Transaction Structures

Membership Substitution Transactions: Why Are They So Misunderstood?

Membership substitution transactions are the most common form of business combination transaction in the nonprofit hospital industry. They are also widely misunderstood and the source of many mistakes. Many large 501(c)(3)s have become more acquisitive as a result of economic pressures of the ACA. Nonprofit health systems have been getting much better at participating in and winning competitive sale processes, resulting in an increased use of this business combination form.

In April 2013, St. Luke’s Episcopal Health System announced its sale, via membership substitution, to Catholic Health Initiatives. In responding to a suit from physician owners (a minority faction) of a St. Luke’s subsidiary, St. Luke’s Sugar Land Hospital, St. Luke’s attorney asserted: “the ownership of St. Luke’s Sugar Land Hospital is totally unchanged by the Transaction.” We have no opinion on this legal debate, but it points out something that repeatedly arises in these transactions – most participants don’t really understand them to any depth.

Given the forecasted level of nonprofit hospital M&A activity in the coming years, as well as the increased use of the membership substitution specifically, it is important that these new and

February 14th, 2017|Transaction Structures|

Affiliations: Matching Objectives and Risks

Affiliations_Matching Objectives and Risks - January 2016Affiliations are contractual arrangements between two or more hospital partners in which they agree to work together on projects. No ownership or control is exchanged in affiliations; however, the term is sometimes used euphemistically, or incorrectly, to describe business combinations. These sorts of agreements have existed for many decades as non-profit hospitals have pursued contractual approaches to improve qualitative, operational, or financial performance. Most often, they represent an effort to share ideas and resources with an objective of economic efficiency and improved health while remaining independent.

Non-profit hospitals are actively considering their strategic financial options due to the economic and medical care implications of the Affordable Care Act (ACA). This activity has not, at least to the present, resulted in a meaningful increase in the number of completed business combinations. It has, however, resulted in a sharp increase in the number of affiliations that are being entered into. Despite the scant empirical support and bubbly atmosphere behind many affiliations, independent hospitals are actively pursuing them in an effort to access the benefits of increased scale without ceding ownership.

Because

The Hospital Joint Venture Handbook

The Hospital Joint Venture Handbook

This joint venture handbook is based upon a series of articles that we began writing for The Governance Institute in the summer of 2014. One year later, many of the “new frontiers” in hos­pital joint ventures that we outlined have continued to evolve at a rapid rate, and new forms of creative partnerships are announced on a regular basis. We hope that this handbook will serve not only as a marker of a unique time of change in the hospital space, but also as an inspiration for further creativity as health systems around the country endeavor to deliver services in an efficient and patient-centered way.

Click here to download the handbook.

Authors: Barry Sagraves, Juniper Advisory; Ken Marlow, Waller
Date: January 2016
Source: The Governance Institute

 

Building a Hospital Joint Venture: A Blueprint for Success

Building a Hospital Joint VentureThis is the third and final article in a series examining the uses of health system joint ventures, the process of developing a joint venture, and expected trends related to these transactions.

In the first two articles, we looked back into the history of joint ventures (JVs), the factors leading to their emergence, and the potential benefits of a JV to a non-profit hospital or health system. We then looked at emerging trends in JVs and speculated as to the future directions that these models could follow to solve for rapidly evolving healthcare challenges. In this article, we will explore the “nuts and bolts” of considering and creating a hospital JV, which will allow us to bring the hypothetical and theoretical into the practical. If you are a hospital or health system considering forming a JV, there are some important factors to think through before embarking on this complex process.

Click here to download the full article.

Authors: Barry Sagraves, Juniper Advisory; Ken Marlow, Waller
Date: May 2015
Source: The Governance Institute

New Frontiers in Hospital Joint Ventures

New Frontiers in Hospital Joint VenturesThis article is the second in a series examining the uses of joint ventures, the process of developing a joint venture, and expected trends related to these transactions.

In our first article, we examined the history of joint ventures (JVs) and summarized some of the potential benefits to a non-profit hospital or health system considering a JV.

In this article, we will speculate as to the directions this flexible yet complex organization structure may take in the future and solutions it may provide to the healthcare industry. We will also cite some recent examples of joint ventures and other affiliations and assess the circumstances under which success is more likely than not.

Click here to download the full article.

Authors: Barry Sagraves, Juniper Advisory; Ken Marlow, Waller
Date: November 2014
Source: The Governance Institute

November 13th, 2014|Transaction Structures|

The Rise of the Hospital Joint Venture

Rise of the Hospital Joint Venture CoverSince the enactment of the Affordable Care Act in 2010, more and more hospitals and health systems have entered into some sort of affiliation, whether through acquisition, membership substitution, joint venture, or clinical affiliation. This trend is a result of the mounting pressures hospitals and health systems face in the current healthcare environment. Yet, fundamental change in the makeup of the hospital market also paves way for innovation, which includes new ways that organizations may partner to confront these challenges. The joint venture structure is one such innovation.

For those hospitals and health systems that are financially sound and have sufficient capital, entering into an affiliation allows them to best position themselves for future success—to thrive rather than just survive. Evaluating strategic alternatives from a position of strength allows the board of a hospital or health system to take its future into its own hands and identify affiliation partners that complement and enhance its operations, capitalization, compliance, and quality functions. Exploring a range of joint venture alternatives has been found by many systems to be a “best of both worlds” approach—combining the installed market presence and

September 15th, 2014|Transaction Structures|

The Governance Institute Special Section: The Expanding Range of Strategic Alternatives Available in Hospital System Mergers and Acquisitions

Expanding Range of Strategic Alternatives Cover

Hospital and health system boards are in a difficult position. The business of governing acute care health systems has become increasingly complex in recent years as board governance and industry structure have lagged.

The sector has evolved from a strictly charitable function to a major industry that comprises 5 percent of gross domestic product (GDP). The business is capital-intensive, highly regulated, technology driven, and, most importantly, its outcomes impact people’s lives.

The United States spends a multiple of what other industrialized nations do on healthcare, and yet our system is subpar. The World Health Organization ranks the U.S. first in spending but 37 overall. The index used is a blend of life expectancy, speed of service, quality of amenities, and other elements that we like to think of as readily accessible in the U.S. Countries that rank ahead of the U.S. include Greece (14), Colombia (22), and Dominica (36).

Some point to the level of ownership fragmentation as one of the causes of our over-priced, underperforming system. The hospital industry is composed of tiny companies compared to similarly sized sec¬tors of the economy. In other industries like managed care, airline,

The Expanding Range of Strategic Alternatives Available in Hospital System Mergers and Acquisitions

The Expanding Range of Strategic Alternatives_JuniperThe business of governing acute care health systems has become increasingly complex in recent years as board governance and industry structure have worked to keep up with the pace of reform and consolidation.  The sector has evolved from a largely charitable function to a major industry that comprises 5 percent of the gross domestic product.  The acute care health system business is capital intensive, highly regulated and technology driven.

Some industry observers point to the level of ownership fragmentation as a challenge to managing and improving acute care services in the United States.  The hospital industry is composed of very small companies compared to similarly sized sectors of the economy.  In other industries like managed care, airline, auto and food, beverage and tobacco companies, for example, the 50 largest companies hold market shares in excess of 75 percent.  The 50 largest hospital companies together command less than 25 percent market share.  The hospital industry has no “large” companies and none have full access to capital like major manufacturing companies have—e.g., commercial paper markets, equity markets, debt markets, synthetic markets, foreign

Protecting Corporate Value in Affiliation Transactions

HFM April 2014 CoverHospital leaders are increasingly interested in affiliations, or relationships with other healthcare organizations that do not involve ownership changes. Affiliations can take many forms, including management agreements, clinical affiliations, purchasing cooperatives, and joint operating agreements. But they also pose unique risks. Community hospitals often pursue affiliations rather than mergers or outright sales, for instance, to access the benefits of increased scale without ceding ownership. However, this strategy often can result in a shift of control and transfer of the community hospital’s ownership without any reciprocal economic or noneconomic benefit. Clear and consistent affiliation objectives—among other strategies—may enable participants to avoid such risks.

Click here to read the full article, or download the article pdf here.

Authors: Joseph Cerreta, Jordan Shields
Date: April 2014
Source: HFM Magazine

New Models for Community Hospital Joint Ventures

New Models for Community Hospital Joint Ventures CoverJoint ventures between investor-owned and nonprofit health care organizations are not new; in fact, they have occurred for at least 25 years. Until recently, nonprofits were employing this type of transaction to address their need for capital without “selling out” and losing control over a vital community asset. The joint venture structure provided nonprofits with an influx of capital while allowing them to retain both a governance role and an economic interest.

In the past few years, however, two new growth-oriented models have appeared. In these models, the nonprofit partner is involved more as a buyer-partner than a seller.

Click here to read the full article.

Author: Barry Sagraves
Date: November 2012
Source: Hospital & Health Networks