Healthcare and Hospital Affiliate Transactions: Critical Legal and Business Issues | Foley & Lardner LLP

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We continue to see affiliate activity among hospitals and healthcare systems, albeit at a slower pace than before, possibly due to the COVID-19 pandemic and the resulting slowdown in elective care, staff shortages and the reluctance of some patients to re-engage. with their providers. These impacts, we believe, are transitory and will resolve in due course, leading to increases in volume of transactions. The agreements we have seen are more “super regional” in nature, such as the Intermountain Healthcare / SCL Health transaction which crosses state borders in a significant way.

With that in mind, we think it is instructive to look at some of the critical legal and trade issues arising from the arrangements described above.

Antitrust

One of the first issues we focus on in these transactions is the enforcement of antitrust laws. Hospital and healthcare mergers have long been a central concern of federal and state antitrust law enforcement agencies. The concern expressed about these agreements is the creation of organizations with sufficient market power, whether in hospital or medical services, to force third-party payers to pay prices higher than the prices of the doctor. market which will be passed on to the beneficiaries or to exclude other providers from entering the relevant market.

In early 2021, the Biden administration issued an executive order on antitrust enforcement, specifically identifying hospital mergers as a target for future enforcement efforts. The executive decree declares that “[h]consolidation of hospitals has left many regions, especially rural communities, with inadequate or more expensive health care options ”, and a summary of the decree cited a history of “runaway mergers” in the hospital sector as leading to the ten largest healthcare systems in the United States “now in control[ling] a quarter of the market. The Biden administration increasingly sees mergers from a more holistic perspective than previous administrations. Thus, we believe that the Administration will examine hospital mergers not only for their potential effects on clients (for example, payers and patients), but also for their potential effects on workers and suppliers. We therefore expect the Biden administration to take a closer look at hospital mergers that may have already passed regulatory scrutiny. In some cases, it can even mean reopening the books on hospital deals that have already been closed.

Structure of the agreement

The next problem we often face is how to structure the affiliation. Since many of these transactions are nonprofit to nonprofit entity agreements, the structures used typically involve what are known as ‘member substitutions’ whereby the acquiring entity becomes the new (and generally the only) corporate member of the acquired entity. (s). In the case of a larger transaction where the affiliated parties are closer to an “equal” stature, it is common to see the creation of a “super parent” who becomes the new (and usually the only) corporate member. of both parties to the affiliation. .

The member substitution structure is popular for a number of reasons, not the least of which is its relative simplicity of execution. Generally, such an operation requires only the modification of the articles of association and certain corresponding modifications of the articles of association of the acquired entity or entities. In addition, the structure can sometimes reduce the burden of seeking consents for material contracts held by the acquiree, depending on the “change in control” and the wording of the assignment that may be present in those contracts. Note that depending on the state in which the acquired entity (s) reside, there may be licensing and / or requirement certificate issues that must be addressed. Finally, these types of structures generally do not create changes in Medicare ownership, which creates the need to file a notice with the Centers for Medicare & Medicaid Services (CMS) prior to closure, but, rather, generally only require timely post-closing notice. to CMS.

Governance

As soon as the parties consider structural issues, they almost always focus on the governance of the combined entities. There is usually a strong desire on the part of the governing body of the acquired entity or entities to “protect” their organization (s). Whether their concerns about their “taking charge” are real or perceived, they often lead the negotiations. Depending on the relative size and bargaining power of each of the parties, we see varying degrees of initial, representation on the board of directors after the close of each part. In addition, we see some “absolute majority” voting protections given to the vested party’s board members, at least for some time after closing, typically around changes in ownership, reductions, or reductions. termination of physical services, operating and capital budgets, etc.

Diligence

As noted above, many of these transactions are structured as membership substitutions. In addition, most of these transactions do not involve any cash transfer to the acquiree. In some cases there may be promises to provide capital or to build new programs or facilities, but generally there are never any direct compensation transfers at close. Therefore, except in certain limited circumstances (described below), there is often nothing to recover after closing if the acquiring entity sustains damage which, in a traditional transaction, would give rise to indemnification.

The economics of these agreements emphasize the parties’ diligence efforts (both business and legal), especially since, as described above, there is often no escrow or d cash to claim compensation. Thus, it is important, especially for an acquirer, that due diligence efforts be thorough. In this regard, we often see multiple layers of due diligence, the first being a ‘big picture’ effort focused on system structure, financial issues (including capital structure), material compliance issues, material relationships with payers, global labor and employment issues (such as pension and collective bargaining issues) and any other material relationships that may be affected by the transaction. This due diligence effort is of a “control” nature and is designed to identify issues that could have a significant and negative impact on the transaction. Subsequently, secondary and additional due diligence efforts typically become more granular.

Closing conditions

Due to the size and nature of hospital and healthcare system affiliations, final transaction documents are typically approved and signed by the parties, with transaction closing occurring after signing. Deferred closings are generally necessitated by the need to make regulatory filings such as federal antitrust filings and state certificates of need or license filings. In addition, it may be necessary to seek certain third party consents for the transaction, including, for example, approvals from major third party payers and service providers.

In most cases, the parties’ obligations to complete the transaction are subject to the satisfaction of various conditions at closing, including receipt of government approvals and material consents from third parties.

Agreement protections

As described above, most healthcare system transactions do not involve any cash consideration. However, in addition to due diligence, they usually involve the presentation of representations and warranties by each of the parties with respect to its activities and operations. These representations and warranties serve several purposes. First, in the case of certain material breaches of representations, the non-violating party may have the right to terminate the transaction prior to closing, thereby protecting the acquirer from the liabilities of the acquiring party.1 Additionally, in instances where the acquirer has agreed to fund capital and / or pay for programs or new facilities, we often see these claims related to damages resulting from breaches of the acquirer’s representations and warranties. That is, in the event that, after closing, it is determined that the acquired entity incurs one or more liabilities which have not been disclosed and / or may be related to a breach of a statement or guarantee , the acquiring entity may be entitled to reduce its capital commitments, on a dollar-for-dollar basis, by the dollar amount of such liability (s).

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1 As noted above, such transactions usually have an execution period (that is to say, the period between signing and closing).

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