Successful Healthcare Restructurings

NCBJ/ABI Workshop Panels October 2017

2

XX Key Issues to Consider | Manage for a Successful

Restructuring

XX Other Items

3 - 10 Overview of the Healthcare Restructuring Sector

Table of Contents

Energy and Power 71%

Materials 12%

Financials 5%

High Technology

4%

Media and Entertainment

4%

Consumer Products and

Services 4%

US Restructuring Industry - Overview

► In 2016, distressed debt and restructuring activity in the US totaled $183.9 billion, a 347.2% increase from 2015

124 restructuring transactions were completed, 47 more than the deal volume in 2015

Energy & power (63%), and media & entertainment (19%) were the top two sectors

► During 9M 2016, the US distressed debt and restructuring market amounted $97.4 billion, a 200.5% increase compared to the same period

in 2015

Energy & power sector accounted for majority share; healthcare sector share was significantly low1

US Debt Restructuring Market –by Industry (9M 2016)2,3

Source: ‘Distressed Debt & Bankruptcy Restructuring Review, First Nine Months 2016’, Thomson Reuters (October 2016);

236

129 159 122 98 132

84 129

88 77 124

2011 2012 2013 2014 2015 2016

Announced Completed

Number of Restructuring Deals in US (2011–2016)4,5

US Completed Restructuring Deals – by Value ($ billion, 2011–2016)

Note: 1) The share of healthcare sector in the US debt restructing market was not reported in 9M 2016, and is thus assumed to be insignificant; accounted for 1–2% in the global market

2) Few values have been extracted using an approximation tool on image and hence, may not be accurate

100% = $97.4 billion

Total ($ billion)

Total (Units)

76.2 61.6 90.4

64.1 41.1

183.9

2011 2012 2013 2014 2015 2016

3

* Respondents were asked to select up to three industries; total of responses will exceed 100%

US Restructuring Industry - Outlook

► According to a survey by AlixPartners with turnaround and restructuring experts in North America, 31% of the respondents selected

healthcare, up from 24% in 2016 and 25% in 2015

► The increase in distress and restructuring activity in healthcare sector is expected to be driven by the new US Congress’ steps to repeal

and replace the Affordable Care Act (ACA), which is creating enormous uncertainty in the insurance, pharmaceutical, and healthcare

services sectors

Survey on Likelihood of Distress in US – by Sector (%, 2016, 2017)

Source: ‘A Changing World’, AlixPartners’ North American Restructuring Experts Survey (2017)

67% 57%

31% 16% 15% 14% 13% 12%

10% 9% 9% 8%

5% 5% 4% 3% 3% 3% 2% 1%

RetailOil & Gas

Healthcare/Medical/PharmaRestaurant/FoodserviceCommercial Real Estate

Maritime/ShippingMinerals and Mining

Education (For Profit)Consumer Goods

Power and UtilitiesMedia/Comms/Telecom

MunicipalitiesManufacturing

Transportation & LogisticsAutomotive

Financial ServicesTechnology

GamingChemicals

Aerospace and Defense

No of Respondents = 207

86%

46%

24%

22%

18%

11%

11%

10%

8%

8%

7%

7%

7%

4%

4%

4%

3%

2%

Energy & Resources

Retail

Healthcare/Medical

For-Profit Education

Municipalities

Manufacturing

Maritime/Shipping

Commercial Real Estate

Communications/Media

Chemicals

Aerospace and Defense

Gaming

Foodservice/Restaurants

Consumer Goods

Financial Services

Transaportation and Logisitcs

Automotive

Technology

No of Respondents = 169

2016 2017

4

Affordable Care Act - Overview and Impact

5

Overview

► In March 2010, Patient Protection and Affordable Care Act (ACA), commonly referred to as Obamacare, was enacted with an aim to

increase the quality and affordability of health insurance, expand insurance coverage, lower uninsured rate, and reduce the cost of

healthcare in the US

Under ACA, states were provided Federal support to expand their medical aid programs along with financial assistance for

families buying insurance coverage through healthcare insurance marketplace

ACA required hospitals and primary physicians to transform their practices clinically, technologically, and financially to lower

costs and improve accessibility

► Since the enactment of ACA, i.e. during 2010–2016, annual growth rate of healthcare cost reduced significantly and the uninsured rate

(measured by age, race, as well as family income) declined

Impact on Health Systems and Hospitals

► Since ACA expanded Medicaid benefits and subsidized private individual coverage, low-income Americans who could not afford

healthcare turned into paying customers and could afford insurance coverage

With more paying customers, during 2010–2016, hospitals hired more staff, including doctors, nurses and medical technicians to

treat the increased number of insured customers

In order to achieve economies of scale, while operating at lower margins to meet ACA’s criteria of lower costs and improved

accessibility, hospitals moved towards increased consolidation

Margins modestly improved as summarized Moody’s

Moody’s view of 2017 “Volume and Revenue Growth Drive Stability”. Outlook is stable. ACA has driven increased inpatient

volume growth and sustained reductions in bad debt expense (particularly in Medicaid expansion states).

Source: ‘Economic Report of The President’, Obama White House (January 2017); Continued in slide note

Affordable Care Act - Outlook

6

“The ACA replacement healthcare plan will most likely negatively affect hospitals from a profitability standpoint. Repealing the ACA without clear guidelines for replacing coverage will drive up costs

across the board for patients, employers and hospitals. Without requiring all to be insured, hospitals will be the insurers of last resort and will absorb the costs of uninsured patients seeking care.”

– Ted Chan, Founder, CareDash (March 2017)

“Unfortunately, the proposed legislation (American Health Care Act) isn't extremely generous to hospitals. The proposed legislation will likely reduce insured levels but won't restore Medicare rates back to their higher pre-ACA levels. A reduction in insured levels without any offsetting increase in

rates/reimbursement may likely lead to higher self-pay and bad-debt levels.” – Jason Almiro, Director of Healthcare Knowledge Management, BOK Financial (March 2017)

New Act and Outlook

► In March 2017, American Health Care Act (AHCA) was announced to replace the ACA, which made certain proposals including elimination

of individual mandate1, implementation of a cap on state Medicaid funding support, and freezing Medicaid expansion effective January 1,

2020

► Although AHCA faced criticism and will be implemented with certain amendments and in phases, the major changes (including

elimination of individual mandate and freezing of Medicaid expansion) remain that will lead to an increase in number of uninsured

patients and volume and revenue declines!

► This, in turn, is expected to increase number of unpaid bills and bad debts, and adversely impact profitability of hospitals

Reduced coverage is also expected to drive up costs for patients, leading to hospitals absorbing costs of uninsured patients, bad

debt expense

With further pressure on already low margins, hospitals will continue to resort to consolidation to achieve economies of scale and

maintain profitability; distress debt and restructuring activity levels also expected to increase

Source: ‘11 Thoughts on How the American Health Care Act Could Affect Hospitals’, Becker’s Hospital Review (March 2017);

Note: 1) Individual mandate under ACA required most individuals to maintain health insurance coverage or potentially to pay a penalty for noncompliance. Specifically, most individuals were

required to maintain minimum essential coverage for themselves and their dependent

Healthcare sector indices have consistently outperformed the S&P 500 Index

and the S&P Retail Select Industry Index during March 2011–January 2017

Peaks and valleys in the healthcare sector indices over March 2011–January

2017 are in line with peaks and valleys in composite market and retail industry

indices during the same period – this is indicative of the high level of

correlation between the healthcare indices, and the composite market and retail

industry indices

Most of the recent large scale bankruptcies were on the back of poor financial

performance

Poor financial performance was partially attributed to measures put in

Affordable Care Act, or Obamacare, and most major insurance companies

that discouraged patients from using physician-owned and out-of-network

facilities

While there was a spike in the number of bankruptcies filled by hospitals and

healthcare centers in 2011, it has reduced over 2012–2016 indicative of the

sector’s strong performance

Recent Large-Scale Bankruptcies

Company Year Filling Type Liabilities at Filling

($ mm)

2015 Ch. 11 $32.5

2015 Ch. 11 $27.7

2016 Ch. 11 $48.9

2016 Ch. 11 $35.4

2016 Ch. 11 $16.6

at Frisco

Number of Bankruptcy Fillings by US Hospital and Healthcare Centers

(2009–2016)

Source: Capital IQ

23

10

27

19 19

14

21

15

2009 2010 2011 2012 2013 2014 2015 2016

Number of Bankruptcy Fillings by US Hospital and Healthcare Centers

(2009–2016)

$80

$110

$140

$170

$200

$230

S&P 500 IndexS&P Retail Select Industry Index

Healthcare Sector Indices vs Composite Market Indices

(March 2011–January 2017)

Source: Bloomberg

Healthcare Financial Health

7

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD

Rural Hospital Closures

Rural Hospital Closures 2009-2017

8

Unlike larger scale hospital systems, rural independent hospitals and providers have considerably less resources and wherewithal to

both influence and absorb future changes driven by government and other payors, government budget considerations, and industry

change.

Rural hospitals are challenged to address declining reimbursement rates, market competition from urban entities, shortage of family

physicians and limited access to capital thus reducing support for IT and new technologies investment. Given these dynamics, we

will continue to see rural hospital distress.

Consolidation is likely to continue in hospital sector in the US, driven by multiple factors including likely decline in revenues due to

enactment of American Health Care Act and lower reimbursements for hospitals

In addition, private equity activity is expected to continue in the healthcare industry during 2017

“Hospital consolidation won't stop (in 2017). The idea of merging to fulfil the "bigger is better" notion is no longer the norm. If hospitals

consider integration, they will approach the situation in terms of how much more leverage a merger would provide in dealing with outside

forces beyond the hospital or health system's control.” – Mark Claster, Partner, Carl Mark Advisors (December 2016)

86 83

58

38

59 51

57 58 60 52

72

93

107

88

99 102

90

19

0

20

40

60

80

100

120

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Q117

Number of Deals

Announced Hospital Mergers & Acquisitions 2000-2017

9 Sources: Levin Associates, HealthCareMandA.com

Healthcare Distress Higher Than Other Industries

10

Polsinelli shareholder Jeremy Johnson has witnessed higher distress in the senior-assisted living and rural hospital sectors among others,

especially in the Southeast region of the U.S. Despite the high level of distress in the healthcare industry, healthcare represents only 4% of

all Chapter 11 filings.

KEY ISSUES TO CONSIDER FOR A SUCCESSFUL RESTRUCTURING

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Eligibility for Filing

12

►Most entities can file for Chapter 7 or Chapter 11 unless:

If organized as a municipality, must file Chapter 9

A not-for-profit cannot have an involuntary petition filed against

that entity

A domestic insurance company cannot file for bankruptcy, this

includes:

• Health Maintenance Organizations (HMOs) are usually found

to be a domestic insurance company and cannot file

• Physician-Hospital Organizations (PHOs) or Physician

Organizations (POs) are in the nature of an insurance

company

• Are they really insurance companies – state classification

test

HIPAA Concerns

13

►Health Insurance Portability and Accountability Act of 1996 (HIPAA)

imposes significant requirements on shielding of Protected Health

Information (“PHI”)

Usually court order to file under seal certain information such as

patient information, including names and liabilities

May even require special procedure to give written notice of bar

date to less traditional types of notice parties

►For example?

Deceased parties – notice to estate representatives

Patients in-hospital who may not be cognizant (i.e. coma)

Attorneys in state tort cases

Often times it’s the tort claims that lead to the filing so

its important for any reorganization or sale to ensure

those claimants receive proper notice

►Destruction of records in event of liquidation or transfer of files in

event of sale is important - -important to protect PHI

Patient Care Ombudsman (PCO)

14

►Do you need one?

Under ACA, Section 333 of the Bankruptcy Code was added to require

the appointment of a PCO in bankruptcy case filed by a “health care

business”

Health Care Business: “any public or private entity….that is primarily

engaged in offering to the general public facilities and services for the

diagnosis or treatment of injury, deformity or disease, surgical, drug

treatment and psychotic or obstetric care.” 11 U.S.C. §101(27)(A)

►The purpose of the PCO is to promote and protect patient rights

►A debtor has thirty (30) days after filing to appoint a PCO to monitor quality

and care of patients

►However, not all cases need one and a motion can be filed to dispense with

appointment. Bankruptcy Rule 2007.2

►Nine (9) factors courts consider in deciding to appoint a PCO. See In re

Pediatrics of Whitlock, P.C., 507 B.R. 10, 11 C. Bankr. N.D. Ga., citing In re

Alternate Family Care, 377 B.R. 754 (Bankr. S.D. Fl. 2007)

The Role of a PCO

15

►Primarily serves as an advocate for the patients

►Confidentiality of Patient Information and Records is critical, so it

was important to put mechanism in place to protect

►PCO Report must be filed sixty (60) day intervals from appointment

►Special Reports – these can be filed at any time and will identify a

change in quality of care; they are used as means to obtain quick

intervention of the Court to address risks to patients

►Retention and Compensation of Professionals by PCO can be an

issue that has to be considered

►Carve-out? This needs to cover the PCO

►PCO can retain counsel so this needs to be provided for as well

Options and Means to Restructure an Entity or Emerge from Bankruptcy

►Reorganize the entity through a Plan which includes some or all of

these:

Restructure the operations of the company

Refinance debt

Re-equitize the company through new investments

Address or need to comply with changes in related statutory

framework

NOTE: Attempts to avoid closing hospitals where beds have

been cut by bankruptcy are unsuccessful – In re Parkway Hospital,

Inc., Bankruptcy Court, S.D.N.Y. 05-bk-14876

►Sell all or some of the assets

►Convert to a Chapter 7 or liquidate in the Chapter 11 (last option)

►Dismissal of case

16

Section 363 Sale Process for Healthcare Entities

17

►Liability associated with the assumption and assignment of healthcare

related contracts

Provider Agreements/Certificates of need (CON)

►Potential liability for overpayments of Medicare/Medicaid receivables arising

out of past-overpayment, audit, fraud or abuse will lead to issues

concerning:

Recoupment

Successor liability

►Reimbursement of Medicare/Medicaid obligations on sale

►Compliance with licensing and regulatory schemes

IRS laws for 501(c)(3) entities

Hill-Burton Obligations

Anti-Trust Laws

►Impact of stay on other agencies like the United States Department of Health

and Human Services (HHS)

Issues to be aware of and considered if selling assets:

18

►The assumption of the Provider Agreement:

The Provider Agreement is the governing agreement with the State and Federal

agencies allowing the healthcare entity to provide, and be paid for, healthcare

services

►Related Concerns:

There could be a dispute over whether it is an “Executory Contract” or not and if

executory – then the debtor (or purchaser) has to cure all defaults, i.e. prior

overpayment liabilities

Purchaser can be liable for these obligations – contrary to “free and clear”

concept of Section 363 of the Bankruptcy Code

HHS will raise successor liability in any sale that does not provide for

assumption and/or will raise the equitable defense of recoupment to future

payables

This can also be raised as an equitable defense which in such case would not be

an interest in property and thus not subject to sale free and clear, provisions of

363

Need Department of Health (DOH) consent to assume or even consummate sale

and transfer provider agreement

Provider Agreements, cont.

19

►If do not assume – re-enrollment issues and cash flow

disruption as prior accounts receivables leveraged and

owed to DOH

• provider could wait 3-6 months for new agreement - if they get one

• Any services during that time period will never be reimbursed by

Medicare so huge loss of revenue

►Prohibition on assigning contracts for personal services

under 365(c) e.g. physician agreements

• If doctors don’t want to participate in sale need to consider impact

and loss of staff

Provider Agreements, cont.

20

►The power of bankruptcy courts to adjudicate Medicare Provider

Agreements in general has been addressed by several circuit courts

in recent years

►However, several circuit courts determined that bankruptcy courts

lack jurisdiction to adjudicate these issues

►The power of bankruptcy courts to adjudicate issues involving the

Medicare Act is not finally decided.

►In Fla. Agency for Health Care Admin. v. Bayou Shores SNF (In re

Bayou Shores SNF), the Eleventh Circuit determined the bankruptcy

court lacked jurisdiction pursuant to 42 U.S.C. §405(h) and 28 U.S.C.

§1334, The Supreme Court has denied the petition for certiorari, 137

S. Ct. 2214 (2017)

►The Eleventh Circuit determined that 42 U.S.C. §405(h), which

applies to the Medicare Act through 42 U.S.C. §1395ii, barred the

bankruptcy court from exercising jurisdiction over Medicare claims.

Provider Agreements, cont.

Provider Agreements, cont.

21

►42 U.S.C. §405(h) provides:

§405(h) specifically referenced only §§1331 and 1346 of

Title 28 so it seemingly does not bar bankruptcy

jurisdiction, which falls under Section 1334 of Title 28

However, the Eleventh Circuit found that, after reviewing

the history of 42 U.S.C. §405(h), the failure to include

§§1332 and 1334 was “inadvertent”

Eleventh Circuit joined the Third, Seventh, and Eighth

Circuits joined the Third, Seventh, and Eighth Circuits in so

holding. Nicole Medical Equipment & Supply v.

TriCenturion, 694 F.3d 340 (3d Cir. 2012); Bodimetric Health

Services v. Aetna Life & Casualty, 903 F.2d 480 (7th Cir.

1990); Midland Psychiatric Associates, Inc. v. United States,

145 F.3d 1000 (8th Cir. 1998)

Provider Agreements, cont.

22

►Basis for decision in finding that a non-bankruptcy court should decide

these issues was that administrative agencies are best equipped to make

these decisions, rather than bankruptcy courts, because Medicare is highly

regulated and the issues frequently involve the health and safety of patients

►Only the Ninth Circuit currently allows for bankruptcy jurisdiction over

Medicare claims. See In re Town & Country Home Nursing Servs., 963 F.2d

1146, 1155 (9th Cir. 1991)

►Recently, rather than address the jurisdictional issue head on In Parkview

Adventist Med. Ctr. v. United States, 842 F.3d 757 (1st Cir. 2016), the First

Circuit held that the government’s termination of the Provider Agreement

was not a violation of the automatic stay based solely upon the police and

regulatory exception so it should be “on narrower grounds”

►First Circuit found that the “police and regulatory power” exception to the

automatic stay applied and, therefore, CMS did not violate the non-

discrimination provisions of the Bankruptcy Code

Certifications of Need (CON)

23

►Certificate of Need Laws require certain types of businesses to have a CON

►Purpose is to ensure the right entities operate healthcare facilities and avoid

overcrowding in the industry in a particular geographic region

►These are for State run programs which generally regulate the number of

beds in hospitals and nursing homes. Presently 34 states currently maintain

some form of CON program – http:/www.ncsl.org/research/health/con-

certificate-of-need-state-laws.aspx – 8/25/2016

►The CON has to be transferred in the sale to the new provider – sometimes

the purpose for the bankruptcy filing and sale is to facilitate a transfer

►Approval process by governing agency must be obtained

Adjusting for Reimbursement

24

►Medicare and Medicaid Reimbursement is a complicated analysis – if value

of asset sold is less than Medicare’s depreciated book value of asset and

asset owned prior to 1997 then Debtor may be owed money

►If sold for more U.S. Department of Health and Human Services (HHS) could

have claim for gain against purchaser - - but assets are sold free and clear

►Also tax allocations have to be addressed

►According to the American Hospital Association, hospitals have absorbed

over $135.6 billion in Medicare and Medicaid cuts since 2010 through 2016

(http://www.aha.org/content/16/acahospitalcuts.pdf)

►The HHS announced on January 26, 2015 that it desired to have 90 percent

of all payments in the traditional Medicare program tied directly to quality

and value by the year 2018 through programs such as Hospital Value Based

Purchasing and the Hospitals Readmissions Reduction Program and at least

50 percent of all Medicare payments tied to quality and value through

Accountable Care Organization (ACO) payment models within the next three

years

Medicare Regulatory Considerations

25

►Section 362(b)(28) of the Bankruptcy Code excepts certain

actions by HHS from the automatic stay imposed upon the

filing in a case - - for example where HHS seeks to exclude or

remove debtor from participating in a Medicare program

Primarily used to address fraud and abuse

►However, if HHS is simply looking to terminate the contract,

then this kind of proceeding may be stayed

Hill-Burton Obligations

26

►Federal loan and grant program for construction and

modernization of non-profit and public health care

facilities

►If entity receives a grant, they must provide a minimum

of uncompensated health care to certain individuals –

and community services

►Is this being addressed in the sale? Or retained in

restructure. If so, need to ensure continuity of

requirements are met so do not lose grants

Sale of not-for-profit – additional concerns

27

►Remember many healthcare providers are non-profit as a

result since 2005 they have been required to comply with

any existing state charitable trust laws, regardless of fact

that any transfer is effectuated “free and clear” under

Section 363 sale

►IRS – 501(c)(3) has very specific rules as to the structure

of tax-exempt entity - - including the purpose for which it

is being operated

Section 363 cannot modify this so if material change

in character, or purpose of entity or sale may lose

status

28 |

Sale of not-for-profit, cont.

What is Not-for-Profit or Non-Profit - State corporate law concept

Corporate purpose is not primarily to earn a profit

No owners / no distribution to “owners”, directors, officers, member, etc.

“nonprofit corporations are subject to the non-distribution constraint. The non-distribution constraint prevents the organization from distributing its net earnings to those in control of the corporation; . . . .” Summers, Et Al. V. Cherokee Children & Family Services, Inc., Et Al., 112 S.W.3d 486, 500-01 (Tenn. Ct. App. 2002)

29 |

Sale of not-for-profit, cont.

Tax-Exempt – Federal and State tax law concept

No part of the net earnings may inure to the benefit of any organization, directors, officers or members, other than the nonprofit

IRS organizational test and operational test for 501(c)(3) corporations:

1) Organizational test: Organizational documents must

a) contain a clear and specific purpose, and limit the purpose of the organization to

one or more exempt purposes,

b) asset distribution to another 501(c)(3) organization upon dissolution, and

c) not expressly empower the organization to engage, otherwise than as an

insubstantial part of its activities, in activities which in themselves are not in

furtherance of one or more exempt purposes

2) Operational test: Concerns the organization’s activities. An organization whose activities

are not within the statute will not qualify for exemption by virtue of a well written

charter. Reg. 1.501(c)(3)–1(b)(1)(iv)

Anti-Trust Laws

30

►Given lower reimbursement and lower volume and increasing costs many

providers have tried to address these issues through merger and consolidation

►Anti-trust counsel and regulatory bodies, including the Federal Trade

Commission (FTC), have a very specific point of view on the various issues which

arise in connection with healthcare transactions and it is important to be aware

of them

►Planning is key in order to avoid complications

►Key Statutes

►Sherman Act and Clayton Act both apply to health care entities

Section 1 of Sherman Act prohibits contracts, combinations and

conspiracies that unreasonably restrain trade. 15 U.S.C. §1

Section 7 of the Clayton Act prohibits combinations of entities by merger

or acquisition where the effect is to “substantially lessen competition” or

which tend to create a monopoly. 15 U.S.C. §18 (The Hart-Scott-Rodino

Act)

Pre-merger - there is a reporting and waiting period for transactions

meeting certain financial thresholds

Anti-Trust Laws, cont.

31

►FTC/DOJ – Guidelines exist for Horizontal Mergers

Potential competitor concerns

Relevant markets

Market shares and concentration

Anti-competitive effect records to be analyzed

Possible pro-competitor efficiencies

Potential defenses include:

• Efficiencies have to be merger specific (cite)

• Failing/floating firm

• State action immunity

►Entities must give pre-merger notice to Department of Justice (DOJ) and Federal Trade

Commission (FTC) under the Hart-Scott-Rodino Antitrust Improvement Act of 1976

(HSRA(7))

Anti-Trust Laws, cont.

►DOJ and FTC have jointly issued hospital merger guidelines and Statement of

Enforcement of policy on mergers among hospitals in 1996 Dep’t of Justice,

Statements of Antitrust Enforcement Policy in Health Care (1996),

www.justice.gov/atr/public/guidelines/0000.htm#CONTNUM_8. In August 1996,

the DOJ and FTC issued revised statements of enforcement policy on mergers and

acquisitions. However, there were no updates to the policy on horizontal mergers

and acquisitions of hospitals.

►With respect to Doctrine of vertical mergers – where company merges with supplier

other tests may be imposed. See also Statement of Antitrust Enforcement Policy

Regarding Accountable Care Organizations Participating in the Medicare Shared

Savings Program

https://www.justice.gov/sites/default/files/atr/legacy/2011/10/20/276458.pdf.

►On April 22, 2015, the Federal Trade Commission submitted a public letter to the

New York State Department of Health (DOH) expressing “strong concerns” over

state regulations offering to provide antitrust immunity to certain healthcare

collaborations undertaken with DOH’s approval and supervision.

►Briefly by way of example is New York’s Certificate of Public Advantage or COPA

regulations came into effect in 2014 to provide a structure for state supervision of

collaborative healthcare arrangements. Goal is to promote community-level

collaborations among New York healthcare providers.

32

Anti-Trust Laws, cont. ►COPA regulations require DOH – in consultation with the New York Attorney

General (NYAG) – to consider a number of factors before conferring antitrust

immunity, including a competitive analysis of the relevant market, weighing

potential procompetitive benefits with the anticompetitive effects, and assessing

the availability of less restrictive alternatives.

►The FTC has and had great success in narrowly confining state action immunity,

including its most recent Supreme Court victories in North Carolina State Board of

Dental Examiners v. FTC, 135 S. Ct. 1101 (2015) and FTC v. Phoebe Putney Health

System, Inc., 133 S. Ct. 1013 (2013).

►State action immunity first requires its proponent to demonstrate that the

challenged collaboration was undertaken pursuant to a “clearly articulated”

affirmative state policy to supplant competition with regulation.

►Second, state action immunity requires “active supervision” of the private conduct

by the state, such that any restraint on competition is a result of knowing,

deliberate state intervention rather than simply an agreement among private

parties.

► It remains to be seen, of course, whether the FTC will ever in fact challenge any of

the providers seeking COPA protection. The FTC’s letter to DOH may fairly be

viewed as at least a placeholder.

33

Anti-Trust Laws, cont.

Recently, FTC has stated that hospital mergers cut competition, efficiency,

FTC panel says

While the FTC is criticizing analysis the growing trend of vertical hospital

mergers, a panel of experts at a FTC conference stated that those mergers

frequently are not necessary and can quash local health care competition

Martin Gaynor, a professor at Carnegie Mellon University said recent data

shows that spending per patient and the cost of treating patients

frequently go up after hospitals acquire physician practices in their

markets. He said these acquisitions can have a direct effect on the

choices consumers have when they need a doctor, and how much they

pay See Law 360 2/26/15

“[Acquisitions] don’t have to harm competition, but they can. If one

hospital acquires the only oncology practice in town, it gives them a real

competitive advantage and can result in higher prices.” Id.

34

Anti-Trust Laws, cont.

The panel highlighted the FTC’s recent victory in the Ninth Circuit this

month where the appeals court agreed that an Idaho hospital’s acquisition

of a local physician group violated the Clayton Act

In that case, the court held that St. Luke’s Health System Ltd.’s purchase

of Saltzer Medical Group PA would allow the hospital to set prices in that

market; St. Luke’s had argued that any stifling of competition would be

outweighed by beneficial economies of scale and compliance with the

ACA

The Court in St. Luke’s relied upon the “Best Alternative to a Negotiation

Agreement” as the test to decide impact of merger. St. Alphonsus Hospital

– Nampa, et al v. St. Luke’s Health Sys., Ltd., 778 F.3d 775 (9th Cir. 2015).

Using this test found the merger to drastically increased the share of the

market place (over 79%)

35

Anti-Trust Laws, cont.

►On April 22, 2015, the FTC submitted a public letter to the New

York State Department of Health (DOH) expressing “strong

concerns” over state regulations offering to provide antitrust

immunity to certain healthcare collaborations undertaken with

DOH’s approval and supervision

►Briefly by way of example is New York’s Certificate of Public

Advantage or COPA regulations came into effect in 2014 to

provide a structure for state supervision of collaborative

healthcare arrangements; goal is to promote community-level

collaborations among New York healthcare providers

►COPA regulations require DOH – in consultation with the New York

Attorney General (NYAG) – to consider a number of factors before

conferring antitrust immunity, including a competitive analysis of

the relevant market, weighing potential procompetitve benefits

with the anticompetitive effects, and assessing the availability of

less restrictive alternatives 36

Anti-Trust Laws, cont.

The FTC has and had great success in narrowly confining state action

immunity, including its most recent Supreme Court victories in North

Carolina State Board of Dental Examiners v. FTC, 135 S. Ct. 1101 (2015)

and FTC v. Phoebe Putney Health System, Inc., 133 S. Ct. 1013 (2013)

State action immunity first requires its proponent to demonstrate that the

challenged collaboration was undertaken pursuant to a “clearly

articulated” affirmative state policy to supplant competition with

regulation

Second, state action immunity requires “active supervision” of the private

conduct by the state, such that any restraint on competition is a result of

knowing, deliberate state intervention rather than simply an agreement

among private parties

It remains to be seen, of course, whether the FTC will ever in fact

challenge any of the providers seeking COPA protection

The FTC’s letter to DOH may fairly be viewed as at least a placeholder

37

Pre-Filing and Post-Filing Guidelines for Officers and Directors

►Other Sale Related Concerns

Bankruptcy Courts where evaluating sales and what has then

presented by Board of Directors as highest and best offer

Outside of bankruptcy directors have a duty to carry out the

missing among other duties:

►Duty of Care

Exists to require directors to manage the organization

competently. Responsibilities that fall under this duty include:

Overseeing management

Monitoring Finances - - important pre and post

bankruptcies

Establishing and promoting the mission of the nonprofit

Ensuring compliance with laws, rules and regulations

►Leading case dealing with fiduciary duties, In re Caremark

Int’l Inc. Deriv. Litig., 698 A.2d 959, 970 (Del. Ch. 1996) 38

Pre-Filing and Post-Filing Guidelines for Officers and Directors, cont.

►Duty of Loyalty

The duty of loyalty exists to ensure directors and officers act in a manner

consistent with the best interests of the non-profit (NPO) as a whole, rather than

furthering their own interest or that of any other entity, at the expense of the

NPO

►Duty of Obedience/Act in Good Faith

Ensure NPO leadership keeps to the organizational mission and that the

organization as a whole follows all applicable laws.

Directors of a for-profit corporation have an obligation to exercise judgment in

an informed, good faith effort to maximize the corporation’s long-term wealth

creating capacity. Credit Lyonnais Bank Nederland v. Pathe Communications,

C.A., No. 12150 (Del. Ch. Dec. 30, 1991)

►Director and Officer Potential Liability

A few situations, people involved with a NPO can be held personally liable for its

debts and other obligations. For example, a director or officer of a NPO can be

held personally liable if he or she: 1) personally and directly injures someone, 2)

fails to pay taxes or file necessary tax returns, 3) personally guarantees a bank

loan or business debt on which the corporation defaults, 4) does something

intentionally fraudulent, or illegal, or 5) co-mingles NPO and personal funds

39

Duty on eve of filing

►Zone/Vicinity of Insolvency

►In Credit Lyonnais Bank Nederland v. Pathe Communications,

C.A. No. 12150 (Del. Ch. Dec. 30, 1991) the Court of Chancery

emphasized that “[a]t least where a corporation is operating in

the vicinity of insolvency, a board of directors is not merely the

agent of the residue risk bearers, but owes its duty to the

corporate enterprise.”

►In Geyer v. Ingersoll Publications Co., C.A., No. 12406 (Del. Ch.

June 18, 1992) the court stated that fiduciary duties to creditors

arise when one is able to establish the fact of insolvency

40

Duty on eve of filing, cont.

►Insolvency

► A nonprofit corporation’s director’s duty of loyalty during the period of insolvency becomes

one of pursuing or ensuring pursuit of the charitable purpose, goal and mission of the

corporation

► Courts have held that directors’ of for-profit corporations have a fiduciary duty to creditors

upon insolvency; however, it is generally limited to protecting the contractual and priority

rights of creditors. Bankruptcy courts have held that for-profit directors may be considered

to have breached their fiduciary duties during insolvency when they approve transactions

that maximize shareholder value to the detriment of creditors. In Re: Gulf Fleet Holdings,

Inc. 2014 Bankr. LEXIS 2142

► When an NPO becomes insolvent, a court may take the NPO’s charitable purpose/mission

into consideration. The New Jersey District Court in United Healthcare Systems stated:

“When analyzing an articulated business reason for the sale, the bankruptcy court must also

take into consideration the fact that a debtor is a charitable institution.” (Emphasis added).

In re United Healthcare System, Inc., 1997 U.S. Dist. LEXIS 5090, at *15 (D.N.J. Mar. 26, 1997)

► The Court in United Healthcare Systems noted that the law allows the bankruptcy court to

entertain higher and better offers, which means that the bankruptcy court may not focus

solely on price

► Court must not only weight the financial aspects

41

Defenses: Business Judgment Rule

►The “business judgment rule” traditionally applies to business

corporations, but it is also the standard under which decisions of the

officers and directors of any nonprofit corporation board. America v.

Yamartino, 2012 Me. Super. LEXIS 19 (Me. Super. Ct., Mar 19, 2012)

►The business judgment rule provides a level of protection for directors

and officers from liability who act in good faith, and in a prudent,

diligent and informed manner, make decisions or actions that may later

prove to be unwise

►The Court in America noted that because most officers and directors of

NPOs are usually volunteers, they should be afforded at least the same

protection that is afforded to directors of for-profit corporations, if not

more protection

►In order for a director to be covered by the business judgment rule,

directors must adequately deliberate, act with reasonable diligence, and

be informed before making material decisions, i.e. “the board must do

more than rubber stamp the decisions of the active managers.” Hill v.

State Farm Mutual Automobile Ins. Co. 166 Cal. App. 4th 1438 (Cal. App.

2d Dist., Sept. 19, 2008) 42

Highest and Best Offer

►When balancing the interest and obligation of the officers to carry out the

mission – court may find that the highest financial offer is not the best

offer and may defer to state authorities.

► In re United Healthcare System, Inc., 1997 WL 176574 (D.N.J. 1997).

Hospital informed State Commissioner of Health that it was experiencing

dire financial problems. Commissioner directed hospital to seek a buyer

within a month. The hospital board selected one of the bidders and entered

into a contract of sale, contingent on the hospital filing bankruptcy and

obtaining court approval of the sale. The bankruptcy court held that the

board did not properly exercise its business judgment in accepting that bid

and that the bankruptcy court could entertain a competing offer that would

yield more money for creditors. It denied the motion to sell, voided the

contract and directed the debtor to seek extensions of its certificates of

need from the Commissioner. The district court reversed and held. “When

analyzing an articulated business reason for the sale, the bankruptcy court

must also take into consideration the fact that a debtor is a charitable

institution…The officers and directors of a non-profit organization are

charged with the fiduciary obligation to act in furtherance of the

organization’s charitable mission. In addition, the law allows the

bankruptcy court to entertain higher and better offers, which means that

the bankruptcy court may not focus solely on price.” 43

Highest and Best Offer

►Further a power bidder may win the sale if it helps sustain the

charitable mission of the organization

►In re HHH choices Health Plan, LLC et al., 554 B.R. 697 (Bankr. S.D.N.Y.

2016) the court held that under state law price alone was not

determination in approving sale and fulfilling the charitable mission as

a deciding factor – if creditors paid in full or if difference in price was

“negligible”

44

5 Reasons Why Healthcare Nonprofits Are Racing To Consolidate

►Bain + Company recently reported that 16 of 21 major healthcare

transactions in Q1 2017 involved nonprofit partners a significant

and unprecedented statistic

►Some factors are at the heart of this dramatic marketplace activity

include:

1. Donations are disappearing

2. Technology is required by consumers in the new nonprofit

space for interaction and information

3. Trumpcare is a threat – whatever happens

4. Baby-boomers are retiring

5. Reimbursement has become increasingly complex

45