Affiliation Trends in Health Care: Answers to Key Questions

February 4, 2015
Missouri Hospital Association
Affiliation Trends in Healthcare:
Answers to Key Questions
Missouri Hospital Association Webinar
February 4, 2015

February 4, 2015
Agenda
5. How do we manage communication during an affiliation process?
4. How does an affiliation process work?
3. What form should our affiliation take?
2. Why should we affiliate?
1. Why are organizations affiliating?

February 4, 2015
Familiar Market Pressures
Recruitment &
Retention

February 4, 2015
Era of Uncertainty
Second Curve
Value Payment
Continuity of Care Required
Systems of Care
Providers for Payment
IT Centric
Physician Alignment
First Curve
Fee-for-Service
Quality Not Rewarded
Pay for Volume
Fragmented Care
Acute Hospital Focus
Stand Alone Providers Thrive
Straddle
REVENUE DROPS
MINIMAL REWARD FOR QUALITY
VOLUME DECREASES
NO DECISIVE PAYMENT CHANGE
PAY FOR VOLUME CONTINUES
HIGH COST IT INFRASTRUCTURE
PHYSICIANS IN DISARRAY

February 4, 2015
Spreading Risk

February 4, 2015
Everyone’s Doing It!

February 4, 2015
Form Follows Function

February 4, 2015
Basis for Affiliation
Strategic Plan
Resource Needs
Affiliation Objectives
Affiliation Process Affiliation
Duty of Care

February 4, 2015
Organizational Needs and Objectives
Financial
Integration
• Capital
• Competency
• Clout
Clinical
Integration
• Standard of
care
• Care
coordination
• Access to
patients

February 4, 2015
Shared perception of needs and
objectives
Sense of urgency
Willingness to cede control
Regulatory restrictions
Political Climate

February 4, 2015
Form Follows Function
Define
Business Aims
and Outcomes
(Function)
Identify and
Prioritize
Objectives
(Function)
Determine Scope
(Function)
Custom Design and
Memorialize Structure
(Form)

February 4, 2015
Varying Forms for Varying FunctionsCapitalInvestment
Integration/Control (Acquired or Given Up)/Stability
Clinical
Affiliation
Minority
Investment
Joint Venture
Management
Agreement
Joint Operating
Agreement
Asset
Purchase/Acquisition
Lease
Merger/
Membership
Substitution
Source: Strategies in Capital Finance, Volume 67 Fall 2011; Cain Brothers
Clinical Financial

February 4, 2015
Example Asset Purchase
PURCHASER
SELLER
(Not-For-
Profit)
Asset Purchase
Agreement with
Deal Terms
Purchased Assets
Equals Cash Plus
Assumed Debt & Other
Liabilities
Purchase Value
Net
Proceeds
Repayments
Not-For-Profit
Community
Foundation
Repayment of
Non-Assumed
Debt and
Liabilities

February 4, 2015
Example Membership Substitution Structure
SYSTEM
PARENT SYSTEM
PARENT
Operating
Hospital(s)
After Closing
Amended and
Restated Articles
And Bylaws
Example
Medical Center
Relinquished
Hospital(s)
Sole Member before
Transaction
Change of
Control
Agreement
Sole Member
Operating
Hospital(s)
Sole Member
Relinquished
Hospital(s)
Operating
Hospital(s)
Example Medical
Center

February 4, 2015
Example Merger Structure
HOSPITAL
SYSTEM
HOSPITAL
SYSTEM
Potential
Acquiring
Subsidiary Example
Medical Center
Example
Medical
Center
After Closing –
Probable Structure
Merger
Agreement
Assets and
Liabilities
Transfer to
Hospital System
Before Closing

February 4, 2015
Virtual Merger Organization
Board of Directors with
Representatives from A&B
Example Virtual Merger Model
Organization A Organization B
Joint Operating Agreement
Provides management services for A and/or B

February 4, 2015
Example Lease Structure
LESSOR
Example Medical
Center
LESSEE
Hospital
Management
Company
Leased
Hospital
Lease Agreement
Lease Payments
Retains
Ownership
Operations
Management
Revenues &
Expenses

February 4, 2015
Management Agreement
Hospital
System
Example
Medical
Center
Community
Advisory
Board
Hospital Revenues or Management Fee
Management Agreement

February 4, 2015
Example Joint Venture Structure
For-Profit or
Not-For-Profit
Partner
Example
Medical
Center
Management
Services Contract
Fee and Earnings
Going Forward
JOINT VENTURE
Governance &
Operations
Cash from Joint
Venture Establishment
and Earnings
Going Forward
Physical
Assets
And/or Cash
Contribution
Physical
Assets
And/or Cash
Contribution
20%-50%
Ownership
20%-50%
Board Representation
80%-50%
Board Representation
80%-50%
Ownership
Net
Proceeds
Repayments
Not-For-Profit
Community
Foundation
Repayment of
Debt and other
Non-assumed
liabilities

February 4, 2015
Not Your Traditional M&A: Regional Collaboration
Merger?
Acquisition?
Joint
Venture?
Regional
Hospital
Critical
Access
Hospital
Community
Hospital
AMC
Other
Providers

February 4, 2015
Characteristics
• Two+ hospitals enter into formal relationship to share
resources and capabilities with an eye toward clinical
integration
• Participants together define common interests to be
advanced through the Collaborative
• Each participant’s individual interests are respected and
protected through the Collaborative’s governance structure
• Participants make some financial commitment to support the
Collaborative’s operations, but each remains economically
independent
Regional Collaboratives

February 4, 2015
Characteristics
• Participants retain management authority of their
respective organizations
• Participants retain financial independence of their
respective organizations
• Participants’ governance remains with their
respective governing boards
Regional Collaboratives

February 4, 2015
Unique Governance Structures
with Common Characteristics
Balanced time, energy, and economic investments by participants
Balanced voting rights and reserved powers for participants
Shared vision and goals while recognizing participants’ unique priorities
Formal but flexible and adaptable rules of operation
Fair opportunity for all participants to engage and be heard

February 4, 2015
Motivations
“Independence Through Interdependence”

February 4, 2015
• Achieve economies of scale through joint purchasing and similar
strategies
• Leverage current and future information technology investments
• Sustain members as they learn to thrive under new care models
• Design continuums of care for specific types of patients
• Improve quality of care through common evidence-based clinical
guidelines
• Develop narrow networks for contracting purposes
• Defend against competition from larger integrated delivery
systems
• Test the waters for more “involved” relationships
Motivations

February 4, 2015
Clinically Integrated Network
• Lean infrastructure to support provider accountability
• Core functions
– Promote evidence-based medicine
– Facilitate care coordination
– Negotiate and manage payer contracts

February 4, 2015
Promote Evidence-Based Medicine
• EBM = integrating individual clinical expertise with the
best available external clinical evidence from systematic
research
• Clinical protocols
– Identify (prioritize)
– Implement (education, technology solutions)
– Incentivize (financial consequences)
– Monitor (reporting on quality measures)
– Remediation (including punitive measures)

February 4, 2015
Facilitate Care Coordination
• Identify high-risk and rising-risk patients
– Disease registries
– Data analytics
• Aggressive interventions
– Patient-centered medical home
– Patient navigator/health coaches
– Remote monitoring
– Transitional care management/chronic care management
• Utilize patient engagement strategies for low-risk
patients

February 4, 2015
Negotiate and Manage Payer Contracts
• Standard fee schedule
• Enhanced fee schedule – care management
• Narrow networks and tiered benefits plans
• Pay for performance
• Shared savings programs
• Bundled payments
• Partial capitation (e.g., primary care services)
• Centers of Excellence
• Global budgets

February 4, 2015
Negotiate and Manage Payer Contracts
• Hospitals’ employee benefits plans
• Direct contracting with employers
• Insurance
– Commercial
– Medicaid
– Medicare Advantage
– Medicare FFS
• Medicare Shared Savings Program (MSSP)
• Bundled Payment for Care Improvement Initiative
• Other demonstration projects

February 4, 2015
Understanding Basic CIN Economics

February 4, 2015
Recognizing the Unique Challenge
of Engaging Physicians

February 4, 2015
Example Clinically Integrated
Network Organizational Structure

February 4, 2015
Traditional Affiliation Process
Planning* Request for Proposal
• Identify affiliation team
• Develop the potential
partner list
• Begin internal due diligence
review
• Evaluate types of affiliation
to be considered
• Create communication plan
• Develop the Request for
Proposal (RFP)
• Describe key opportunities
• Provide history and key
information
• Identify characteristics of a
preferred strategic partner
• List affiliation objectives
• Describe procedures
governing affiliation process
• Solicit Confidentiality
Agreement (CA)
Stage I

February 4, 2015
Awaiting RFP
Responses
Evaluating RFP
Responses
• Web meeting with potential
partners
• Continued internal due
diligence
• Side-by-side comparison
• Comparison to affiliation
objectives
• Host on-site presentations
• Establish data room
• Manage due diligence
process
• Provide expectations to
each finalist
Stage II

February 4, 2015
Letter of Intent Partner Selection
• Report findings from due
diligence of partners
• Negotiate with partners
• Select partner for exclusive
negotiation
• Final due diligence
• Negotiation of definitive
agreement
• Hart-Scott-Rodino filing, if
necessary
Stage III

February 4, 2015
Developing a CIN

February 4, 2015
Launching a CIN

February 4, 2015
Operating the CIN

February 4, 2015
Agenda
5. How do we manage communication
during the affiliation process?
4. How does an affiliation process work?
3. What form should our affiliation take?
2. Why should we affiliate?
1. Why are organizations affiliating?

February 4, 2015
Transparency Confidentiality
The Message
DEVELOPING

February 4, 2015
Assuring Consistency of Message
ONE VOICE
Facts Only
Objectives
Opportunity of the
Affiliation
BOARD(S) OF
DIRECTORS
CEO(S)
DEVELOPING

February 4, 2015
Requirements for Formal or Informal Approvals
• If using an ad hoc committee, define purpose and
authority
• Review bylaws and other documents that address
restrictions and requirements related to affiliation
arrangements
• Establish mechanism to add potential partners to the
process
COORDINATING

February 4, 2015
Receiving and Adjusting to Feedback
• Accept input – Adapt the message
• Don’t be dismissive or defensive
• Be prepared to explain should suggestions be
rejected
• Adjust concept to accommodate worthy suggestions
• Defend concept and explain if suggestion is rejected
• Communicate that final decision resides with the board
COORDINATING

February 4, 2015
Crisis Management
• Develop a plan
• Follow your plan
• Address rumors head-on
• Use a single spokesperson
• Proactively address exposé pieces in press by
coordinating news release with local media so it can
“break” the story
COORDINATING

February 4, 2015
The Message
When do we start
talking publicly?
• Traditional: When
the decision is made
to issue an RFP
• Collaborative: When
the Governance is
decided
Frequency of
Communication?
• Monthly with board
and physicians
• At major milestones
in process
• When
misinformation
pushes the
message off course
Method of
Communication?
• News bulletins
• Letters
• Emails
• Dedicated web site
• Public meetings
• Videos
TIMING

February 4, 2015
Executing Communication Plan
• Importance of staying coordinated
• Establish internal communications network
• Communicate extensively
• Keep a pulse on constituencies
• Create a quick reaction team
• Avoid overreaction

February 4, 2015
Addressing Concerns
• Involve physicians in the process
• Ad hoc committee members
• Due diligence teams
• Facilitate inter-staff meetings with potential partner
• Remind physicians that the board is final authority but
that their input is vital to the process

February 4, 2015
Martie Ross
913.232.5145
mross@pyapc.com

Affiliation Trends in Health Care: Answers to Key Questions

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Editor's Notes