The Art of the Deal: The Re-Emergence of Post-Acute M&A Activity

1. Jason S. Greis, Esq. McGuireWoods LLP Friday, December 4, 2009 ALTHA Advocacy Meeting The Art of the Deal: The Re-Emergence of Post-Acute M&A Activity

2. Current State of the U.S. Economy: The Good, the Bad and the Ugly • The “Good”: • Consumer confidence rebounding since low in Feb. 2009 • Purchasing Managers’ Index (Mfg.) has recovered to pre-recession index figures • Stimulus funds may be beginning to have an impact • Dow and NASDAQ are respectively up 17.5 and 35.5% • Volatility Index has settled (albeit higher) from Oct./ Nov. 2008 high • Corporate and consumer deleveraging continues • Private equity companies getting back into the markets ($400 billion private equity investment overhang)

3. Current State of the U.S. Economy: The Good, the Bad and the Ugly • The “Bad”: • Availability of commercial credit still drastically limited for most borrowers • Lower risk tolerance by banks and private equity firms leading to larger syndications for smaller deals and more restrictive financial terms • Healthcare legislation creating uncertainty resulting in backlog of M&A activity

4. Current State of the U.S. Economy: The Good, the Bad and the Ugly • The “Ugly”: • Loss of an estimated $8 trillion in personal wealth • Worst may be yet to come in commercial real estate markets • Massive governmental debt load threatens to destabilize U.S. dollar and cause inflation • 10.2% unemployment rate (Oct. ’09) is highest in 26 years (healthcare the exception, has added 597,000 jobs) The Unknown: • Impact of health reform legislation/regulation on providers (i.e., reimbursement compression; new provider types; removal of post-acute silos; bundling; 1-year MMSEA extension, etc…)

5. Current State of the Healthcare Sector (an M&A Perspective) • Healthcare IPO and M&A activity has increased over the past 4 months: • Cumberland Pharmaceuticals (8/10/09) (IPO) • Emdeon (8/11/09) (IPO) • Select Medical Holdings (9/24/09) (IPO) • Talecris Biotherapeutics (9/30/09) (IPO) • Omeros (10/7/09) (IPO) • AGA Medical Holdings (10/20/09) (IPO) • Omega Healthcare Investors (NYSE: OHI) announces agreement with CapitalSource to purchase 80 LTC facilities (11/17/09) (SPA) • RehabCare completes merger with Triumph HealthCare (11/24/09) (merger)

6. Current State of the LTACH Industry (an M&A Perspective) • Top 10 companies own approximately 73% of LTACHs; • 5 publicly-traded companies operate approximately 53% of LTACHs; • Publicly-traded companies with substantial cash reserves may explore small “one-off” strategic acquisitions in next 18 months to round out geographic gaps; • Increased deal activity anticipated after passage(?) of potential health care reform bill; • More than 60 LTACHs (15%) may change ownership or enter into strategic alliances by end of 2010!

7. “Perfect Storm” of Industry-Specific and Macroeconomic Events Resulting in Increased M&A Activity • MMSEA development and bed expansion moratorium; • Regulatory uncertainty causing some operators to re-think LTACH focus; • Credit crisis, slow-pay Medicaid agencies and increased bad debt causing escalation in average debt burden and distressed sale activity; • Increasing disparity in hospital and system payor mix; • Overbedding in certain geographic markets, underutilization in others.

8. “Perfect Storm” of Industry-Specific and Macroeconomic Events Resulting in Increased M&A Activity • Increasing inequality in resources due to I.P.O. and private equity investment and system-wide economies of scale; • EBITDA multiples remaining low for distressed sales—caveat emptor (generally 4.5 to 5x), with certain notable exceptions; • Improving operator sales multiples (6 to 6.5x) • Private equity companies presently investing in the LTACH sector reaching investment horizon: • Carlyle Group • Cressey & Co. • Ferrer Freeman & Co. • Highland Capital Management • TA Associates • Waud Capital Partners • Welsh Carson

9. Key Provider-Level Issues Leading to Increased M&A Activity • R.A.C. and Wisconsin Physician Services/AdvanceMed-type audits; • Increased capital expenditure needs for development and expansion of high observation/intensive care units; • Continued need for more intensive provider outreach and education; • Physician contracting issues (vertical incentive alignment); • Electronic health record adoption; • Revised MS-LTC-DRG relative weights for FY 2010; • Ever-increasing insurance costs, despite soft insurance market; • Delays in Medicaid reimbursement.

10. The Future of LTACHs: Gazing into the Crystal Ball • LTACHs will continue to be an essential part of the continuum of care. • The only true constant is change! • Medicare payment rate adjustments; • Post-acute care bundling pilot or demonstration project; • Mandatory quality reporting; • Competition from SNFs, IRFs and continuing care hospitals(?), until facility and patient criteria developed; • Loss of executive compensation rebuttable presumption; • Restrictions on physician hospital ownership and JVs; • Increasing transparency in relationship with physicians.

11. The Future of LTACHs: Gazing into the Crystal Ball • Entry into market of new operators funded by smaller private equity funds and key LTACH leaders exiting from consolidation of other providers • Significant M&A activity of “usual suspects” in LTACH sector unlikely over next 18 months • Strategic sales and consolidation of operators with between 10 and 25 facilities • “Cherry picking” of facilities based upon location for operators with smaller number of facilities (i.e., competition, ownership structure, and CON vs. non-CON state) • Generally leading to a market dominated by a small number of well capitalized companies able to roll with the changes.

12. About McGuireWoods LLP • 18 domestic and international offices, 8 with health care practices; • Ranked 6th largest health care practice in 2009; • Established health care practice with breadth and depth of experience representing providers, including post-acute care and senior care operators and management companies; • Trusted transactional, regulatory, payor appeal and litigation counsel; • Cost-effective legal solutions. Business Department Capital Markets | Energy & Utilities | Health Care | International | Land Use & EnvironmentalMergers & Acquisitions, Securities & Corporate Services | Real Estate Transactions | Tax & Employee Benefits | Technology & Business Litigation Department Antitrust & Trade Regulation | Business & Securities Litigation | Complex Commercial Litigation | Financial Services Litigation | Government Investigations IP Litigation/Patents | Labor & Employment | Product & Consumer Litigation | Restructuring & Insolvency | Toxic Torts & Environmental Litigation ATLANTA • BALTIMORE • CHARLOTTE • CHARLOTTESVILLE • CHICAGO • JACKSONVILLE • LOS ANGELES NEW YORK • NORFOLK • PITTSBURGH • RALEIGH • RICHMOND • TYSONS CORNER • WASHINGTON, D.C. • WILMINGTON ALMATY, KAZAKHSTAN | BRUSSELS, BELGIUM www.mcguirewoods.com Ó 2009 McGuireWoods LLP

13. QUESTIONS Jason S. Greis, Esq. McGuireWoods LLP 77 W. Wacker Drive, Suite 4100 Chicago, Illinois 60601 Phone: 312.849.8217 jgreis@mcguirewoods.com www.GreisGuidetoLTACHs.com