Preparing Your Organization for Affiliation or Sale · PDF file3 5 ©2013 Foley & Lardner...
Transcript of Preparing Your Organization for Affiliation or Sale · PDF file3 5 ©2013 Foley & Lardner...
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©2013 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500
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Preparing Your Organization for Affiliation or Sale
Tuesday, March 26, 2013
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Presenters
Adria WarrenFoley & Lardner LLP Senior [email protected]
Richard K. ReinerAdventist Health SystemsExecutive VP, President/CEO Multi-State [email protected]
Michael A. Crabb III (Trey)ZieglerManaging [email protected]
Roger StrodeFoley & Lardner [email protected]
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ADVENTIST HEALTH SYSTEM
March 2013
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One of the Largest Faith-Based Healthcare Systems in the US
44 Hospitals Operated in 10 States
2012 Total Operating Revenues of $7.3 Billion
AA/AA- Bond Rating
$517 Million in Capital Spending Annually (5-Yr Avg)
Serving More than 4 Million Patients Annually
More than 7,600 inpatient beds
55,000 Employees
8,500 Affiliated Physicians
Long-Term Care Division
Adventist Health System
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Altamonte SpringApopkaCelebrationDaytona BeachDeLandEustisKissimmeeLake PlacidLand O’ LakesOrange CityOrlando (2)Ormond BeachPalm CoastSebringTampa (2)Tarpon SpringsWauchulaWesley ChapelWinter ParkZephyrhills
Rocky MountainRegion
DenverLittletonLouisvilleParker
MidwestRegion
Bolingbrook Durand Glendale HeightsHinsdaleLa Grange Appalachia
RegionFletcherGreenvilleJellicoManchester
Georgia Region
CalhounSmyrna
FloridaRegion
SouthwestRegion
Fort WorthKilleenLampasasSan Marcos
AHS is a Diversified Company
Mid AmericaRegion
Kansas City
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2012 Financial Overview
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2011 Actual
2012 Actual
2012 vs. 2011
%
Admissions 352,960 356,228 3,268 0.9%
Average Daily Census 4,388 4,405 17 0.4%
Inpatient Surgeries 97,975 98,314 339 0.3%
Outpatient Surgeries 144,966 145,654 688 0.5%
OP ER Registrations 1,139,542 1,217,133 77,591 6.8%
Gross OP Revenue 11.09 B 12.40 B 1.31 B 11.8%
Same Store Volume Statistics December YTD
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2009 2010 2011 2012
Medicare - All 42.1% 42.6% 43.3% 43.4%
Medicaid - All 11.7% 12.9% 13.5% 13.6%
HMO/PPO 34.2% 32.7% 31.6% 30.8%
Other 4.4% 4.3% 4.3% 4.7%
Self Pay 7.6% 7.5% 7.4% 7.6%
* Based on Gross Patient Revenue
Payor Mix - December YTD
* Based on Gross Patient Revenue
* There may be rounding differences due to format
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* Same Store excludes Huguley and FH Wesley Chapel
Same Store Net Patient RevenueRate vs. Volume
* MIS Net Patient Revenue less Bad Debt per Adjusted Admission
Excludes EHR Payments and CMS Settlement
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(Values in Millions)2011
Actual2012
Actual2012
Budget2012A vs
2012B
Total Operating Revenue 6,930 7,236 7,195 41
Salaries & Benefits 3,365 3,520 3,495 (25)Supplies 1,248 1,311 1,281 (30)Other Expenses 1,381 1,429 1,463 34Total Operating Expenses 5,995 6,260 6,239 (21)
EBDITA 936 976 956 20
Capital Costs 562 563 585 22
Operating Income 374 413 371 42
Investments 69 77 47 30EHR Incentive 56 58 0 58CMS Settlement 0 43 0 43Debt Change Impact (21) (82) (17) (65)Non-Operating Income/(Loss) (4) (3) (2) (1)
Net Income 474 505 398 107
* There may be rounding differences due to format. TOR includes Gains on Subs and JVs + Prior Year Medicare/Medicaid
AHS Management Income StatementDecember YTD
* There may be rounding differences due to format. TOR includes Gains on Subs and JVs + Prior Year Medicare/Medicaid
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* EBDITA Margin is reflective of the new income statement presentation with minority interest and LOR reflected below EBDITA* Values in Millions
Total Operating EBDITA Margin
637.0 656.4 704.0 773.9 854.5 935.8 976.0
* Values in Millions
AHS Investment Returns
AHS 1,082 M$ 50/50 Blend 1,021 M$
12 Year Total
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* New Method Reclassified Bad Debt to a Reduction from Revenue Beginning in 2011
Days Cash On HandDecember YTD
* 2010 is Weighted for the Addition of Bert Fish, Tampa and Helen Ellis and 2012 is Weighted for the Addition of FH Wesley Chapel
Debt to Total CapitalDecember YTD
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* Cash includes Cash, Inv., & Funded Depr. and Long-Term Debt includes LTD & 50% Capital Securities
Total Cash to Long-Term DebtDecember YTD
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AHS Facilities
2000 A- (negative) Baa1 (stable) 332001 A- (stable) Baa1 (stable) 362002 A- (positive) A3 (stable) 372003 A (stable) A3 (positive) A (stable) 372004 A (positive) A2 (stable) A (positive) 382005 A+ (stable) A2 (stable) A+ (stable) 382006 A+ (stable) A2 (positive) A+ (stable) 362007 A+ (stable) A1 (stable) AA- (stable) 352008 A+ (stable) A1 (stable) AA- (stable) 362009 A+ (positive) A1 (positive) AA- (stable) 362010 AA- (stable) Aa3 (stable) AA- (stable) 412011 AA- (stable) Aa3 (stable) AA- (stable) 402012 AA- (stable) Aa3 (positive) AA (stable) 40
FitchS&P Moody's
AHS Ratings History
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Existing Partnerships
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PorterCare + CHI (Centura Health)
4 AHS Hospitals
Metroplex Health System + Scott & White
2 AHS Hospitals
Huguley + Texas Health Resources (JV Closed May 2012)
1 AHS Hospital
Emory Adventist + Emory Healthcare
1 AHS Hospital
Takoma Regional + Wellmont Health
1 AHS Hospital
Partnership Experiences
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Trey Crabb, Managing DirectorB.C. Ziegler & Co.(312) 705-7272
Twitter: @healthbanker
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IMMEDIATE CONSIDERATIONS
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U.S. Not-for-Profit Healthcare Outlook Remains Negative– Increased need for capital relating to plant modernization
and IT systems– Greater limitations on access to capital (and higher costs)
for lower rated credits– Increased reimbursement pressures across all payers– Large unfunded pension liabilities– Benefits of tax-exemption under pressure– Benefits of economies of scale, including increased
bargaining power with suppliers, payers and labor
Source: Moody’s Investors Service, March 4, 2013
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IMMEDIATE CONSIDERATIONS
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What are your transaction goals?– Do you want to maintain services in the community?– Do you want a partner to invest in the community?– Do you want to maintain jobs at the hospital?– Do you want to minimize ongoing losses?– What about our current executive management?– Should we just try and create a foundation?
What kind of transaction or affiliation will best serve your hospital and community?
– Sale– Consider joint ventures or partnership affiliations– Cashless affiliations can increase access to capital, improve credit,
market share, scope of services and economies of scale– Governance will play a major issue in determining the transaction
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IMMEDIATE CONSIDERATIONS
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What is your timeline?– Transactions of this type can often take 12 months to close– Not-for-profit to for profit hospital deals may take longer
due to regulatory hurdles, both State and FederalDo you need an advisor?
– What is hard to quantify is “what do we not know?”– Too often hospitals engage help to help them “seal the
deal” and they’ve already picked a partner– What feels like the most obvious candidate may be wrong
for reasons not clear at the start of the process
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ONCE YOU’VE DECIDED TO SELL -PREPARATION IS KEY
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Preparation can mitigate the risk that a transaction’s closing will be delayed or sidetrackedIf issues arise during due diligence, responses and solutions are readily availableIf issues are disclosed early, the bidder’s price for the hospital or health system will have accounted for these issues, thus, avoiding a last minute repricingClosing proceeds quicklyWhat preparation should be undertaken?
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RELATIONSHIPS WITH REFERRAL SOURCES
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Highly regulated with huge potential financial issues if not in complianceLook closely at anti-kickback statutes and Stark lawExample of transaction issues:
– 2010 $30 million settlement by Detroit Medical Center for engaging in improper financial relationships with referring physicians
Steps to take now:– Identify physician and institutional referral sources– Evaluate whether financial relationships exist– Assess whether the relationship is compliant with the anti-kickback statute, Stark law and
applicable state laws – is it “arms length?”– Specific relationships to look at:
Physician employment agreementsLeasesMedical director agreementsSupply agreements with physicians
– If you find a non-compliant relationship, correct it ASAP
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BILLING AND CODING
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Be able to demonstrate that issues identified in old billing and coding audits have been addressed and remediatedConsider re-auditing to demonstrate complianceEven minor exposure may look significant to a buyerBe sure revenue cycle management systems are up to date
– Net collections = Net Patient Revenue?
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LICENSES, PERMITS, AND ACCREDITATIONS
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All government permits should be up-to-date and unrestrictedClose out any recent suspensions or investigations by regulatorsBe aware in advance whether a change of ownership transaction will impact any healthcare licenses or permits
– This is particularly important if you are considering a stock vs. asset transaction which may affect the transfer of licensure (i.e. notice and approvals)
Showing improved policies or successful follow-up audits can evidence that issues have been resolved to a potential acquirer
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BOND AND DEBT ISSUES
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Many times hospital transactions are motivated by recent bond covenant defaults or being over leveredQuestion: Will we be able to satisfy our current debt and otherobligations in a transaction without a restructuring or other settlement?Engage in a review of bond and debt issues with counsel to understand the full range of options before considering a transaction
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COMMERCIAL INSURANCE RELATIONSHIPS
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When looking at payor contracts, hospitals considering a buy-side transaction focus on Medicare and Medicaid contracts firstHowever, commercial insurers pay for a significant portion of healthcare in the U.S., so knowing these contractual relationships is essentialKey Issue: The structure of the waiver and discounting of patient co-payments and deductibles
– How do the commercial insurers treat out-of-network policies that apply to patients who visit out-of-network providers
– What happens in the case of non-compliance?A seller should consider a preemptive change since buyers will prices compliance into a transaction
– If the policy if compliant, make sure it is well documented to the satisfaction of a potential buyer
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CULTURE OF COMPLIANCE
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Be prepared to respond to certain inquiries including:– Does the compliance plan address all of the hospital’s risk areas?– When was the compliance plan last updated?– Does the hospital have an active compliance officer and privacy
officer?– Do key employees complete healthcare compliance training
regularly?– Do hospital board minutes reflect senior management’s attention to
healthcare compliance issues?– Has the seller made a systematic attempt to solicit compliance
issues from employees and partners through compliance hotlines and other approaches?
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CONTRACTS
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Core contracts to be reviewed:– Vendors– Suppliers– Customers– Payers– Lessors– Lenders
Hospitals must identify and review these contracts and be prepared for contract provisions that can cause challenges, particularly those regarding:
– Assignment– Change of control– Liability– Restrictive covenants (non-competes and non-solicits)– Termination
Understand whether loss or suspension of payment under contracts will create cash flow issues for the buyer
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PATIENT PRIVACY ISSUES
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HIPAA and the Health Information Technology for Economic and Clinical Health (HITECH) Act should be a compliance focus for all hospitalsFailure to comply with patient privacy laws result in both civil monetary penalties and reputational harm
– ExamplesSeptember 17, 2012: Massachusetts eye and ear care provider paid $1.5 million to settle potential HIPAA violationsJune 26, 2012: Alaska Department of Health and Human Services paid out $1.7 million to settle HIPAA violations in addition to taking corrective actions
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OTHER ISSUES
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Avoid taking on new multi-year contracts– Information Technology
Avoid non-maintenance construction/physical plant improvement commitments/spendWork closely with board of trustees/board appointed committee to establish prioritiesCreate a small working group of transaction deal team membersConfidentiality/sunshine issues
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THE SALES PROCESS: TYPICAL TIME TABLE
• Six to twelve months is the estimated timeframe to closing
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CASE STUDY: MARQUETTE GENERAL HOSPITAL
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Scenario:– Financially stressed not-for-profit hospital in Michigan with 275 beds– Goals of transaction:
Shore up debt and pension liabilitiesUpdate aging plantsImprove quality Stem patient outmigration to nearby Wisconsin market
Process:– 26 potential partners were identified– 10 proposals were submitted– Acquired by Duke LifePoint (DLP JV) for $483 million
Result:– $350 million on capital improvements and physician recruitment– $23 million donation to Marquette General’s foundation– Eliminated MGHS’s debt– Continued employment for all current MGHS employees
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Compelling Legal Issues
Roger StrodePartner
Foley & Lardner LLP
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Compelling Legal Issues
Board Process
Material Governmental Approvals and Material Third Party Consents
Due Diligence and Compliance
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Board Duties
Board members are fiduciaries and have certain duties to the entity when considering a transaction:
– Duty of Care– Duty of Loyalty
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Board Duties—Duty of Care
Duty of Care—Act in an informed, good faith manner when participating in board decisions; exercise the care of an ordinarily prudent person in a like position.
– Business Judgment Rule—decision to be sufficiently informed, in good faith and in the honest belief that the action taken is in the best interests of the organization, and is made by disinterested trustees
– Often the focus of BJR is on process
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Board Duties—Duty of Loyalty
Duty of Loyalty—Trustee to exercise his or her power in good faith and in the best interests of the hospital and its mission, not in his or her own interests or the interests of another person or entity
– Consider any conflicts of interest, such as offers of employment from the buyer
– Trustees also must maintain the confidentiality of the process and any decisions made by the Board
– Particularly challenging for physician trustees
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Board Duties—Practical Approach
Focus on an informed affiliation process– Use a subgroup of the Board to evaluate affiliation options– Feed the Board “the elephant a spoonful at a time”– Understand what the Board doesn’t know
Focus on the mission of the hospital and its service to the communityBe skeptical and ask questions—don’t simply accept whatever is tossed at youHire subject matter experts (e.g., legal counsel, financial advisors)Ferret out conflicts early in the process and require that any Board members with significant conflicts recuse themselves
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Cy Pres and Charitable Trust Issues
Hospital affiliations or sales may trigger state laws/doctrines aimed at protecting tax exempt assets
– Sales of not-for-profit assets to for-profit use more likely to implicate such statutes
States (through statute or practice) may require some level of state review—often through the Attorney General
– May require “approval” in some state (e.g., PA and Ohio)– May also require court approval (e.g., PA Orphan’s Court)
Highly recommended that the State AG be contacted early in the process so as to avoid “surprise” or embarrassment
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Cy Pres and Charitable Trust Issues
AG will be interested in:– Identity of the buyer and whether the buyer is the type of
organization that will preserve the mission of the selling hospital
– The process used to reach the ultimate decisionProcess sometimes more important than the decision
– The price, if any, to be received for the hospital and whether the price is fair
Consider appraisals and/or fairness opinions
– How the net transaction proceeds will be usedOften, a foundation is established to hold proceedsMany AGs require that foundation fund only “health care” needs
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Antitrust Laws
Particular focus of the Federal Trade Commission these days
– Rockford Memorial/OSF Transaction – Promedica/St. Luke’s Transaction– Phoebe Putney Transaction
Regulators looking at impact of a transaction on both hospital services and physician servicesIf acquiring entity not already in the market, substantive antitrust concerns are lessened
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Antitrust Laws—HSR Filing Issues
If each of the transaction parties are large enough and the transaction itself is large enough, the parties will be required to make an HSR Filing with the Federal Trade Commission and Department of Justice
– Size of Parties Test– Size of Transaction Test
Both parties required to fileIf filing necessary, take care in the creation of so-called “4(c)” documentsOnce an HSR filing is made, the transaction cannot be consummated until the HSR waiting period has expired (either by passage of time or through early termination)
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Antitrust Laws—Practical Tips
If concern over market concentration, consider hiring an economist to do a market study
– HHI analysis– Diversion analysis
Payors are likely complaining parties—consider engaging with payors and large employers to explaining the benefits of the combinationConsider adopting and following antitrust protocols
– May help avoid “gun jumping” (i.e., the premature exchange of competitively sensitive information)
– May help avoid creation of problematic 4(c) documents
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Other Material Consents
Other Governmental Consents– CON/COE– Licensure
Consider Need for Following Consents– Bond Holder Consent– Other Material Lenders– Capital Lessors– Significant Physician Groups
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Due Diligence and Compliance
Sophisticated affiliation partners (whether or not “buyers”) are very concerned about liability around coding, billing, Stark Law violations and Anti-Kickback risksSophisticated affiliation partners will undertake significant amounts of due diligence in order to sort out risksHighly recommended that sellers undertake their own due diligence review of themselves prior to marketing the hospital in order to uncover any potential significant risks
– Issues discovered late in sale process can cause deals to unwind
– Purchase price will never go up, only down
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Q&A Session