Joint Operating Agreements in Healthcare - straffordpub.commedia.straffordpub.com/products/joint-operating... · 6/4/2013 · Joint Operating Agreements in Healthcare Elizabeth M.
Post on 14-Mar-2020
0 Views
Preview:
Transcript
Joint Operating Agreements in Healthcare Complying With Regulatory Requirements and Maintaining
Tax-Exempt Status in Structuring Virtual Merger Arrangements
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
TUESDAY, JUNE 4, 2013
Presenting a live 90-minute webinar with interactive Q&A
Elizabeth M. Mills, Senior Counsel, Proskauer Rose, Chicago
Jan Murray, Of Counsel, Foley & Lardner, Boston
Sound Quality
If you are listening via your computer speakers, please note that the quality of
your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory and you are listening via your computer
speakers, you may listen via the phone: dial 1-866-871-8924 and enter your PIN
when prompted. Otherwise, please send us a chat or e-mail
sound@straffordpub.com immediately so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
• Click the SEND button beside the box
FOR LIVE EVENT ONLY
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the + sign next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
5
©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
Joint Operating Agreements: Back to the Future
Jan E. Murray
Foley & Lardner
Boston, MA
617.226.3132
jemurray@foley.com
4832-5546-6004
©2013 Foley & Lardner LLP
Agenda
Pressures Driving Hospital Affiliations
Range of Hospital Affiliations: Mergers,
Acquisitions, Joint Ventures and Joint Operating
Agreements (JOA)
– Definition of JOA
– Differences among Affiliation Models
Tax and antitrust considerations in forming and
operating JOAs
Other legal issues in forming and operating JOAs
Pitfalls of JOAs
Strategic and practical considerations
6
©2013 Foley & Lardner LLP
Pressures Driving Hospital
Affiliations
“The healthcare industry is undergoing a
period of fundamental transformation in
which the very model of healthcare
delivery is being questioned and
changed.”
Moody’s Investors Service (quoted in
American Hospital Association (AHA)
Fundamental Transformation of the
Hospital Field, 2012)
7
©2013 Foley & Lardner LLP
Pressures Driving Hospital
Affiliations
Health care reform forcing increasing
collaboration among hospitals,
physicians and other providers
Limited access to capital
– Particularly for non-profits, capital markets
have not fully recovered from financial
meltdown
– In addition to other capital needs, IT
requirements are expensive to fund
8
©2013 Foley & Lardner LLP
Pressures Driving Hospital
Affiliations
Reimbursement pressures
– According to industry analysts, “the
median hospital revenue growth rate is the
lowest in two decades…”
– Moody’s rated hospital outlook as negative
for at least next several years in 2012.
(Moody’s Investors Service, quoted in
AHA publication, Fundamental
Transformation of the Hospital Field,
2012)
9
©2013 Foley & Lardner LLP
Increasing Consolidation
According to the AHA Trendwatch
Chartbook 2013 the number of
hospitals in hospital systems has grown
steadily from 2001-2011 (nearly 3,000
hospitals up from under 2600 in 2001);
and
The number of hospital M&A deals has
increased in every year from 2000-
2011 (90 announced deals)
10
©2013 Foley & Lardner LLP
What Does All This Mean?
“In addition to the increase of hospital mergers, other forms of hospital transactions are also increasing. According to [AHA] data, while the number of hospitals has only marginally increased since 1999 (up less than 1%), the number of hospitals affiliated with a system has increased 16%...This means that while the number of hospitals is not growing, the number of health system affiliations is rising, highlighting the trend of existing hospitals to consolidate in some way.” (Dixon Hughes Goodman, “What Hospital Executives Should be Considering in M&A”)
11
©2013 Foley & Lardner LLP
Increasing Consolidation
First quarter of 2013 has seen some
slowdown in M&A activity; 23 deals
down from 34 in last quarter of 2012
Activity picking up at end of first quarter
though and is expected to rise when
effects of sequestration are better
known (FierceHealth Finance, “Healthcare M&A
Tumbles,” 4/26/2013)
12
©2013 Foley & Lardner LLP
Range of Hospital Transactions
Forms of hospital consolidation can
take the form of loose affiliations all the
way to absorption of an entity by
acquisition
Joint Operating Agreements (JOA) lie
on the “looser” end of the spectrum
somewhere above an affiliation or joint
venture but below mergers and
acquisition
13
©2013 Foley & Lardner LLP
Range of Hospital Affiliations
Affiliation/Joint Venture
– Typically either by contract or by creation of a
NewCO that has limited purpose (e.g., joint
purchasing only)
Merger/Acquisition – Two corporations combine with one surviving
For profit: may occur by purchase of shares of an entity
Non profit: typically occurs by substitution of a member
Alternative: Purchase of assets
Consolidation
– Merger of two entities into a new entity
14
©2013 Foley & Lardner LLP
Joint Operating Agreement
Definition
– Typically involves the formation of a new entity,
super parent, by existing hospitals seeking to
affiliate and is jointly “owned” by existing hospitals
– Existing hospital corporations and boards remain
intact with certain powers that may still be
exercised
Contrast to merger/acquisition where a subsidiary or the
surviving shell corporation is absorbed and wound down
or treated as mere operating division
– Super parent is given certain obligations and
powers to manage certain aspects of the whole
enterprise
15
©2013 Foley & Lardner LLP
Joint Operating Agreement versus
Merger
Powers of the parent in merger-type
transaction if wholly owned sub
survives
– Structural and actual control ceded to new
parent which:
Appoints and removes board members
Approves amendments to articles or bylaws
Authority over asset transfers, budgets and
strategic plans
Approval of mergers, acquisitions or affiliations
of subsidiaries 16
©2013 Foley & Lardner LLP
Joint Operating Agreement versus
Merger
Hospital boards maintain some level of autonomy in JOA in relation to a “super parent” which may or may not be a pass-through entity
Significant variances can exist among JOAs with respect to sharing of responsibility for governance/management issues
IRS analyzes control under facts and circumstances to determine whether the dealings under the JOA are “merely matters of accounting between related organizations rather than rising to the level of unrelated trade or business” (See Darling R., Friedlander M., “Virtual Mergers Hospital Joint Operating Agreement Affiliations,” 1997 EO CPE Text)
17
©2013 Foley & Lardner LLP
Joint Operating Agreements
Financial Matters
– Revenues of hospital corporations flow to
“parent”
– Joint contracting for managed care takes
place through parent
– Over time, debt may be secured by parent
18
©2013 Foley & Lardner LLP
Shared Governance and
Management Features in JOA
– Hospital boards may maintain
responsibility for religious directives
– Hospital entities continue to own assets
– Local hospital boards and management
may direct some local services
– Some local level of budget authority may
be exercised by Hospital Boards
– May appoint, remove some board
members
19
©2013 Foley & Lardner LLP
Joint Operating Agreement versus
Merger
If JOAs are designed to permit
negotiating jointly with managed care
companies then must meet certain
requirements from an antitrust
standpoint
If JOA “parent” is to receive tax exempt
treatment and/or avoid UBIT on
transfers of revenue from hospital
members, must meet certain IRS
requirements. 20
©2013 Foley & Lardner LLP
Why do JOA rather than Merger?
Preserve special mission in system—
e.g., religious directives
Avoid legal restrictions arising from
public status—i.e., permit public
hospital to be joined in system
Permit joint action without surrendering
complete independence
21
22
Joint Operating Agreements in Healthcare
Elizabeth M. Mills, Esq.
Senior Counsel
Proskauer
Three First National Plaza
70 West Madison
Chicago, IL 60602-4342
emills@proskauer.com
(312) 962-3538
June 4, 2013
22
23
Federal Income Tax Exemption Issues
23
24
What's The IRS Got To Do With it?
• Section 501(c)(3) tax-exempt organizations must operate for
exempt purposes
• 501(c)(3) organizations can endanger their exemption if they
conduct a trade or business unrelated to exempt purposes ("UBI")
as a substantial part of their activities
• 501(c)(3) organizations can't share profits with non-exempt
entities or provide an equity-type interest to non-exempt entities
• With very limited exceptions, tax-exempt bond-financed property
can't be used, occupied, or owned by non-exempt entities
- Or by tax-exempt organizations in UBI activities
24
25
Why do they care about control?
• "Actual" hospital merger
- Hospitals are brought together under common tax-exempt
parent
- Parent exercises structural control through director
appointment and reserved powers
- Related organizations are an "integral part" of each other and
can share services and management without UBI
25
Joint Operating Company
Delegated Hospital Board Selection
Parent A
Hospital
A1**
Joint
Operating
Company*
Parent B
Hospital
A2
Hospital
B1 Hospital
B2
* JOC board makes decisions for hospitals as their parent; supermajority requirements, but not class voting, permitted
** Each hospital retains its license, governing board, and assets
Appoint JOC directors
Reserve powers over
JOC organic changes
Appoint directors and exercise reserve powers
26
Why do they care about control?
• A JOA often doesn't have this type of structural control
• Thus, the IRS examines four factors to determine whether
JOC has equivalent of parent-subsidiary relationship with
the participating hospitals
27
Joint Operating Company
Parents Retain Board Selection
Parent A
Hospital
A1**
Joint
Operating
Company*
Parent B
Hospital
A2
Hospital
B1
Hospital
B2
* JOC board makes decisions for hospitals as their parent; supermajority requirements, but not class voting, permitted
** Each hospital retains its license, governing board, and assets
Appoint JOC directors
Reserve powers over
JOC organic changes
reserve powers
Appoint
hospital
directors
Reserve powers
over hospital
organic changes
Appoint
hospital
directors
Reserve powers
over hospital
organic changes
exercise
28
IRS Factor 1: Delegation of Significant Authority
over Participating Entities
• JOC should have power to, e.g.;
- Establish budgets
- Establish strategic plans
- Approve debt
- Reallocate income among entities (financial integration)
29
IRS Factor 2: Permanence
• A temporary relationship doesn't look like a parent-
subsidiary relationship
• Is there glue to hold the parties together through disputes
- E.g., arbitration or other dispute resolution
• Are there disincentives to voluntary termination
- E.g., penalties for walking
30
31
IRS Factor 3: Veto Rights
• JOC exercises control, not just veto, over participants
- Can initiate action, not just react
• JOC members have limited ability to veto JOC decisions
31
IRS Factor 4: Limited Reserved Powers
• Members have limited powers over JOC
• Only shareholder-type powers
• Member powers over JOC aren't exercised indirectly
though class voting on JOC board
32
Joint Operating Company
Parents Retain Board Selection
Parent A
Hospital
A1**
Joint
Operating
Company*
Parent B
Hospital
A2
Hospital
B1
Hospital
B2
* JOC board makes decisions for hospitals as their parent; supermajority requirements, but not class voting, permitted
** Each hospital retains its license, governing board, and assets
Appoint JOC directors
Reserve powers over
JOC organic changes
reserve powers
Appoint
hospital
directors
Reserve powers
over hospital
organic changes
Appoint
hospital
directors
Reserve powers
over hospital
organic changes
exercise
33
Partial System JOAs
• Affiliates not participating in JOA aren't integrated
• Services to them may be UBI
34
Joint Operating Company
Partial Hospital System Participation
Parent A
Hospital
A1**
Joint
Operating
Company*
Parent B
Hospital
A2***
Hospital
B1***
Hospital
B2
* JOC board makes decisions for hospitals as their parent; supermajority requirements, but not class voting, permitted
** May be unincorporated division of Parent
*** Each hospital retains its license, governing board, and assets
Appoint JOC directors
Reserve powers over
JOC organic changes
reserve powers
Appoint
hospital
directors
Reserve powers
over hospital
organic changes
Appoint
hospital
directors
Reserve powers
over hospital
organic changes
exercise
Exercise all Parent
powers
35
Antitrust Issues
36
Antitrust Issues Dovetail with Tax Exemption
Issues
• In each case, the test is whether the parties have created a
unity of economic interest through the JOA
37
Reason for Antitrust Concern
• If JOA members are competitors, their joint planning and
pricing through the JOA is anti-competitive
• Sherman Act Section 1 prohibits contracts, combinations
and conspiracies between two or more parties that
unreasonably restrain trade
- Such as price fixing
- Such as market allocation
• Note that unity of economic interest doesn't help with
Sherman Act Section 2 monopolization issues
38
What is Unity of Economic Interest?
• Copperweld Corp. v. Independence Tube
- Wholly owned subsidiaries can't conspire with parent
• As with tax exemption, the objective is to make the JOC
akin to a parent and the hospitals in the JOA akin to
subsidiaries
39
What is Unity of Economic Interest?
• Control over appointment and removal of directors and officers
• Control over hospitals' corporate documents
• Ability to operate and control the hospitals' assets and clinical programs subject to typical shareholder powers
• JOC control over JOA budget and strategic plan and those of hospitals
• Limited rights of members or hospitals to terminate, and it's hard to to do so
- FTC/DOJ guidelines suggest 10 years
• JOC can allocate profits and losses, assess capital contributions, and negotiate managed care contracts
40
Partial System JOAs
• As in tax exemption, the system parts not controlled by the
JOC remain competitors of the JOC
41
©2013 Foley & Lardner LLP
Potential Pitfalls of JOAs
Tension between super parent and active hospital subsidiaries – May be dissonance between the mission of the
super parent and the mission of a member hospital corporation or between the member hospital corporations that is played out at super parent level
– Hospital may be generating revenue that is directed to other entities in the system
More complex from a regulatory standpoint to manage because discrete entities remain in place
42
©2013 Foley & Lardner LLP
Anatomy of Failed JOA
Some have been unwound because of
tension between the hospital
corporations and the new “parent”
– In 2008 Health Alliance in Cincinnati was
sued to permit two hospitals to exit the
JOA
– Ultimately state court of appeals permitted
the hospitals to terminate their relationship
with the JOA because Health Alliance was
determined to have defaulted on the JOA
43
©2013 Foley & Lardner LLP
Anatomy of Failed JOA
Health Alliance was formed in 1995 by a JOA
and ultimately included four hospitals: Christ
Hospital, Saint Luke’s Hospitals, Jewish
Health Systems and Fort Hamilton
Certain powers were reserved to hospital
corporations: ownership of plant, property,
equipment and ultimate responsibility for
fulfilling respective charitable missions
(Health Alliance of Greater Cincinnati v.
Christ Hosp., 2008 Ohio-4981)
44
©2013 Foley & Lardner LLP
Anatomy of Failed JOA
Christ Hospital accounted for some 40% of the revenues of the Alliance but very few funds were directed to Christ Hospital
Trustees of Christ Hospital feared that the Alliance planned to close their Auburn Hospital
Christ Hospital would take on new debt through tax exempt bond financing that would not generate funds for its use
Provided termination notice based on breach of the Joint Operating Agreement
45
©2013 Foley & Lardner LLP
Anatomy of Failed JOA
Health Alliance dispute also points to
potential tension arising from exercise of
fiduciary duty in system with significant
governance powers still residing at local
corporate level
Ohio appellate court noted that the Christ
Hospital directors were exercising their
fiduciary duties in attempting to preserve
assets
Court also ruled that Alliance had a fiduciary
responsibility to the member hospitals 46
©2013 Foley & Lardner LLP
BUT—JOAs Work and Have a
Future
Saint Joseph/Candler hospitals in Georgia
are still operating under a JOA since 1995
Several new JOAs have been formed in the
last few years
– Poudre Valley Health System/University of
Colorado Hospital
– KentuckyOne and University of Louisville Hospital
– Saint Joseph’s Hospital and Emory Healthcare
47
©2013 Foley & Lardner LLP
Other Legal Issues in Formation of
Joint Operating Agreement
Antikickback (AKS): Broad federal statute
that prohibits offering or soliciting anything of
value in return for referrals (42
U.S.C.§1320a-7b(b))
Stark: prohibits physicians from referring
patients for the designated health services
from entities with which the physician has a
financial relationship unless an exception
applies (42 U.S.C. §1395nn)
48
©2013 Foley & Lardner LLP
JOAs and AKS and Stark
JOAs typically do not include physician groups as owners so does not usually raise new Stark issues that would not have been resolved at the direct financial relationship level
– Although JOA may create a new “link” for Stark purposes, should not create new indirect relationship if physicians are not compensated on the value or volume of referrals to the entity billing/providing DHS
49
©2013 Foley & Lardner LLP
Stark and Antikickback
AKS issues may be implicated because JOAs involve financial relationships among referral sources that remain discrete entities – Need to examine each arrangement among
participating entities to ensure that funds flow mechanisms do not act as an impermissible inducement for referrals—e.g., physician groups affiliated with one hospital member entering into an arrangement with another hospital member
– OIG provided safe harbor for Cooperative Hospital Service Organizations—payments to these from the member hospitals for service provided by CHSO thought to implicate AKS (42 CFR 1001.952(q))
50
©2013 Foley & Lardner LLP
JOAs – Strategic/Practical
Considerations
Clearly identify strategic goals to be achieved
by a partnership
– Need to fill in service gaps on a continuum?
– Need strong financial partner?
– Need stronger management capability?
What is the appropriate model to meet the
strategic goals?
– Strongly centralized governance versus local
control
– High level of system integration versus
divergence in management or clinical services
51
©2013 Foley & Lardner LLP
JOAs—Strategic/Practical
Considerations
Any limitations to merger to be
considered?
– Religious mission?
– Public Status?
– Community political factors?
52
top related