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AMCs and Regional Collaboratives: Formation and Legal Issues
Affiliation Strategies for At-Risk Community Hospitals05.17.2016 | 4:00 5:00 pm CDT05.18.2016 | 9:45 10:45 am CDT
Faculty :
Michael [email protected]
Jay HardcastleBradley Arant Boult Cummings [email protected]
#Agenda
12345Factors Affecting Financial Viability of Community HospitalsStrategic Considerations in Evaluation of Affiliation AlternativesIntroduction to the Regulatory Approval ProcessPotential Hospital Affiliation Structures and AssociatedLegal ImplicationsOverview of the Request for Proposal Process
#Financial Viability of Community HospitalsKey Factors: Reimbursement Pressures
Lack of MedicaidExpansionProvider-Basedvs.FreestandingOutpatient ServicesDSH PaymentReductionsCommercialPayersValue-Based PaymentModels and RiskArrangements
#Financial Viability of Community HospitalsKey Factors: Medicaid Expansion
Medicaid Expansion Affecting Hospitals
#Financial Viability of Community HospitalsKey Factors: Volume and Operational CostsSource: American Hospital Association
#Financial Viability of Community HospitalsKey Factors: Place of Service ShiftsServices shifting from acute care inpatient/ED settingto outpatient/urgent care settings
Source: American Hospital Association
#Financial Viability of Community HospitalsKey FactorsMaintaining a competitive market position in the face of industry shifts
Employer health plans aligning with regional and national centers of excellenceExpansion ofclinically integratednetworksReadiness foralternativepayment models
#Cleveland Clinic (cardiac)Pacific Business Group on Health (knee and hip replacements, spine surgeries)
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Financial Viability of Community HospitalsOther ConsiderationsPhysicianRecruitment ChallengesInformation Technology ResourceNeedsNeeds for AdditionalAccess to CapitalCompliance with Complex Regulatory Requirements
#Financial Viability of Community HospitalsKey StatisticsHospital Acquisitions (2008 2015)
Sources: Irving Levin Associates, Inc. HealthCare Services Acquisition Reports (2008 2015)
#(1) In 2013, consolidation of several investor-owned systems resulted in a large number of hospitals involved in acquisition activity9
Financial Viability of Community HospitalsSource: NC Rural Health Program, Findings Brief: A Comparison of Closed Rural Hospitals and Perceived Impact, April 2015.
From 2010 through 2014, 47 rural hospitalsacross 23 states ceased provision of inpatient services 123451.5 million people lost access to local healthcare because of these closures26 rural hospitals no longer provide any healthcare services21 rural hospitals restricted services to only provide limited, non-inpatient servicesAt least 11 more rural hospital closures occurred in 2015Almost 75% of rural hospital inpatient closures occurred in states that have not expanded Medicaid under the ACA
#13% of rural hospitals are vulnerable to closure
35% of rural hospitals are operating at a loss
Financial Viability of Community HospitalsKey StatisticsSources: Associated Press. "Rural Hospitals Struggle to Stay Open, Adapt to Changes."Modern Healthcare., 2 May 2015., iVantage Health Analytics Rural Relevance under Healthcare Reform Study, 2015
13%35%
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Financial Viability of Community Hospitals2015
Key Financial Metrics:ProfitabilityLiquidityCapital StructurePhysical Plant Needs
#Importance of Evaluating Potential Affiliation Alternatives
Defer the DiscussionSingular Focus onIndependent Survival1Eroding financial resultsRising debt loadsAging physical plants with deferred maintenance and upgradesPhysician attritionEmployee attrition
Proactive Open to Affiliation Options2Better opportunities to retain more local governance (Affiliation vs. Acquisition)Higher likelihood for multiple offersNegotiate from a better position of strength to obtain more committed benefits to the communityCommunity HospitalBoard ApproachPotential Community Hospital Impact
#*Involve municipality leadership, if applicable, early to determine options
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Request for Proposal ProcessStrategic approach can yield better results for maintaining continuity of care to the community and achieving hospital objectives in an affiliation
Important to be mindful of involving multiple parties as this can be a requirement for state Attorney General review
ORApproachesWide-ReachingStrategic
#Request for Proposal ProcessKey Strategic ConsiderationsCommitments to Benefit the Community:12345Funding of Capital NeedsRetained Local Governance NeedsProvision of Core and Specialty ServicesPhysician Recruitment Assistance Preservation of Charitable Care Mission6Access to Enhanced Quality, Population Health Initiatives,Clinical Protocols, etc.
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Request for Proposal ProcessKey Strategic Considerations
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Request for Proposal Process1Define strategic objectives/potential partners2RFP distributed to potential partners3Evaluate Expressions of Interest/Letters of Intent4Select potential partner(s) to continue in process5Perform partner due diligence6Negotiate and enter into a definitive agreement 7Submit necessary information for state and/or federal regulatory approval process8Close transaction
#Introduction to the Regulatory Approval ProcessState Attorney General authority for approval of transactionsinvolving not-for-profit and community-owned healthcare entities
Source: Independent research performed by PYA (Pershing Yoakley & Associates, P.C.)
AG Review AuthoritySome Oversight RightsNo Statute or Statute Not Actively Enforced
#Introduction to the Regulatory Approval ProcessOther Regulatory Approval Considerations
Hart-Scott-Rodino ActFiling/FTC Review
State Laws PursuingAntitrust Immunity12Certificate ofPublic Advantage(COPA)Other RecentCooperativeStatutes
#The size-of-transaction threshold for reporting proposed mergers and acquisitions subject to antitrust enforcement will increase from $76.3 million for 2015 to $78.2 million for 2016.19
AcquisitionInvestment/Financial RiskAssumed by PartnerLevel of Control Relinquished by Hospital
Joint Venture
ManagementAgreement
Joint Operating Agreement
Hospital Lease
Affiliation ArrangementsPotential Hospital Legal StructuresLOWHIGHHIGH
#Potential Hospital Legal StructuresAffiliation AgreementsLegal ConsiderationsState LawStark LawOtherAnti-KickbackAntitrustTax-Exemption
#Potential Hospital Legal StructuresJoint Operating Agreements
CharacteristicsIncome statement consolidationEntities retain ownership of assets/responsibility for liabilitiesServices agreementsLimited capital commitmentsGovernance andStructural Issues
Establishment of parentReserve powers of parent/ individual entitiesLegal ConsiderationsCMPPrivacyAntitrustTax-ExemptionState LawAnti-Kickback
#Potential Hospital Legal StructuresJoint Operating AgreementsDue Diligence Focus Areas
Regulatory Matters
Transaction Created IssuesPhysician arrangements
ComplianceViolation of lending covenants upon consolidation
Bond indenture
Change in control provisionsLegal ConsiderationsCMPPrivacyAntitrustTax-ExemptionState LawAnti-Kickback
#Potential Hospital Legal StructuresJoint VenturesLegal ConsiderationsState LawStark LawAnti-KickbackAntitrustTax-Exemption
CharacteristicsCapital Contributions/ CommitmentsIdentified Governance Rights
Structural Issues
Cultural and ReligiousNaming RightsEthical and Religious DirectivesFoundationsTechnical Structure IssuesAssigning membership to an entity with no membersOtherOther
#Potential Hospital Legal StructuresJoint VenturesLegal ConsiderationsState LawStark LawAnti-KickbackAntitrustTax-ExemptionIdentified Governance RightsSuper majority rightsReserve powersShedding religious affiliationReaching Consensus between PartiesAmending governing documentsSpending/borrowing thresholdsReplacing Key Executives
Key Governance IssuesPrivacyOther
#Potential Hospital Legal StructuresLeases / Management AgreementsLegal ConsiderationsState LawOtherAnti-KickbackAntitrustRelated to inability to sell hospitalKey considerationsPrepaid rentTermRepresentations and warrantiesOther purchase agreement-like clausesCapexWorking capitalLeaseFee consists of all profits
De facto Sale
Distinguishing FeaturesTax-ExemptionStark Law
#Potential Hospital Legal StructuresAcquisitionsLegal ConsiderationsState LawOtherAntitrustForms of AcquisitionAsset PurchaseMerger/Stock PurchaseMember SubstitutionRisk AllocationChange of OwnershipForm
#Potential Hospital Legal StructuresAcquisitionsCommon CommitmentsConsiderationsCapital ExpendituresCommunity BenefitRemedies for BreachCharity CareIncrease/DecreaseProvisions for Medicaid ExpansionContinuity of ServicesLength of CommitmentFinancially Troubled ServicesEmployee MattersMerger of BenefitsSingle/Varying Salary ScalesCatholicity and Other Cultural MattersServices According to ERDsAcquisition Approval AuthorityCommunity BenefitRegulatory Approvals
#Potential Hospital Legal StructuresAcquisitions: Approval Considerations
1Federal Trade Commission/Department of Justice2State Attorney General3Soft Approvals (unions, major employers)4Local Law Considerations (public notices, publications)5Major Contracts and Leases
#Contact InformationMichael [email protected]
Jay HardcastleBradley Arant Boult Cummings [email protected]
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