Health Services Tax Conference May 18-19, 2015, Presentations included: Mega Trends and the Impact on Healthcare, The Healthcare Industry: A View from Washington and The New Health Economy.
2. PwC
Welcome and opening remarks
Bob Valletta
US Health Services Leader, PwC
Rob Friz
US Health Services Tax Leader, PwC
Sandi Hunt
GHRS Health Services Leader, PwC
Kelvin Ault
US Investor-owned Health Services Tax Leader, PwC
3. PwC
Agenda – Day One
12:45pm - 1:00pm Welcome and opening remarks
Bob Valletta, US Health Services Leader, PwC
Rob Friz, US Health Services Tax Leader, PwC,
Sandi Hunt, GHRS Health Services Leader, PwC
Kelvin Ault, US Investor-Owned Health Services Tax Leader, PwC
1:00pm - 1:45pm Megatrends and the Impact on Healthcare
Tim Ryan, Vice Chairman, Markets, Strategy and Stakeholders Leader
at PwC
1:45pm - 2:45pm The Healthcare Industry: A View from Washington
Pam Olson, US Deputy Tax Leader and Washington National Tax
Services Practice Leader, PwC
Hon. Dave Camp, Senior Policy Advisor, Washington National Tax
Services, PwC
2:45pm - 3:00pm Break
3:00pm - 4:00pm Breakout session #1
4:00pm - 5:30pm Healthcare M&A Transactions and Convergence
Brett Hickman, US Health Services Deals Leader, PwC
6:30pm - 9:00pm Tour of Wrigley Field
4. PwC
Agenda – Day Two
7:30am – 8:30am Registration and Breakfast
8:30am – 9:30am The New Health Economy
Ceci Connolly, Leader, PwC’s Health Research Institute
9:30am – 10:30am Keynote General Session
Governor of Tennessee from 2003-2011, Philip Bredesen
10:30am - 10:45am Break
10:45am – 11:30am Breakout session #2
11:30am – 12:15pm Breakout session #3
12:15pm – 1:15pm Lunch
1:15pm – 2:15pm How various organizations are responding to health reform
Amy Bergner, Managing Director, Healthcare and Benefits, PwC
2:15pm – 2:45pm Break
2:45pm – 4:00pm Breakout session #4
4:00pm – 4:30pm General session and wrap up – Ask the experts
5. Megatrends | 2015 Health Services Tax Conference
May 18, 2015
www.pwc.com
Megatrends
and the Impact on Healthcare
9. PwC 9
China and the US agreeing
on broad climate goals —
not random
10. PwC
10
3D houses are being
constructed in less than
two hours in China
Using four huge 3D
printers, a Chinese
company printed the
shells of 10 one-room
structures in 24-hours
at a cost of only about
$5,000 per building.
14. PwC
Accelerating
urbanization
Urbanisation rate, 2030 (%)
14
The movement of populations out
of suburbs and rural areas and
into cities is changing how people
work and live
• More than half of the global population now
lives in urban areas.
• In the next 25 years about a billion people
move to cities.
• In China alone, 300 to 400 million people will
move to cities in the next 15 years, which
translates to building the entire built
infrastructure of the US in 15 years.
15. PwC 15
Accelerating
urbanization
Healthcare Implications.
Health organizations will need to understand
consumers, their needs and their behaviors
differently than they have in the past
In 2013, 35% of survey
respondents told PwC’s
Health Research
Institute (HRI) they had
visited a retail clinic in
the past year
Source: PwC Health Research Institute, April 2014, “Healthcare’s New Entrants: Who will be the industry’s Amazon.com?”
In 2007, that number was just 10%
Have you been to a
medical clinic in a retail
store or pharmacy in
the past 12 months?
16. PwC 16
By the end of this century, the world will need to
produce 2.5 times more food than was needed in
the last 8,000 years, all while the average global
temperature rises at an average rate of 0.15oF
per decade (which it has done since 1901).
Air pollution
(annual mean concentration of particulates
less than 10 microns of diameter)
Climate change
& resource
scarcity
17. PwC 17
Climate change
& resource
scarcity
Healthcare Implications.
Scare resources, the risk of over-regulation, & how
indebted governments will handle huge fiscal deficits
are top of mind for healthcare CEOs
Source: PwC Pharma 2020: From vision to decision
71% of
healthcare CEOs
are nervous about
changes in regulation.
18. PwC 18
Demographic
shifts
Census data leave no doubt that minorities are
rapidly increasing as a proportion of the total
United States population.
Minorities will become the majority of the
national population around the year 2050, but
many communities have made the transition.
19. PwC 19
Demographic
shifts
Healthcare Implications.
Population changes are generating increased demand
for health care, making it a large and growing share of
GDP across the world
1Source: United States Census Bureau, 2012 data.
The ACA newly
insured compared
to the currently
insured …
20. PwC 20
By 2050, the GDP of the emerging market
seven countries will be twice the size of
the G7; and, the F7 will continue to
increase in relevance
Shift in global
economic power
2009 2050
G7 countries
US, Japan, Germany, UK, France, Italy, Canada
E7 countries
China, India, Brazil, Russia, Indonesia, Mexico, Turkey
$29 $21
$69$138
GDP
In US$ trillions
Bangladesh
Morocco
Nigeria
Vietnam
Philippines
Peru
Colombia
The F7
Today’s frontier markets
will be tomorrow’s
emerging markets….
21. PwC 21
Shift in global
economic
power
New Health
Economies
Public-private
partnerships
New flow of
funds
Shift in global
economic power
25. PwC 25
Technological
breakthroughs
Healthcare Implications.
Emerging technologies are fueling innovations in
healthcare that will revolutionize treatment
Michael Balzer saved his wife’s
eyesight by 3D printing a
model of her skull, with a life
threatening tumor inside of it,
which allowed a surgeon to
perform a delicate and novel
operation with minimal invasion
Source: http://elitedaily.com/news/world/man-helps-save-wifes-eyesight-3d-printing-skull-tumor/907578/
Pamela Shavaun Scott, with a
3D printed copy of her own
skull. Her right index finger is
indicating the location of the
meningioma she had removed
26. PwC
26
So what does
this all mean?
Accelerating
urbanization
Climate change
& resource
scarcity
Demographic
shifts
Shift in global
economic power
Technological
breakthroughs
27. PwC
3 things
leaders can do
As leaders, make inherent tensions
productive.
Commit to learning and evolving.
1X per week — how are you
connecting with the world's best
thought leaders?
27
28. PwC
28
Healthcare Thought Leadership
HealthCast: Global Best
Practices in Bending the
Cost Curve
http://www.pwc.com/gx/en/healthcare/bending-
the-cost-curve/assets/pwc-healthcast-global-
best_practices-in-bending-the-cost-curve-full-
report.pdf
Healthcare reform: Five
trends to watch as the
Affordable Care Act turns
five
http://www.pwc.com/us/en/health-
industries/health-research-institute/aca-health-
reform.jhtml
The FDA and industry: A
recipe for collaborating in
the New Health Economy
http://www.pwc.com/us/en/health-
industries/health-research-institute/hri-pharma-life-
sciences-fda.jhtml
Top Health Industry
Issues of 2015
http://www.pwc.com/en_US/us/health-
industries/top-health-industry-
issues/assets/pwc-hri-top-healthcare-issues-
2015.pdf
30. The Healthcare
Industry – A View from
Washington
www.pwc.com
Pam Olson
US Deputy Tax Leader and Washington
National Tax Services Practice Leader, PwC
Hon. Dave Camp
Senior Policy Advisor, Washington National
Tax Services, PwC
34. PwC
King v. Burwell case could have major effect on ACA and 2015
legislative session
• On March 4, the US Supreme Court began hearing oral arguments on
whether premium tax credits and cost-sharing subsidies can be offered to
roughly 8 million enrollees in federally-run health insurance exchanges
covering 34 states.
− Ruling expected in late June
• House and Senate debate on response to a ruling against Administration
could consume much of post-June 2015 legislative session
• Adverse ruling carries implications for consumers and businesses:
− The employer mandate penalties are assessed when employees receive
premium tax credits, and the individual mandate can be waived if
available coverage is unaffordable.
− ACA guarantee of coverage regardless of pre-existing conditions
would remain in effect
− Without insurance subsidies, individual markets could be crippled in
states that would be impacted absent a legislative response by
Congress or action by states relying on federal exchanges
35. PwC
Repeal of the Medical Device Tax
• The ACA imposed a 2.3 percent excise tax on medical device
manufacturers.
• Repeal of the medical device excise tax is one of the few
items for which there is bipartisan support, and conditions
are ripe for repeal in the current Congress.
• CBO’s January 2015 Budget and Economic Outlook
estimates that the medical device excise tax will raise over
$30 billion over the 2016 to 2025 budget window.
• A recent CRS analysis concluded the impact of the tax on the
device industry is minimal, with most costs passed on to
consumers in the form of higher prices.
36. PwC
Congress passes permanent “Doc Fix”
House (392-37) and Senate (92-8) votes mark bipartisan resolution
to Medicare physician pay issue that has required 17 temporary
fixes since 1997
• Permanently repeals reduction in Medicare physician fees (21% cut took
effect on March 31, 2015), and replaces with 0.5% increase 2015-2019 (freeze
2020-2025).
• Extends Children’s Health Insurance Program through 2017 and extends
other miscellaneous health programs
• CBO projects net increase in deficit of $141 billion (2015-2025) but notes
that long-term deficit effect is unclear
− Partial offsets from increases in Medicare premiums for high income beneficiaries,
reducing increases in Medicare payment rates for providers, and reducing future
Medicaid payments for ‘disproportionate share’ hospitals
− Minor changes in revenues related to health programs ($3.7 billion over ten years)
related primarily to reduced need for ACA coverage tax subsidies
− Increased Medicare spending could trigger action by Independent Payment
Assessment Board earlier than previously projected (2018 instead of 2022)
37. PwC
CBO long-term budget projections, 2014-2043
Extended baseline assumptions include “sequester” level spending caps
and no extension of expiring tax provisions
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
PercentofGDP
Discretionary and other mandatory outlays
Medicare, Medicaid, health subsidies
Social Security
Net interest
Revenues
Source: CBO Long Term Budget Outlook, July 2014.
40. PwC
Number of OECD countries with territorial systems has
grown since last US tax reform
Only six of 34 OECD countries have worldwide tax systems
9 8 9 10
12 13 14 15 16
21
23 24
27 28
0
5
10
15
20
25
30
1986 1988 1989 1991 1992 1998 2000 2001 2003 2004 2005 2006 2009 2011
Source: PwC report, Evolution of Territorial Tax Systems in the OECD, prepared for the Technology CEO Council, April 2, 2013.
41. PwC
Research credits & patent box regimes
-10%
0%
10%
20%
30%
40%
50%
India
Portugal
Spain
France
Denmark
Malaysia
Brazil
Hungary
Norway
SouthAfrica
Turkey
CzechRepublic
Canada
Taiwan
Belgium
China
Netherlands
Ireland
Japan
Austria
Italy
Australia
UnitedKingdom
Russia
SouthKorea
Singapore
UnitedStates*
Slovenia
Chile
Finland
Iceland
Indonesia
Israel
Luxembourg
Mexico
Poland
SlovakRepublic
Sweden
Switzerland
Germany
NewZealand
US is 27th out of
41 countries
Countries with solid bars have patent box regimes
(Ireland's Knowledge Development Box is under development).
R&D tax subsidy rate does not reflect patent box.
US rate is a weighted average of alternative simplified and regular research tax
credits.
Source: Information Technology and Innovation Institute, "The United States Lags Far Behind in R&D Tax Incentive Generosity," July 2012
42. PwC
Recent tax reform developments
2007 2010 2011 2012 2013 2014 2015
W&M
Chairman
Rangel
tax reform
bill
(HR 3970)
Senator
Wyden
tax reform
bills
(S 3018;
S 727)
Obama Admin.
FY 2016 budget
proposes
minimum tax
on foreign
earnings of US-
based company
CFCs
“Fiscal cliff”
legislation
makes most
Bush tax cuts
permanent
SFC Chairman
Baucus
international;
cost recovery;
administration;
energy
tax reform drafts
W&M
Chairman
Camp
tax reform
bill (HR 1)
SFC
working
groups to
address tax
reform
W&M
Chairman
Camp
international
tax reform
draft
President
Obama
‘framework
for
business
tax reform’
W&M
Chairman
Camp
financial
products;
small
business
tax reform
drafts
43. PwC
Fiscal deadlines, other dates affecting prospects for tax
reform
May 31, 2015 Highway funding expires
June/July 2015 US Supreme Court decision expected in King v. Burwell case
August 2015 GOP presidential primary debates begin; Iowa straw poll held
October 1, 2015 Internet tax moratorium expires
October 1, 2015 FY 2016 begins; budget “sequestration” reinstated
October/November 2015 Treasury debt limit “extraordinary measures” expire
December 2015 Deadline for year-end “tax extenders” bill, if not addressed as part of tax reform
January 2016 Iowa and New Hampshire primary elections held
July 2016 Republican and Democratic presidential nominating conventions held
44. PwC
Thank you!
Pam Olson, US Deputy Tax Leader and Washington National Tax
Services Practice Leader, PwC
pam.olson@us.pwc.com +1 202-414-1401
Honorable Dave Camp, Senior Policy Advisor, Washington
National Tax Services, PwC
david.l.camp@us.pwc.com +1 202-414-1700
46. Breakout session
1a. IRS Controversy Activity
Loss Reserves/CAP/PFA’s
R&D Tax Credit Successes via
CAP and PFA’s
www.pwc.com
Robert P. Alperin
Kevin M. Brown
Mark S. Smith
47. PwC
Agenda
• IRS: Doing Less with Less
• Discounted Unpaid Losses
• R&D Tax Credit
• Other Issues
Circular 230: This document was not intended or written to be used, and it cannot be
used, for the purpose of avoiding US Federal, state or local tax penalties that may be
imposed on any taxpayer.
47
51. Declining IRS personnel resources
LB&I Technical Staff FY - 2012 FY - 2013 FY -
2014
YOY
Decrease
Revenue Agents 3353 2980 2814 16%
International Examiners 508 535 436 14%
All 4946 4626 4345 12%
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Appeals
Staffing
2173 2111 1981 1830 <1750
- Appeals staffing has fallen by
approximately 20% since 2010
- Cycle time in CIC cases is
roughly 800 days (> 2 years)
51PwC
52. PwC
IRS priorities
• Recent comments from IRS executives on the future of LB&I
examinations
• Move more taxpayers into Compliance Assurance Process
• Make audits more “issue-focused”
• Increase mid-market audit coverage
• Increased use UTP disclosures to target audits
• Eliminate special distinction for CIC taxpayers (900 of 260,000
LB&I taxpayers) - 50% of IRS resources focused on CIC taxpayers
• Increase audits of flow-through entities
• 190,000 of 260,000 LB&I taxpayers are flow-through entities
• Increased international issue focus
52
53. Trends in IRS exam and appeals
• Elimination of Tiers, introduction of IPGs/IPNs
• Eliminate distinction for CIC taxpayers
• Requirement of IDRs to state underlying issue
• Stricter enforcement of IDR timelines
• Appeals returning to quasi-judicial approach
• Effort to create audit templates with examples of good / bad tax planning
• Impact of BEPS rhetoric
2014 Compliance Assurance Process (CAP) program
186 taxpayers 162 returning
taxpayers
64 in compliance
maintenance
20 taxpayers
in pre-CAP
53PwC
55. PwC
Deductible Unpaid Loss Reserves:
Setting the Stage
• Section 832(b)(5) permits a deduction for losses incurred, which
include discounted unpaid losses.
• Section 846 requires that those losses be discounted, and instructs
that the starting point for computing discounted unpaid losses is
undiscounted unpaid losses shown in the annual statement.
• Section 1.832-4(b) further requires that unpaid losses represent a fair
and reasonable estimate of the amount the company will be required
to pay.
• Hanover Insurance Co. v. Commissioner, (1st Cir., 1979) (Unpaid
losses set forth in annual statement are not insulated from review by
IRS.)
55
56. PwC
Deductible Unpaid Loss Reserves:
A String of Additional Cases
Utah Medical Insurance Assoc. v. Commissioner, (TC, 1998) (“Fair and
reasonable estimate” was not limited to midpoint of actuarially-
determined range.)
Physicians Insurance Co. of Wisconsin v. Commissioner, (TCM 2001)
(Whether estimates of unpaid losses are fair and reasonable is a
valuation issue, there is no single correct estimate, must objectively
validate how amount was arrived at.)
Minnesota Lawyers Mutual Ins. Co. v. Commissioner, (8th Cir. 2002)
(Bulk, adverse loss development portion of unpaid losses is not
deductible.)
56
57. PwC
Deductible Unpaid Loss Reserves:
A 2009 Coordinated Issue Paper
• Coordinated Issue Paper LMSB4-1109-041 states IRS position that
deductible (“fair and reasonable”) tax reserves cannot include
explicit or implicit “margins”
• As a practical matter, in Examination IRS relies on its own actuaries
to determine reserves, and sometimes asserts there was an implicit
“margin” if taxpayer’s number was higher
• History of redundancy also sometimes used against taxpayers
• Formal status of the paper is unclear after decoordination of all CIPs,
but as a practical matter the issue is still sometimes raised
• Acuity case also casts a shadow on the CIP’s analysis
57
58. PwC
Deductible Unpaid Loss Reserves:
The Acuity Case
• In Acuity v. Commissioner, (TCM, 2013), the Tax Court focused on
actuarial credentials and application of established actuarial
standards to conclude that reserves were fair and reasonable.
• The opinion is 98 pages long and demonstrates the kind of solid
factual development that can withstand challenge.
• The case was not appealed by the Service, because it was inherently
factual and only a memorandum opinion.
• Some at IRS privately question what is left of the “margin” issue
provided the process for determining unpaid losses has actuarial
integrity.
58
59. PwC
Deductible Unpaid Loss Reserves:
The Acuity Case, cont’d
• Earlier, the Seventh Circuit (to which Acuity would have been
appealed) concluded in State Farm v. Commissioner, (7th Cir., 2012)
that compensatory damages portion of bad faith judgment was
includible in unpaid losses even though not strictly “under” an
insurance contract.
59
60. PwC
Deductible Unpaid Loss Reserves:
What Paths to Resolution?
• Preventing a Challenge in the First Place
What makes a strong case, and how can it be constructed up-front?
• Fast-Track Settlement in Appeals
Learning from a war story
• Prefiling Agreement
What reserve issues may lend themselves to the PFA process?
• CAP Taxpayers
Any advice?
60
62. PwC
R&D Tax Credit Overview
• Incentive for companies to perform R&D in the US
• Eligible expenses include wages, supplies and contractors
- Qualified Research Expenditures (“QREs”)
• Incremental credit
• Two methods
- Regular method - 13% reduced credit
- Alternative Simplified Credit (“ASC”) method – 9.1% reduced credit
• Software development activities are eligible
- Including development of internal use software (“IUS”)
• Federal R&D tax credit expired 12/31/14
• Many states and countries have R&D tax credits or incentives
62
63. PwC
Recent Developments
• New IUS Proposed Regulations issued January 16, 2015 (taxpayer
favorable)
• New Final and Temporary Regulations published on June 3, 2014 allow
certain taxpayers to elect the ASC on an amended return (taxpayer
favorable)
• CCA 201423023 provides IUS guidance
- Essentially follows the decision in the FedEx case (taxpayer
favorable)
• Suder case (taxpayer favorable)
- Software development is eligible for the research credit,
- Expansive definition of eligible activities part of process of
experimentation, and
- Credible documentation, survey data and witness testimony
63
64. PwC
R&D Tax Credit Overview (cont.)
• 4-Part and Additional 3-Part “High Threshold of Innovation” Test for
IUS
- 4-Part Test
◦ Permitted Purpose
◦ Technological in Nature
◦ Technical Uncertainty
◦ Process of Experimentation
- Additional 3-Part Test
◦ Innovative
◦ Significant Economic Risk
◦ Not Commercially Available
64
65. PwC
2015 Proposed Regulations
• Defines IUS as software developed by the taxpayer for use in “general
and administrative functions” that facilitate or support the conduct of
the taxpayer’s trade or business
- General and administrative functions are limited to:
◦ Financial management functions
◦ Human resource management functions, and
◦ Support services functions
- Preamble explains that this list is intended to target “back-office
functions” that most taxpayers would have regardless of the
taxpayer’s industry
• Defines non-IUS
- Software held for commercial sale, lease, or license, or
- Software that enables a taxpayer to interact with third parties or
allows third parties to initiate functions or review data on the
taxpayer’s system
65
66. PwC
2015 Proposed Regulations (cont.)
• Dual-function software
- It is not always possible to distinguish software sub-components based on
function
- Presumption that dual-function software is designed primarily for a
taxpayer’s internal use
◦ However, that presumption will not apply if the taxpayer can identify a
subset of elements of the software that only enables the taxpayer to
interact with third parties or allows third parties to initiate functions or
review data
› The portion of expenditures allocable to this third-party subset needs
meet only the less stringent four-part test
- Safe harbor
◦ For cases in which it is not possible to isolate the third party subset, the
safe harbor allows a taxpayer to include 25% of the potential QREs
associated with the dual-function subset through meeting the four-part
test, while the remaining 75% would have to meet the high threshold of
innovation test
◦ The safe harbor is met if the third-party-functional interaction is
reasonably anticipated to constitute at least 10% of the dual-function
subset’s use
66
67. PwC
2015 Proposed Regulations (cont.)
• High Threshold of Innovation Test
- Prong 1: Innovation
◦ In line with the 2001 Final Regulations
◦ Defines software as “innovative” if it would result in a reduction in
cost or improvement in speed or other measurable improvement
that is substantial and economically significant, if the
development is or would have been successful
› The intent was to make this test “measurable and objective” in
order to reduce potential controversy
67
68. PwC
2015 Proposed Regulations (cont.)
• Prong 2: Significant Economic Risk
- Generally, in line with the 2001 Final Regulations and 2001
Proposed Regulations
- Provides that “significant economic risk” exists if the taxpayer
commits substantial resources to the development and there is
substantial uncertainty, because of technical risk, that such resources
would be recovered within a reasonable period.
◦ “Substantial” uncertainty exists if, at the beginning of the
taxpayer’s activities, the information available to the taxpayer does
not establish the capability or method for developing or improving
the software
◦ The uncertainty must relate to capability or methodology, not to
the appropriate design
68
69. PwC
2015 Proposed Regulations (cont.)
• Prong 3: Commercially Available for Use
- No change
- Prong 3 is met if commercially available software cannot be
purchased, leased, or licensed and used for the intended purpose
without modifications that would satisfy the innovation and
significant economic risk requirements
69
70. PwC
2015 Proposed Regulations (cont.)
• Effective date
- Effective for tax years ending on or after the date the Final
Regulations are published
◦ However, “the IRS will not challenge return positions consistent
with these proposed regulation for taxable years ending on or
after the date [January 20, 2015] these Proposed Regulations are
published”
◦ For tax years ending before January 20, 2015, taxpayers may
choose to follow either all the IUS provisions in the 2001 Final
Regulations or all the IUS provisions in the 2001 Proposed
Regulations
70
71. PwC
Applicability to Insurance Industry
• Significant IT spend
• Developing software for internal use, for use by customers and in some
cases developing software for sale, lease or license
• Expenses typically limited to wages and contractors
• Large portion of contractor costs often incurred outside the US
- Need to be performed on US soil to qualify for federal R&D tax credit
• Healthcare, Life, P&C
• IT employees typically required to track their time by project, by phase
and sometimes task
• Project accounting often used for book purposes based on SOP 98-1
guidance
• Taking advantage of ASC
• Desire to obtain certainty
71
72. PwC
IRS Point of View on IUS
• High risk
• Receives lots of scrutiny
• Claims receive even more scrutiny even though Tiered Issue Focus no
longer exists
• Heavily focused on three of the tests including (1) Technical
Uncertainty, (2) Process of Experimentation and (3) Innovativeness
• If IUS and over $500k of credit, IRS Engineer is required to refer to
MITRE
- However, MITRE is not required to be involved
72
73. PwC
IRS Point of View on IUS (cont.)
• Pre 2015 Proposed Regulations
- Follow 2004 Advance Notice of Proposed Rulemaking (“ANPRM”)
(Internal Revenue Bulletin 2004-6)
◦ Taxpayer must follow either the 2001 Final Regs (T.D. 8930) or the
2001 Proposed Regs
› Do no accept FedEx
› 2001 Final Regs, includes “Discovery” test – very high bar
› 2001 Proposed Regs, no “Discovery” test but must be “unique or
novel”
› Proposed Regs include examples of qualifying and non-
qualifying projects and activities – can be useful
• Post 2015 Proposed Regulations
- ANPRM no longer applicable
- No “Discovery” test
73
74. PwC
IRS Point of View on IUS (cont.)
• Project accounting and contemporaneous documentation
• Exams are time consuming
• Credits are often disallowed entirely at exam (especially if MITRE
involved)
• Appeals process is long
- Settlements around 50%
74
75. PwC
CAP and PFA Program Approach
• Pre-Filing Agreement (PFA) allows a taxpayer to obtain certainty on an
issue before the filing of its return
• PFA results in a closing agreement that precludes the IRS from
challenging the issue in any subsequent examination of the taxpayer’s
return
• Similar to having a Compliance Assurance Process (CAP) audit of a
single issue
- i.e., the compressed time frame for entering into a PFA generally
takes less than six months and eliminates protracted post-filing
disputes
• Allows taxpayers to conserve precious controversy resources and better
manage their reserves and uncertain tax positions
• Optimal time for requesting a PFA for a calendar year taxpayer is at the
end of a filing year and the first two or three months following the close
of the tax year
75
76. PwC
CAP and PFA Program Approach (cont.)
• Key components of the PFA process
- $50,000 user fee
- IRS normally requires 30 days to consider a PFA application
- The IRS expects transparency and a resource commitment from the
taxpayer
- Either party may withdraw from the PFA any time prior to execution
of the PFA agreement
- PFA applies to four subsequent tax years
76
77. PwC
CAP and PFA Program Approach (cont.)
• Observations
- PFA process has demonstrated numerous advantages for clients
- Due to the tight time constraints on both parties, the IRS has been
persuaded to adopt time saving techniques that greatly reduce the
difficulties associated with a normal IRS audit
◦ Been able to successfully keep MITRE out
- For instance, the following techniques have proven very useful:
◦ Holding a kick-off meeting with the IRS to discuss the timeline
and any methodologies as well as addressing any areas of
contention
◦ Weekly or biweekly meetings with the IRS team to discuss issues
as they arise
◦ The use of closing agreements or memoranda of understanding to
memorialize interim resolutions of issues (e.g., reliance on
Proposed Regs, recording of interviews)
77
78. PwC
CAP and PFA Program Approach (cont.)
◦ Allowing the IRS to participate in the selection and review of the
areas under consideration (e.g., IRS sitting in on project
interviews)
◦ Use of the PFA experience as a barometer for determining
whether CAP would be a productive use of client resources
◦ Fostering a positive relationship with the IRS team by engaging
them in the development of the issue and encouraging them to be
active participants in the process
◦ Agree on methodology and technical issues on the front end (e.g.,
use of statistical sampling, project questionnaires and employee
time surveys)
78
80. PwC
Other Issues
• What other tax controversies do health insurers typically face?
• What other tax controversies does YOUR company face?
• What means of resolving those controversies might be appropriate?
80
81. Thank you!
Robert P. Alperin
TPDG Partner, Boston
(617) 530-5178
robert.p.alperin@us.pwc.com
Kevin M. Brown
TCDR Partner, Washington
(202) 346-5051
kevin.m.brown@us.pwc.com
Mark S. Smith
Insurance Managing Director, Washington
(202) 312-7518
mark.s.smith@us.pwc.com
82. Breakout session
1b. Tax reform Q&A Session with
Dave Camp
Accounting Methods Update
including implications
of New FASB Revenue
Recognition Standards
Lee Grubbs, HCA
George Manousos, PwC
Hon. Dave Camp, Senior Policy Advisor,
Washington National Tax Services, PwC
86. PwC
Revenue recognition standard
• Joint FASB/IAS project to harmonize revenue recognition for Financial Statement
purposes
- Intent is to allow better comparison across industries
- Allow better comparison with competitors traded on different exchanges
• Industries most impacted are Software, Government Contracting and Energy
• Delayed effective date for years beginning after 12/15/17. For example, Q1 2018.
Non-public entities have an additional year
- Early adoption is allowed
- IASB has recently voted to comply as well
88. PwC
Repairs update
• Everyone on board for 2014, or 2015, or both?
• Retroactive partial disposition loss election only available for 2014 year.
• Section 481(a) adjustments:
- How far back must you go?
- IRS position on 481(a): Gross vs. net?
◦ What is the “item” of repair?
◦ Could reasonably argue no netting required.
90. PwC
Hospital/Provider assistance payments
• Payments often made to provide financial assistance to hospitals/healthcare
providers
• Treatment of payments?
- Exam: Capital under 1.263(a)-4; no amortization
- Taxpayer:
◦ Deductible under 162; or
◦ Deductible under “promote and protect” doctrine
• Appeals: Agreed with the taxpayer
92. PwC
PLR 201518012
• Taxpayer entered into a Management Services Agreement (“MSA”) to receive
management services from its shareholder (“Shareholder”).
- Services included attendance at BOD meetings, general consulting, legal, M&A,
strategy, etc.
• MSA included a clause that a termination fee was payable to Shareholder if Taxpayer had
a firm commitment to do an IPO, but didn’t have to complete the IPO.
• Stipulated that the termination payment was to approximate the future services to be
provided under the MSA.
• Termination payment held to be deductible.
• Key IRS considerations:
- Services did not facilitate the IPO;
- Payment was akin to additional compensation for past services;
- Payment not contingent on successful IPO;
- MSA was in place before IPO, although unclear how far in advance; and
- Payment recorded as an expense.
• PLR does not discuss risk of Section 301 distribution.
94. PwC
Previously capitalized transaction costs
• Costs incurred to facilitate an acquisition, IPO, spin, etc. required to be capitalized.
- Become a separate and distinct, unamortizable tax asset.
• Regulations “reserve” on treatment of these capitalized costs.
• What did Indopco say?
• Opportunity to recover such costs as a 165 abandonment loss?
- Sale of previously acquired entity?
- Privatization of public company?
• IRS experiences?
95. PwC
Proposed “Next Day Rule” regulations
• Target’s items arising ‘simultaneously’ with the transaction allocated to final target
return.
• Target's items arising ‘after’ the transaction allocated to first target post-transaction
return.
• Compensatory costs: Allocated to final target return.
• Target's success based fees: Allocated to final target return.
• Consideration: Is liability fixed ‘simultaneously’ with or ‘after’ the transaction?
97. PwC
Accounting methods procedural update
• Rev. Procs 2015-13 and -14 issued on January 16, 2015
• Rev. Proc. 2015-13 obsoletes former accounting method change procedures under
Rev. Proc. 97-27 (non automatic changes) and 2011-14 (automatic changes)
• Rev. Proc. 2015-14 contains the list of accounting method changes eligible for the
automatic consent procedures contained in Rev. Proc. 2015-13
• Generally effective for Forms 3115 filed on or after January 16, 2015, for a year of
change ending on or after May 31, 2014 (subject to transition rules)
• Old Rules: Taxpayers under IRS exam generally were restricted from filing a
request for change in method unless they filed in one of two window periods or
obtained the consent of the director
• New Rules: Broad eligibility rules that generally allow taxpayers under IRS exam to
request changes in method at any time. However,
- Generally will not receive audit protection, unless file in one of two window
periods or one of four other audit protection exceptions apply
- New two-year spread period of a positive (unfavorable) Section 481(a) adjustment
will apply, unless file in a window period or eligible for certain audit protection
98. PwC
Accounting methods procedural update (continued)
• Audit protection received if:
- File in the new “90 day” window
◦ Begins the 15th day of the 7th month
- File in the unchanged 12o day window
- Present method not before the Director
- Change resulting in a negative Section 481(a) adjustment
- No exam imposed change and issue not under consideration
◦ “Springing” audit protection
- New member of a consolidated group in the Compliance Assurance Process
99. PwC
Lee Grubbs
Vice-President and Chief Tax Officer
(615) 344.2665
lee.grubbs@HCAHealthcare.com
George Manousos
Tax Partner
(202) 414.4317
george.manousos@us.pwc.com
Thank you!
100. Breakout session
1c. Best practices around charity
care, community benefit reporting,
and Community Health Needs
Assessments on Form 990,
Schedule H
www.pwc.com
Ron Schultz,PwC
Laura Parello, PwC
Donna Borgese, UPMC
101. PwC
Agenda
• Introductions and overview
• Nonprofit hospital tax exemption – Background
• Community benefit reporting by the sector
- IRS SOI data and IRS/Treasury report to Congress
- Other reports/studies
• CHNAs
- Basic requirements – Input, accountability, transparency
- State reporting impacts
• Questions/Wrap up
103. PwC
Comparison of community benefit elements
Rev. Rul. 56-185
• Nonprofit for care of the
sick
• Not exclusively for those
able to pay
• Must not refuse those
unable to pay (free or
discounted care)
• Bad debt not charitable
• Open medical staff
• No inurement
Rev. Rul. 69-545
• Nonprofit for care of the
sick with an ER
• ER care available to all
regardless of ability to
pay (Rev. Rul. 83-157)
• Other care available to
those able to pay (self
pay, insured or
Medicare)
• Open medical staff
• Training, education
and research
• Community board
Rev. Rul. 83-157
• Medicaid and Medicare
• Open medical staff
• Training, education
and research
• Community board
• No ER where state health
agency determined it
would be unnecessary
and duplicative
• Note: no mention of
charity care
104. PwC
Observations regarding charity care
Rev. Rul. 56-185
• “A nominal charity record for a given period of time, in the absence of
charitable demands of the community, will not affect its right to continued
exemption.”
• “The fact that its charity record is relatively low is not conclusive that a
hospital is not operated for charitable purposes to the full extent of its
financial ability.”
Rev. Rul. 69-545
• “By operating an emergency room open to all persons and by providing
hospital care for all those persons in the community able to pay the cost
thereof either directly or through third party reimbursement, Hospital A is
promoting the health of a class of persons that is broad enough to benefit the
community.”
105. PwC
Community benefit standard – Current state of play
• Facts and circumstances no bright lines
• Both quantitative and qualitative elements
• Financial ability of the hospital is relevant under the guidance
• Community’s needs regarding charity care also relevant
• CBE % varies based on community’s demographics
• Schedule H factors are grounded in longstanding guidance
- Charity care, Medicaid, needs-based care
- Health improvement and subsidized health services
- Research, education and training
- Grants for community benefit
- But not Medicare, bad debt, or costs for privately insured patients
106. PwC
IRC Section 501(r) for hospitals to obtain/maintain 501(c)(3)
status – Additional exemption requirements
Section Requirement Effective date
501(r)(3) Community Health Needs Assessment – each tax exempt
hospital must conduct a CHNA at least once every three years and
adopt an "implementation strategy" to meet the needs identified by
the assessment.
Taxable years beginning
after March 23, 2012
501(r)(4) Financial Assistance Policy – each tax exempt hospital must
establish, implement, and make widely available written policies
regarding financial assistance and emergency medical care.
Taxable years beginning
after March 23, 2010
501(r)(5) Limitation on Charges – each tax exempt hospital must limit
the amount it charges for emergency or other medically necessary
care provided to patients eligible for financial assistance to the
amounts generally billed to insured patients, and cannot use
gross charges.
Taxable years beginning
after March 23, 2010
501(r)(6) Billing and Collections – a tax exempt hospital cannot take
"extraordinary collection actions" (lawsuits, arrests, liens, or other
similar actions) until it has made "reasonable efforts" to determine
whether a patient is eligible for financial assistance.
Taxable years beginning
after March 23, 2010
108. PwC
Discussion of Community Benefit Expenditures (CBE) IRS SOI updated
for 2011 data
1. IRS Statistics of Income releases Form 990 data points annually and has
included Schedule CBE data releases for each of 2009, 2010 and 2011
2. Today’s data presentation is based on SOI data which is publicly available
from the IRS report to Congress
- Use of aggregate sector Schedule H CBE data on IRS SOI can be used to
do comparisons as follows:
◦ Sector wide (all reporting hospitals) year to year
◦ By hospital type (e.g., children’s, research, etc.) within the overall
sector, year to year
◦ Comparison of a particular hospital or group of hospitals/peer group
against the aggregate sector or aggregate of a hospital type
109. PwC
2011 Form 990, Schedule H, Part I, line 7 – Community Benefit Expenditures
(Per Jan. 2015 IRS report to congress – Dollars in thousands)
7 Financial assistance and certain other company benefits at cost
Financial assistance and means-
tested government programs
a. Number of
activities or
programs
(optional)
b. Persons
served
(optional)
c. Total
community
benefit
expense
d. Direct
offsetting
revenue
e. Net
community
benefit
expense
f. Percent of
total
expense
a. Financial Assistance at cost (from
Worksheet 1)….
$17,415,426 $2,500,841 $15,011,379 2.32
b. Medicaid (from worksheet3,
column a)
82,406,170 63,769,821 18,736,792 2.90
c. Costs of other means-tested
government programs (from
worksheet 3, column b)….
4,225,182 2,916,334 1,305,880 0.20
d. Total Financial Assistance and
Means-Tested Government
Programs
104,046,778 69,186,996 35,054,051 5.42
Other benefits
e. Community health improvement
services and community benefit
operations (from Worksheet 4)…..
3,029,646 369,626 2,659,025 0.41
f. Health professions education (from
Worksheet 5)….
13,621,372 4,389,163 9,232,250 1.43
g. Subsidized health services (from
Worksheet 6)….
17,113,507 11,916,218 5,113,403 0.79
h. Research (from Worksheet 7)…. 9,435,570 1,022,817 8,412,686 1.30
i. Cash and in-kind contributions
for community benefit
(from Worksheet 8)….
2,034,871 42,998 1,991,957 0.31
j. Total. Other Benefits…. 45,234,966 7,740,822 27,409,320 4.24
k. Total. Add lines 7d and 7j… $149,281,744 $86,927,818 $62,463,371 9.67
110. PwC
IRS/Treasury report to congress – Comparison of taxable, tax-exempt and
government hospitals
Table Taxable Private tax-exempt Government
owned
Charitable Care 1.31% 2.13% 6.56%
Bad Debt 1.81% 1.54% 3.42%
Medicaid/SCHIP/etc. 1.77% 1.94% 4.01%
Medicare 6.07% 1.21% 1.67%
Table: Comparison of Certain CMS - Reported Expense Data as a Percentage of Total Expenses
111. PwC
Possible shortcomings of the Schedule H Community Benefit Expense
table (or why the CBE % is <100%)
• Medicare?
• Bad debt?
• Community building?
• Restricted grants issue beginning in 2013?
• Exclusion of costs pertaining to insured patient population?
• Use of net costs rather than gross costs to measure CBE?
• Inconsistent numerator/denominator (net costs in
numerator but gross costs in denominator)?
• Other?
112. PwC
Other reports/studies
• 2005 GAO Report
• 2006 Congressional Budget Office Report
• 2009 IRS Nonprofit Hospital Final Report
• Columbia Law Review Article
113. PwC
Recap of Community Benefit reporting
• Expect Congress and other stakeholders to continue reviewing the reported
Schedule H community benefit expenditure data
• Expect researchers and perhaps media to attempt to slice and dice the data
to break it down by types of hospitals, regions, hospital size, specialty, etc.
• As data is increasingly scrutinized, may put pressure on the overall nonprofit
hospital sector and on individual hospitals to defend their CBE numbers
• Those hospitals with relatively small CBE percentages will be put in a
position of justifying exemption based on other factors
115. PwC
Conducting the CHNA
i. Define the
Community
vi. Make the CHNA
Widely Available
v. Adopt the CHNA
Report
iv. Document the CHNA
(CHNA Report)
iii. Solicit and Account
for Input
ii. Assess Community’s
Health Needs
Community
Health Needs
Assessments
(CHNAs)
116. PwC
Key points regarding final regulations
• Facilities have already conducted the first CHNA. Next required CHNA,
generally, must be completed by the end of the 2016 tax year and comply
with the final regulations
• Two components – CHNA report and implementation strategy
• Some next steps
- Facility should review current CHNA and implementation strategy to
identify areas
requiring change
- Consider definition of community served, particularly low income,
minority, and medically-underserved populations
- Consider opportunities to conduct joint CHNA and implementation
strategy (whether related or not)
- Establish a system to obtain, review and incorporate public comments
regarding the CHNA
- Need to address evaluation of impact of actions taken in the CHNA report
117. PwC
State community benefit reporting requirements
• Approximately 23 states require tax-exempt hospitals to provide some form
of community benefit.
• Eleven states require by law or regulations that tax-exempt hospitals
conduct CHNAs. Approaches vary widely by states.
• Ten states have laws that require community benefit plans (implementation
strategies). In some cases the requirements for these are more stringent then
those required under the ACA.
• Terminology and reporting vary greatly among states and differ from federal
reporting.
- Differences in the definition of “community benefit”.
- Example: Certain states allow the inclusion of Medicare shortfall
(California) others do
not (Minnesota).
• Future of state reporting?
118. PwC
State community benefit reporting requirements
State comparison
State Required reporting Are community building &
community health
services reported?
Is data publicly
available?
California Private nonprofit hospitals must
submit a community benefit plan
Goods and services that increase
access, promote health, or meet a
community need are included in
the statute’s definition of
community benefit
Yes
Illinois Nonprofit hospitals must submit
annual community benefit plans, in
addition to disclosing charity care
provided, bad debt, and cost of
government-sponsored indigent care
One line is included for “other
community benefits” on the reporting
form. A detailed description of how
benefits are provided and calculated
is required for the category
Yes – available
upon request
Rhode
Island
Annual report of uncompensated care
required to support licensure
Community health improvement
services and community building are
not included
No
122. PwC
Objectives
Provide overview of the healthcare deal activity and volume during 2014 for
the hospital, managed care, post acute, and private equity sectors.
Provide overview of the healthcare deal outlook for 2015 for the for the
hospital, managed care, post acute, and private equity sectors and in
addition, provide an in-depth analysis of the M&A drivers in the hospital
and managed care sectors for the near term.
Provide overview of the key healthcare and business issues that are causing
many healthcare stakeholders to rethink their business models.
Provide a list of key takeaways and answer questions from the audience.
Current
Deals Trends
& Activity
Outlook for
Healthcare
M&A
Key
Healthcare
Issues
Questions
and Closing
Remarks
1
2
3
4
124. PwC
After a significant spike in 2009, worldwide M&A activity decline and
plateaued between 2010 and 2013 but reached record levels in 2014
Outlook
Moody’s Investors Service
“As hospital operators prepare
for the implementation of the
broader reaching aspects of
healthcare reform, acquisition
activity is likely to continue, in
some cases driving up leverage
and requiring considerable
integration efforts.”
IDC
“Consolidation among
providers will accelerate, with
the total number of hospitals
and physician practices
decreasing and moving toward
accountable care. Private
equity firms will continue to
play a role.
Source: Moody’s Investors Service
125. PwC
Activity by sector – Hospitals
While hospital deal volume declined since the high of 2012 (94 transactions in 2012 to 79 in 2014), there was a significant increase
in Q4’14 with over half of the 2014 transactions occurring in the fourth quarter
$inmillions
126. PwC
Activity by sector – Managed Care
Despite a lag behind some of the other sectors, Managed Care saw close to a 50% increase in M&A activity as 22 deals in 2014
were announced versus 15 in 2013
$inmillions
127. PwC
Activity by sector – Post Acute
For the second straight year, the Post Acute sector had more than double the volume of the next comparable healthcare services
sector in 2014
$inmillions
128. PwC
Activity by sector – Private Equity
Overall for 2014, 62 announced transactions involving private equity (“PE”) firms compared to 58 in 2013. We continue to see
stable and consistent year over year trends
130. PwC
Hospital M&A Outlook
2014 Hospital M&A volume trailed that of previous years as hospitals shift toward more alliance based
transactions, but regional deals are picking up in unconsolidated major markets, including Chicago, NYC, and LA
PwC Health Services 2014 Deal Insights Report
“We have seen a shift from traditional M&A within the hospital sector in terms of take
control transactions towards more alliance based transactions. … Traditional M&A
activity is still taking place, just to a lesser extent than in prior years in the hospital
sector.”
– February 2015
Moody’s Investors Service
“For-profit and not-for-profit hospitals are increasing their M&A activity in response to
declines in reimbursements and patient volumes. This activity will likely help the
hospitals build scale and market share and lower their costs.”
– August 2014
131. PwC
Hospital Drivers and Trends
The following five trends are affecting the industry now and in the future, but will put pressure on margins in
the near term
Reform is bringing an influx of new patients, creating service capacity challenges — particularly in
regions already facing physician shortages. In addition to Medicaid expansion, exchange contracts are driving
utilization growth. Providers should also focus on how to operate on Medicare and Medicaid rates; think of
physicians as partners in payment; open or expand clinics; and stay out of the bottom quartile on clinical quality.
Reimbursement rate pressure – between federal budget cuts and consolidating payers who now enjoy greater
negotiating leverage – is creating a greater impetus for providers to adopt more aggressive cost-
control initiatives. Rapid growth of high-deductible health plans also continues to create high levels of
patient bad debt for providers to manage.
IDC’s top prediction for 2014 is that new business models – including ACOs/medical homes, ownership
models, consumer engagement, and quality-based payment – will drive at least 50% of HIT growth. The
shift to value-based care will also require investment in community-care solutions, including telehealth, remote
health monitoring, mhealth, and social and advanced analytics.
Coordinating payer relationships, M&A, physician alignment, and investments are crucial to the
future stability and strength of hospitals. As insurance carriers and new entrants continue to cross into areas
traditionally dominated by health systems, providers will also need to explore new opportunities to capitalize on
their own core expertise.
Providers are working to report and control quality and improve care due to increasing demands for transparency
from payers and consumers; expanding pay-for-performance programs; and refusal by payers to pay for never
events. Rapid adoption of electronic patient records and the increase in targeted cyber attacks also
makes data security policies and procedures a high priority for providers.
Healthcare
Reform
Cost Controls
IT Initiatives
Strategic
Positioning
Quality
Control &
Reporting
132. PwC
US Health Systems Expand Globally
Both for-profit and not-for-profit US health systems are expanding abroad to capitalize on maturing
economies and demand for healthcare
Source: Company filings, Factiva, PwC Analysis
133. PwC
Managed Care M&A Outlook
Deal activity in the managed care sector trended towards acquisitions of targeted small, specialty firms and
health plans participating in government sponsored healthcare programs and is expected to continue in 2015
PwC Health Services 2014 Deal Insights Report
“The uptick in activity can be directly related to managed care companies seeking
opportunities through acquisitions to balance uncertainty and potential financial losses
as a result of ACA. Part of this evolved into a trend towards acquisition of targeted small,
specialty firms and health plans participating in government sponsored healthcare
programs. Moving forward into 2015, this trend is expected to continue as managed care
companies seek opportunities to expand their member population to balance any
financial uncertainty.”
– February 2015
134. PwC
Managed Care Drivers and Trends
While payers continue to adapt to reform-driven change, they’re also moving to counter health system
consolidation and differentiate themselves in the increasingly consumer-driven marketplace
Payers continue to address multiple issues and opportunities related to the Affordable Care Act
(ACA), including: population health management, ACA fees and state-level reimbursement, an influx of new
enrollees, minimum Medical Loss Ratios, and modifying business, operational, and technology models.
Economies of scale in administration drove consolidation along with consumer expectations of large
provider networks, which are difficult for smaller companies to assemble. Payer consolidation is also being
driven by M&A activity in the provider space, which would otherwise give some health systems greater
negotiating leverage over carriers.
Payers are structuring for the future of the industry with actions around: Payer/Provider
Collaboration, Strategic Partnerships, M&A, ACOs, Private Exchanges, Restructuring to/from Non-profit Entities,
and Global Expansion. MCOs are also attempting to influence costs and patient outcomes by acquiring healthcare
providers and IT companies. And both direct-pay models and new entrants threaten to disrupt existing payer
business models.
Consumerization, consumer education, new delivery models (like Duals, exchanges, change in employer
coverage) and the move to retail markets/disintermediation are shifting the industry toward more direct
distribution to the consumer. Narrow networks and defined contribution benefit strategies continue to
gain traction among cost-conscious employers and consumers. Likewise, the aging population, rising healthcare
costs, and the growing middle class in developing countries are driving demand for supplemental healthcare
insurance around the globe.
Payers are promoting greater transparency and empowering members to take control of their own
health and care decisions by offering convenient, personalized, and engaging digital tools. Carriers also
continue to streamline IT systems not only to cut costs, but to implement analytics and workflows that
improve health outcomes.
Healthcare
Reform
Consolidation
Positioning
for the Future
Product
Development
HIT,
Consumer
Tools, &
Analytics
135. PwC
Emerging Payer Priorities: Overview
In the emerging health market, carriers’ ability to meet consumer needs will depend on how well they empower
consumers and differentiate themselves across three key dimensions:
Source: PwC HRI Report
1. Personalized experiences
Create simpler and connected experiences that enable people to make “best fit” heath care
choices, enabled by digital solutions and powered by personalized information.
2. Value based care
Lead the market in collaborating with doctors, hospitals, and other providers to build a
connected and consumer-centered health care system.
3. Community activation
Invest in and improve the health of individuals and our community with a focus on reducing
health disparities and inequities.
136. PwC
Post Acute M&A Outlook
The post acute section continued to demonstrate impressive increases in deal volume and value in 2014 and it
expected to continue as Private Equity firms seek to exit investments in 2015
PwC Health Services 2014 Deal Insights Report
“While long term care has always been a strong volume leader, what is unique about the
sector as it ended 2014 is the anticipation for continued strong M&A trends in 2015 sub-
sectors continue to look as promising as it experienced in 2014. An economic
environment of low interest rate and available financing helped drive significant deal
activity in 2014. Many analysts believe the increased level of M&A activity over the last
two years will continue in 2015 as long as interest rates remain low, which it appears will
likely happen through at least June 2015. Consolidation is also expected to continue
among the health care real estate investment trusts (“REITs”) and private providers.”
– February 2015
137. PwC
Private Equity M&A Outlook
Corporate carve-out are expected to be strong as another carve-out was announced in January with Madison
Dearborn’s announced acquisition of Walgreens intravenous infusion service business
PwC Health Services 2014 Deal Insights Report
“Overall the financing markets remained favorable as rates on high-yield debt remained
around 6% (evidenced by yields on high yield bond ETFs throughout the year). High
stock market prices, strong corporate balance sheets and new entrants into the health
care market have challenged private equity deal making in 2014. In fact, we’ve observed
that market dynamics coupled with high EBITDA multiples allowed private equity funds
to opportunistically sell portfolio companies in 2014 thus providing their investors with
returned capital. In addition, private equity investments into the equipment and supply
deals were headlined by corporate carve-outs.”
– February 2015
139. PwC
The only way to remain viable and relevant is for health systems to have
an M&A strategy linked to their actions
Current state Future state
Strategy Rooted in the past, limited to vision
and mission
Forward-looking, market-driven,
disciplined and concrete
Value proposition “All things to all people” Differentiated value proposition for
consumers, public and private payors
Basis of competition Volume, pricing power, breakthrough
research
Value for a given quality and access
level
Clinical focus Illness/hospital-based care Illness and wellness/retail, mobile and
home health
Key capabilities MD affiliation, capital formation,
revenue management, acute care
operations
Informatics, care redesign, population
and risk management, patient
experience
Role of quality and
process excellence
Differentiator Table stakes
What it does for the
organization
Reflects our history and aspirations Helps make hard choices and aligns
everyone to achieve high performance
New requirements for a M&A strategy
140. PwC
Arguably, most providers will end up in one of five models with M&A as a
tool to achieve the ends for each model
Strategic model Value creation Examples
• Apply innovative care delivery model to non-adjacent geographies
• Monetize intellectual property and brand globally – clinical, research,
teaching
Clinical
innovation
• Expand footprint to drive central, tertiary hub, often an AMC
• Leverage relatively more integrated chassis with IT to demonstrate
quality as a competitive advantage (not risk bearing)
• Benefit from increased tertiary/quaternary volumes
Hub and spoke
• Build concentration in a reasonably contiguous regional market
(typically outside major urban centers)
• Apply continuum and integration to enable risk bearing
• Benefit from market power, lower-cost model and reduced leakage
Geographic
cluster
• Apply superior operating model to undervalued assets
• Benefit from efficient, replicable operating model
• Pursue clinical integration at the local level
• Tend to be geography-agnostic (growth/income preferred)
Scaled
portfolio
Fully
integrated
• Leverage owned assets and labor to create high value
• Focus typically in dense markets
• Includes insurance capabilities – fully risk-bearing
141. PwC
These macro trends are forcing healthcare participants to rethink
business models and engaged in M&A activity
Convergence
Clinical
Integration
Population
Health
Capital
Strategies
New Entrants
142. PwC
Convergence in health is the blurring of lines between traditional
sector-based silos; it is new partnerships and new roles
ACOs
• Partners HC & Neighborhood HP
• Highmark & West Penn
• Aetna & Carilion Clinic
• CIGNA & St. John’s Mercy
International
• UnitedHealth – acquired AMIL
in Brazil
• Aetna - product launches in China and
entered the India market in June
• Cigna - Global growth strategy includes
launching an international health care
plan for globally mobile individuals
Intra-payer M&A
• Aetna’s acquisition of Coventry
• WellPoint’s acquisition of Amerigroup
• Wellcare Health Plans acquired
UnitedHealth’s Florida Medicaid plan
Intra-payer M&A
• Aetna’s acquisition of Coventry
• WellPoint’s acquisition of Amerigroup
• Wellcare Health Plans acquired
UnitedHealth’s Florida Medicaid plan
International Strategies are being
pursued to globally expand payers’
footprint while also allowing them to
expand into new business models.
M&A has been anticipated
by many in the industry,
both horizontal and vertical
deals are picking up.
While most payers
began ACO pilots a
while ago, the
jockeying to pair off
with providers and
other organizations
has increased.
143. PwC
Clinically integrated networks have developed to work together, in
unison, to provide more efficient and effective patient care
Source: Truven Health; Becker’s Hospital Review
Fee for Service Fee for Quality & ValueOngoing shift
144. PwC
There has been rapid growth of Medicare Accountable Care
Organizations to drive quality, cost, and overall care of a defined
population
Source: The Advisory Board
1 Accountable Care Organization.
145. PwC
Current/future capital strategies have transitioned focus to
outpatient settings, population health, and new service offerings
Municipal Bonds
Direct Bank Loans
Operating Profits
Capital Leases
Gifts/Philanthropy
Grants
Sale of Assets
Traditional/NewSourcesofCapital
1. Renovation and Expansion of
Outpatient Facilities
2. Population Health Management
(ex. clinically integrated networks, ACOs)
3. New Service Offerings (ex. retail
health, direct-to-employer clinics)
4. New Technology Offerings (ex.
telemedicine, Big Data)
New Uses of Capital
Traditional
Sources
New
Sources
Private Equity
Real Estate
Investment Trusts
(REIT)
Business Partners
146. PwC
Nearly half of the Fortune 50 companies are new entrants into the
healthcare landscape
Of the 38 Fortune 50 companies with a
major stake in healthcare, 24 are new
entrants, from retailers to technology
companies, to telecommunications
businesses to consumer products
companies.
Source: HRI Report
147. PwC
Major employers are also responding by making the move to high
performance networks as a cost reduction method
According to PwC’s Touchstone Survey, 4% of employers have already
implemented performance based networks but 33% plan to consider
over the next few years.
&
Procedures: Orthopedics
Procedures: Transplants & Cardiac
&
&
Procedures: Cardiac
Procedures: Cardiac & Joints
&
Procedures: Diabetes Management
&
Procedures: Transplants & Cardiac
&
Source: PwC Health Research Institute
Large employers such as Lowe’s and Walmart are
partnering directly with hospitals to provide services.
Many of these are bundled payments for procedures
such as heart surgeries or knee replacements. Some
employers pay all related travel costs as well as waive
deductibles.
149. PwC
Summary
Key Points:
• After a period of decline, worldwide M&A activity increased in 2014 and is
expected to continue to do so for the foreseeable future
• Participants in the New Health Economy must capitalize on key trends, including
convergence, emerging capital strategies, population health, and clinical
integration, to position themselves for future success
For More Information:
Medical Cost Trend: Behind
the Numbers 2015
Healthcare’s new
entrants: Who will be
healthcare’s
Amazon.com?
Health Services Deals
Insights: 2014 and 2015