PYA Senior Healthcare Consulting Manager Michael Ramey presented “Affiliation Strategies for At-Risk Community Hospitals” with Jay Hardcastle, partner at Bradley Arant Boult Cummings at the AHLA Health Care Transactions Program. The presentation helped: 1. Identify factors affecting the continued financial viability of community hospitals. 2. Introduce the importance of board/management being proactive in evaluating potential affiliation alternatives before reaching a dire state. 3. Discuss the request-for-proposal process. 4. Explore legal structures to retain the best value for the community via appropriate models (i.e., management agreement, lease, acquisition, joint operating agreement, joint venture, affiliation). 5. Provide lessons learned from recent hospital transactions.

1. 1
Affiliation Strategies for
At-Risk Community
Hospitals
05.17.2016 | 4:00 – 5:00 pm CDT
05.18.2016 | 9:45 – 10:45 am CDT
Faculty :
Michael Ramey
PYA
mramey@pyapc.com
Jay Hardcastle
Bradley Arant Boult Cummings LLP
jhardcastle@babc.com

2. 2
Agenda
1
2
3
4
5
Factors Affecting Financial Viability of Community Hospitals
Strategic Considerations in Evaluation of Affiliation
Alternatives
Introduction to the Regulatory Approval Process
Potential Hospital Affiliation Structures and Associated
Legal Implications
Overview of the Request for Proposal Process

3. 3
Financial Viability of Community Hospitals
Key Factors: Reimbursement Pressures
Lack of Medicaid
Expansion
Provider-Based
vs.
Freestanding
Outpatient Services
DSH Payment
Reductions
Commercial
Payers
Value-Based
Payment
Models and Risk
Arrangements

4. 4
Financial Viability of Community Hospitals
Key Factors: Medicaid Expansion
Medicaid Expansion Affecting Hospitals

5. 5
Financial Viability of Community Hospitals
Key Factors: Volume and Operational Costs
2.50
2.00
1.50
1.00
0.50
0.00
0.50
1.00
1.50
2.00
2.50
2009 2010 2011 2012 2013 2014
Revenue and Expense Drivers
Admissions Inpatient Days Inpatient Surgeries Births
Total Outpatient Visits Full-Time Personnel Total Expenses
Source: American Hospital Association

6. 6
Financial Viability of Community Hospitals
Key Factors: Place of Service Shifts
Services shifting from acute care inpatient/ED setting
to outpatient/urgent care settings
176,511,062
173,686,925
171,803,076
169,860,722
167,637,410
167,093,881
693,106,685
610,000,000
620,000,000
630,000,000
640,000,000
650,000,000
660,000,000
670,000,000
680,000,000
690,000,000
700,000,000
162,000,000
164,000,000
166,000,000
168,000,000
170,000,000
172,000,000
174,000,000
176,000,000
178,000,000
2009 2010 2011 2012 2013 2014
Inpatient Days v. Outpatient Visits
Inpatient Days Outpatient Visits
Source: American Hospital Association

7. 7
Financial Viability of Community Hospitals
Key Factors
Maintaining a competitive market position in the face of
industry shifts
Employer health plans
aligning with regional and
national centers of
excellence
Expansion of
clinically integrated
networks
Readiness for
alternative
payment models

8. 8
Financial Viability of Community Hospitals
Other Considerations
Physician
Recruitment
Challenges
Information
Technology
Resource
Needs
Needs for
Additional
Access to Capital
Compliance with
Complex
Regulatory
Requirements

9. 9
Financial Viability of Community Hospitals
Key Statistics
Hospital Acquisitions (2008 – 2015)
Sources: Irving Levin Associates, Inc. HealthCare Services Acquisition Reports (2008 – 2015)
60
52
72
90
107
88 100 102
78 80
125
156
244
296
178
265
0
50
100
150
200
250
300
350
2008 2009 2010 2011 2012 2013 2014 2015
Number of Deals Number of Hospitals

10. 10
Financial Viability of Community Hospitals
Source: NC Rural Health Program, Findings Brief: A Comparison of Closed Rural Hospitals and Perceived Impact, April 2015.
From 2010 through 2014, 47rural hospitals
across 23states ceased provision of inpatient services
1
2
3
4
5
1.5 million people lost access to local healthcare because of these closures
26 rural hospitals no longer provide any healthcare services
21 rural hospitals restricted services to only provide limited, non-inpatient services
At least 11 more rural hospital closures occurred in 2015
Almost 75% of rural hospital inpatient closures occurred in states that have
not expanded Medicaid under the ACA

11. 11
13% of rural hospitals are vulnerable to closure
35% of rural hospitals are operating at a loss
Financial Viability of Community Hospitals
Key Statistics
Sources: 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%

12. 12
Financial Viability of Community Hospitals
2015
Key Financial Metrics:
 Profitability
 Liquidity
 Capital Structure
 Physical Plant Needs

13. 13
Importance of Evaluating Potential
Affiliation Alternatives
Defer the Discussion
Singular Focus on
Independent Survival
1
 Eroding financial results
 Rising debt loads
 Aging physical plants with deferred
maintenance and upgrades
 Physician attrition
 Employee attrition
Proactive
Open to Affiliation Options
2
 Better opportunities to retain more
local governance (Affiliation vs.
Acquisition)
 Higher likelihood for multiple offers
 Negotiate from a better position of
strength to obtain more committed
benefits to the community
Community Hospital
Board Approach
Potential Community
Hospital Impact

14. 14
Request for Proposal Process
Strategic 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
OR
Approaches
Wide-Reaching Strategic

15. 15
Request for Proposal Process
Key Strategic Considerations
Commitments to Benefit the Community:
1
2
3
4
5
Funding of Capital Needs
Retained Local Governance Needs
Provision of Core and Specialty Services
Physician Recruitment Assistance
Preservation of Charitable Care Mission
6 Access to Enhanced Quality, Population Health Initiatives,
Clinical Protocols, etc.

16. 16
Efficiencies to be
Realized
Information
Systems
Economies of
Scale:
Administrative
Resources
Economies of
Scale:
Purchasing
Sharing Best
Practices/Clinical
Protocols
Request for Proposal Process
Key Strategic Considerations

17. 17
Request for Proposal Process
1 Define strategic objectives/potential partners
2 RFP distributed to potential partners
3 Evaluate Expressions of Interest/Letters of Intent
4 Select potential partner(s) to continue in process
5 Perform partner due diligence
6 Negotiate and enter into a definitive agreement
7 Submit necessary information for state and/or federal regulatory approval process
8 Close transaction

18. 18
Introduction to the Regulatory Approval
Process
State Attorney General authority for approval of transactions
involving not-for-profit and community-owned healthcare entities
Source: Independent research performed by PYA (Pershing Yoakley & Associates, P.C.)
AG Review Authority
Some Oversight Rights
No Statute or Statute Not Actively
Enforced

19. 19
Introduction to the Regulatory Approval
Process
Other Regulatory Approval Considerations
Hart-Scott-Rodino Act
Filing/FTC Review
State Laws Pursuing
Antitrust Immunity
1 2
Certificate of
Public Advantage
(COPA)
Other Recent
Cooperative
Statutes

20. 20
Acquisition
Investment/FinancialRisk
AssumedbyPartner
Level of Control Relinquished by Hospital
Joint Venture
Management
Agreement
Joint Operating
Agreement
Hospital Lease
Affiliation
Arrangements
Potential Hospital Legal Structures
LOW HIGH
HIGH

21. 21
Potential Hospital Legal Structures
Affiliation Agreements
Possible Services Contained Therein
Clinical Protocol Sharing
Joint Physician Recruiting
Exclusivity Arrangements
Transfer Arrangements
Rights of First Refusal
Licensing or Naming Rights
Legal Considerations
State Law Stark Law Other
Anti-Kickback Antitrust Tax-Exemption

22. 22
Potential Hospital Legal Structures
Joint Operating Agreements
Characteristics
 Income statement consolidation
 Entities retain ownership of
assets/responsibility for
liabilities
 Services agreements
 Limited capital commitments
Governance and
Structural Issues
 Establishment of parent
 Reserve powers of parent/
individual entities
Legal Considerations
CMP Privacy
Antitrust Tax-Exemption
State Law
Anti-Kickback

23. 23
Potential Hospital Legal Structures
Joint Operating Agreements
Due Diligence Focus Areas
Regulatory Matters Transaction Created Issues
 Physician
arrangements
 Compliance
 Violation of lending covenants upon
consolidation
 Bond indenture
 Change in control provisions
Legal Considerations
CMP Privacy
Antitrust Tax-Exemption
State Law
Anti-Kickback

24. 24
Potential Hospital Legal Structures
Joint Ventures
Legal Considerations
State Law Stark Law
Anti-Kickback Antitrust Tax-Exemption
Characteristics
 Capital Contributions/
Commitments
 Identified Governance Rights
Structural Issues
 Cultural and Religious
 Naming Rights
 Ethical and Religious Directives
 Foundations
 Technical Structure Issues
 Assigning membership to an
entity with no members
OtherOther

25. 25
Potential Hospital Legal Structures
Joint Ventures
Legal Considerations
State Law Stark Law
Anti-Kickback Antitrust Tax-Exemption
 Identified Governance Rights
 Super majority rights
 Reserve powers
 Shedding religious affiliation
 Reaching Consensus between Parties
 Amending governing documents
 Spending/borrowing thresholds
 Replacing Key Executives
Key Governance Issues
PrivacyOther

26. 26
Potential Hospital Legal Structures
Leases / Management Agreements
Legal Considerations
State Law Other
Anti-Kickback Antitrust
 Related to inability to “sell”
hospital
 Key considerations
 Prepaid rent
 Term
 Representations and
warranties
 “Other” purchase agreement-
like clauses
 Capex
 Working capital
 Lease
 Fee consists of
all profits
De facto Sale Distinguishing Features
Tax-Exemption
Stark Law

27. 27
Potential Hospital Legal Structures
Acquisitions
Legal Considerations
State Law Other
Antitrust
Forms of Acquisition
Asset Purchase
Merger/Stock
Purchase
Member
Substitution
Risk Allocation
Change of Ownership
Form

28. 28
Potential Hospital Legal Structures
Acquisitions
Common Commitments Considerations
Capital Expenditures 
Community Benefit
Remedies for Breach
Charity Care 
Increase/Decrease
Provisions for Medicaid Expansion
Continuity of Services 
Length of Commitment
Financially Troubled Services
Employee Matters 
Merger of Benefits
Single/Varying Salary Scales
Catholicity and Other Cultural Matters 
Services According to ERDs
Acquisition Approval Authority
Community Benefit  Regulatory Approvals

29. 29
Potential Hospital Legal Structures
Acquisitions: Approval Considerations
1 Federal Trade Commission/Department of Justice
2 State Attorney General
3 Soft Approvals (unions, major employers)
4 Local Law Considerations (public notices, publications)
5 Major Contracts and Leases

30. 30
Contact Information
Michael Ramey
PYA
mramey@pyapc.com
865-673-0844
Jay Hardcastle
Bradley Arant Boult Cummings LLP
jhardcastle@babc.com
615-252-2386