear • Unwinding of physician arrangements • Alvarado Hospital trial distraction Margins simply better outside of California

14. The Process • Investment bankers utilized but process managed and directed at the market level • Summary facility profiles developed – formal traditional descriptive memorandums not utilized • Defined sales criteria – no real estate buyers or non-industry outsiders • Large deposit required • Standardized transaction agreements (asset purchase structures) utilized • Experienced legal counsel mandated

15. Sale Solicitation Strategy • No national systems interested • Limited interest from private equity/hedge funds • Offered as donation to major nonprofit systems – offer declined • Cultivated local buyers • Avoid political battles

16. And the Winners Are… • Predominately physician-owned/managed organizations • Most utilized some form of whole-hospital physician syndication • Almost all utilized financing secured by real estate • Final results … still being tabulated

17. California Nonprofit Conversions • Extensive regulatory review process • Broad discretion given to AG • Essentially political/administrative process determined by philosophy of sitting AG • Experienced advisors crucial • Ability to control/use net proceeds of sale (application of traditional charitable trust doctrines) • Health planning “light”

18. Predictions for the Future • Hospital acquisition activity is cyclical • Parallels operating/reimbursement cycles • Large systems performing strategic assessmentsof existing portfolios • Effective capital deployment vs mission • FEMA grants now fully spent • Access to necessary capital will be more difficult • Cost of construction in California not likely to decrease significantly • Passage of health care reform will improve valuations • Proposed seismic reclassification will make certain assets more attractive

19. Thank You Eric Tuckman, President Advisory Health Management Group