Prospect Medical Holdings, Inc. CEO Interview: Sam Lee

• On 2:54 pm EDT, Tuesday September 22, 2009

67 WALL STREET, New York - September 22, 2009 - The Wall Street Transcript has just published its Medical Real Estate: Healthcare REITs, Long-Term Care Facilities and Hospitals Report offering a timely review of the sector to serious investors and industry executives. This 45 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investor Perception -- Secular Shift -- Health Care Reform -- REITs Growth -- Public Markets -- Divident Yields -- Debt Levels -- Grow Generation -- Outpatient Versus Inpatient Care -- Health Care Delivery -- Leaseback Arrangements -- Skilled Nursing -- Seniors Housing -- Growth and Expansion -- Positioning the Company for Winning -- Portfolio Diversification -- Geographical Growth -- Advantages to Investing in Licensed Hospitals -- Higher Returns -- Underwriting -- Fragmented Industry -- Consolidation Opportunities -- Debt Refinancing -- Growth in Health Care Spending

Companies include: LifePoint Hospitals (LPNT); Community Health Systems (CYH); Psychiatric Solutions (PSYS) and Tenet (THC); Medical Properties Trust (MPW); Healthcare Realty Trust (HR); LTC Properties (LTC); Health Care REIT (HCN); National Health Investors (NHI); HCP Inc. (HCP); Alexandria (ARE); BioMed (BMR); Senior Housing Properties Trust (SNH); Omega Healthcare Investors (OHI); Ventas (VTR); Emeritus (ESC); Brookdale (BKO); Fannie Mae (FNM); US Physical Therapy (USPH); AmSurg (AMSG)

In the following brief excerpt from the 45 page report, Sam Lee, Chief Executive Officer of Prospect Medical Holdings, Inc., discusses the outlook for the sector and for investors.

TWST: A good place to start is with a brief history of Prospect Medical Holdings.

Mr. Lee: I took over as the CEO of this company about 18 months ago. Prospect initially was a physician management organization, an IPA - Independent Physician Association - prior to the August 2007 acquisition of my company, Alta Healthcare System, which owned and operated four community hospitals in greater Los Angeles. Through the first nine months of fiscal 2009, our revenues from the hospital and IPA business segments were about equal. The company is leading with the hospital side, with the IPA arm also being a profoundly important part of Prospect's strategy.

TWST: Talk a bit more about what your overall business strategy is today.

Mr. Lee: We are a Southern California health care services provider that brings together hospital services and IPA management. We provide the highest-quality medicine under the most cost-effective operating model, combined with revenue diversification in our services, payors and geography. We offer the full spectrum of acute hospital services, including medical, surgical and psychiatric care. And with the IPA side, we also have the ability to work with primary care and specialist physicians to facilitate improved patient care through preventative medicine and, to be consistent with the operating model, provide these services in a very cost-effective manner. This is not a new model. This is something that we designed back in 2002-2003, when I first joined Alta. What we realized back then is what we are seeing evaluated today: Health care services cost too much. That's our opinion, and it's our responsibility to provide high-quality health care under a reasonable cost structure and cost-effective operating model. Otherwise, the system, which is not working, will continue to worsen. We certainly appreciate our success to date in implementing this model and believe that we are positioned to continue to be successful relative to other providers. As we take the next step in this health care services evolution, some of these concepts are currently being implemented in an attempt to continue to reduce the cost of providing health care services. There may be a limitation on access to health care services in some communities, but certainly not in ours because we recognized the challenges back in 2002-2003. I think most importantly, we have been ahead of the curve in designing and implementing ways to reduce costs and operate more efficiently without sacrificing quality. By taking this approach, our existing platform operations have been consistently successful, and other operations that we have integrated have also benefited from our model. One of the things that we recognized back in 2002-2003 was that the cumulative annual growth rate of health care services was increasing at, I believe, right around 8% a year, whereas the GDP was only growing at about 3% a year. This disparity is worse now. We had to first and foremost continue to provide health care to the communities we served, especially in light of the fact that the number of hospitals and providers were, and still are, contracting at the same time that the local population was growing. That certainly puts a burden on the clinicians and management. We also recognized that cost-effective medicine and quality medicine go hand in hand. If you are not cost effective and you are not profitable, there is usually a high probability that your quality of medicine will suffer as well. The services patients demand must be paid for - quality medical staff, quality facilities, in-house laboratory services or the ability to procure, on a timely basis, such services, pharmacy supplies and so on. All of these parts are critical to gaining the trust of physicians and patients, and convincing each to come to your hospitals. Also we have focused on revenue diversification. As a health care services provider, that old adage of there being insurance or government payors to pay as long as you can provide medicine cost effectively is true. But if you focus on any one aspect, your revenue can increase or decline dramatically almost overnight due to changes in reimbursement. So for us to become operationally proficient, we knew we needed to do the same thing over and over again very precisely to wring out the excess or inefficiencies. Certainly, one component is you need time. Practice makes perfect. But if you have a volatile revenue model, you don't have the chance. It's not a sexy model; it's a model built to last, built to be efficient and built to gain trust in the quality of medicine over a long period of time.

TWST: Would you talk a bit more about what, if any, plans you have to expand beyond the greater Los Angeles area, where I believe you currently own and operate five hospitals?

Mr. Lee: That's right. What did the founder of Subway say? "Start small, finish big," which is what he did. Probably not the best example to underwrite by, but our current management team started with a few hospitals, then we combined with the IPA arm, and then we recently acquired a majority interest in another larger hospital, Brotman Medical Center. So what we have done in the last few years is increase our geography within Southern California from just certain parts of Los Angeles to Orange County and into San Bernardino County, which is also called the "Inland Empire." By the way, with approximately 15 million total residents, these three counties have a higher population than many states. In the way of services, we have diversified from acute health care services to higher-level medical procedures with the increased ownership in Brotman. And of course we have diversified with the IPA side, which is a physician management organization. We have also diversified our payor mix more towards commercial and managed care, resulting in less reliance on government payor Medicare and Medi-Cal. We still have significant organic growth opportunities within our current platform, especially as it relates to further improving the operating metrics at Brotman. From an acquisition perspective, there are opportunities within Orange County, the Inland Empire and Los Angeles County. But one thing that many of us in health care know is that one of the more difficult markets to operate in is California and, moreover, Southern California. We have done extremely well here, primarily due to our model as well as our management and execution. We believe that the model is portable, which allows us to consider opportunities in other parts of the United States when appropriate. As the retail adage goes, "If it it works in PeoriaE" In a similar sense, if you can make it work in California, you can probably make it work anywhere because California is so difficult to execute in. And not only are we executing, we are probably doing as well or better in California than most for-profit companies are performing outside of California.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 45 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

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