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.

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
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2
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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

5. Page 4
Consolidation by Key Market
Participants
Horizontal Integration
Vertical
Integration

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!

9. Page 8
Investment/FinancialRisk
AssumedbyPartner
Level of Control Relinquished by HospitalLOW HIGH
HIGH
Potential Hospital Legal Structures

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
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2
3
4
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7
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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

14. Page 13
Request for Proposal Process

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