The transaction process for community hospitals is discussed, including the importance of understanding the legal, valuation, and practical issues involved with the request for proposal process; preparing for due diligence by identifying and remedying items that will affect the deal and value in advance of “buy side” diligence; structuring the arrangement to protect the charitable mission and community assets of the hospital and the considerations and provisions within; ensuring appropriate consideration is received for the value of a community hospital; and assessing state regulatory and antitrust issues associated with sales of community hospitals.
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Community Hospital Sale Process: Key Issues in Transactions
1. May 2018
Michael Ramey
PYA
Jay Hardcastle, Esq.
Bradley
Selected Issues in the Sale Process of
a Community Hospital
AHLA HEALTH CARE TRANSACTIONS
2. Page 1
Agenda
Pressures on Community Hospitals
Developing an Effective Affiliation Strategy
Objectives from Transaction
Request for Proposal Process
Understanding Value of the Hospital
Preparation for Due Diligence
Forward Look to Post Transaction
Regulatory Approvals to Complete the Transaction
1
2
3
4
5
6
7
8
3. Page 2
Pressures on Community Hospitals
Investments
in Technology
Investments
in Facilities
Physician
Shortages
Provider
Alignment for
Episodic Care
Ongoing
Capital Needs
Operational
Considerations
4. Page 3
Pressures on Community Hospitals
Maintaining Robust
and Effective
Compliance Programs
Political
Uncertainty
Horizontal and
Vertical Integration
by Key Market
Participants
Assuming Risk in
Value-Based
Reimbursement
Strategic Considerations
6. Page 5
Considerations for Boards and
Executives
Market
Dynamics
Board
Education of
All Options
Understanding
Needs and
Prioritizing
Action Plans
Pointer: Boards should exercise fiduciary duty by seeking education
on affiliations and considering multiple reasonable options.
7. Page 6
Assessing Strategic Objectives
Investments to enhance
healthcare locally
Preservation of charitable
care mission
Preservation of religious
mission
Sustaining employment
for work force
Continuity of clinical
services
Funding of capital needs
Managing risk
8. Page 7
Protecting the Board
Handling board members with conflicts of interest
Consideration of options other than sale
Debt refinancing, cost cutting, other affiliation
strategies
Engagement of professional strategic consultant
Fair market value opinions
Documentation of meetings and presentations by
outside professionals in minutes
Pointer: Review State Attorney General statute to
ensure that any specific requirements for board
consideration is documented in the minutes!
10. Page 9
Maintenance of Community Benefit Programs
Capital Commitments
Maintenance of Charity Care Policy
Continuity of Service Lines
Employee Protection
Protection of Religious Identity
Reinvestment of Profits Locally
Commitment to Shared Mission
Preservation of Donor Recognition
Objectives from Transaction
1
2
3
4
5
6
7
8
9
11. Page 10
Shared governance during a
transitional period
Classes of directors
(one class from the legacy
board, another class from
the buyer’s team)
Time limits on transitional
periods
Reserve powers
(blocking rights versus
initiation rights)
Governance Considerations
12. Page 11
Forms of Transactions
Asset
Sale
Merger
Stock Sale
Membership
Substitution
13. Page 12
Funding of Foundation
Provisions for post-closing working capital
and balance sheet “true-ups”
Provisions for funding indemnification claims
Unwind Provisions
Call right in favor of foundation
Disaffiliation of hospital entity
Enforceability of Capital Expenditure
Commitments
Contractual right to damages
Contractual right to specific performance
Both
Other Structural Considerations
15. Page 14
Legal Considerations in the RFP
Process
Anticipating concerns of attorney general
Drafting Confidentiality Agreement with the
release of RFP materials to the attorney general in
mind
16. Page 15
Source: Independent research performed by PYA, P.C.
State attorney general authority for approval of transactions
involving not-for-profit and community-owned healthcare entities
The Regulatory Approval Process
17. Page 16
State-specific regulations
governing transactions involving
for-profit partners
Understanding value transferring
to a buyer/affiliate in the
transaction
Understanding the time at which
the facility should be valued
Date of letter of intent?
Date of purchase agreement?
Closing date?
Fair Market Value Considerations
18. Page 17
Contract compliance
Real estate
Physicians
Billing practices
Coding oversight, policies, and
procedures
Medical necessity reviews
340B
Due Diligence Preparation
Pointer: Identify all payments to referral sources and associated
contracts!
19. Page 18
Sufficiency and
documentation of
compliance program
Seven elements of an
effective compliance
program a minimum
Historical regulatory
actions/audits
IT security / HIPAA
processes
Due Diligence Preparation
20. Page 19
Financial reporting
Adequate accounts receivable
reserves
Third-party payer liabilities
Other unrecorded liabilities
Leases
Pension accounting
Debt covenant compliance
Transactions with related parties
Due Diligence Preparation
21. Page 20
System Improvement Agreement
Corporate Integrity Agreement
Self-Referral Disclosure Protocol
Refunds
Self-Dealing
Meaningful Use
Cost Reports
Special Issues in Community
Hospital Transactions
22. Page 21
Indemnification by foundation
Retained debt obligations
Use of proceeds from transaction
Working capital – post close administration
and adjustments
Looking Ahead to Post Transaction
23. Page 22
State attorney general
oversight/approval
Assessment of market
overlap/competition
HSR filing
Federal Trade Commission
intervention/hold separate
agreements
Certificates of public advantage
(COPA)
Cooperative agreements
How to Get the Deal Done
Pointer: Pay attention to debt assumption!
24. Page 23
Contact Information
Michael Ramey
PYA
mramey@pyapc.com
865-673-0844
Jay Hardcastle, Esq.
Bradley Arant Boult Cummings LLP
jhardcastle@babc.com
615-252-2386
Editor's Notes
Moody’s: In 2017, nonprofit hospital median cash flow was 8.1% compared to 9.7% in 2016; lowest level since 2008-2009 recesession.
https://www.beckershospitalreview.com/finance/moody-s-preliminary-nonprofit-healthcare-profitability-margins-at-10-year-low.html
Physician Shortages – Association of American Medical Colleges - up to 121,300 physician shortage by 2030 (up to 49,300 primary care, 72,700 specialists)
https://www.beckershospitalreview.com/hospital-physician-relationships/why-america-s-physician-shortage-could-top-120k-by-2030-5-things-to-know.html