Under increasing pressure to cut costs while coordinating care and improving quality, hospitals and health systems have been merging at a rapid rate.
The industry's merger and acquisition activity increased by almost 20 percent in the third quarter of 2013 compared with the same quarter a year ago, with 267 deals announced in the past three months, according to Irving Levin Associates.
As the healthcare industry continues to undergo significant transformation, more hospital and health system consolidation is likely in the next few years. However, before providers begin executing a transaction, there are a few important factors they need to consider to ensure success, says Holly Carnell, JD, an associate at law firm McGuireWoods.
During a Nov. 13 webinar, Ms. Carnell and McGuireWoods partners Geoffrey Cockrell, JD, and Gretchen Heinze Townshend, JD, discussed physician contract reviews and other tasks hospitals and health systems should complete before beginning a transaction.
1. Make sure board members are aware of their fiduciary duties. Before initiating a transaction with another organization, hospitals and health systems should ensure their board members are aware of their fiduciary duties under state law, according to Ms. Carnell.
The duty of care is generally concerned with the transaction process. Amongst other things, this requires board members to carry out a full investigation of the relevant details, ensure fair market value and evaluate alternatives and any competing offers. They should also thoroughly document all of their investigations, she said.
Second, board members have to fulfill their duty of loyalty, which involves detecting and avoiding conflicts of interest. Each hospital or health system director should be acting in the organization's best interests, and any potential conflicts — for instance, a board owner's status as a hospital property owner — should be put squarely on the table early on, Mr. Cockrell said.
"It's often the case members of the board have some secondary relationship to hospital," he said. "That's certainly appropriate, but it makes it more challenging to navigate through the presence of conflicts of interest."
Furthermore, Ms. Carnell said the duty of loyalty also encompasses keeping discussions about the transaction confidential to avoid prematurely causing too much of a stir in the surrounding community. "Helping people remember that up front can pay dividends later down the road," she said.
Finally, non-profit hospital and health system directors should be aware of their duty of obedience to purpose, she said. This means they must act in accordance with the primary goals for the organization. For 501(c)(3) organizations, that objective is furthering charitable purposes.
As part of their obligations to the community they serve, nonprofit hospital board members need to consider the implications the transaction will have for their organization's mission. According to Ms. Carnell, "for a community hospital, the hardest question in discharging the board’s duties, is often to determine if the continuation of the hospital as an acute care hospital is really the best use of resources in furtherance of the organization’s mission."
Depending on the state they are located in, hospitals and health systems might have additional statutory duties that board members should also know about, Ms. Carnell said.
2. Complete pre-transaction diligence. Conducting pre-transaction diligence is another important consideration for hospitals and health systems looking to join forces with others, Ms. Townshend said. This process should take place far enough in advance of a transaction so any problems can be remedied on the hospital's terms as opposed to the potential buyer's, she said.
The first step is identifying all of the hospital's relationships with referring physicians and those physicians' immediate family members. The organization then needs to review all of these financial relationships to ensure that they don't violate the Stark and Anti-Kickback laws. This requires a careful review of the Anti-Kickback safe harbors and Stark exceptions, she said.
Furthermore, all arrangements must be documented. Types of physician relationships hospitals need to keep an eye on can include employment agreements, medical directorships, consulting agreements or on-call agreements, according to Ms. Townshend. Relationships with vendors, ancillary service providers and joint venture partners may also merit scrutiny.
"Each of these relationships needs to be assessed for compliance with both the Anti-Kickback Statute and Stark," she said.
If a healh system identifies noncompliant arrangements, they need to clean those relationships up and document them properly before moving forward with any kind of transaction, she said. They should also look into their options for self-disclosing violations, especially if they uncover Stark violations.
"Once Stark is violated and the hospital becomes aware of such violation, if the hospital doesn’t return all the payments to Medicare, it is creating potential false claims liability," she said.
Additionally, providers should check for billing and coding problems. Hospitals can stay on top of these issues by having a third party regularly conduct billing and coding audits to identify areas of concern, she said.
3. Identify key liabilities and concerns. Aside from board member fiduciary duties and pre-transaction diligence, there are other key liabilities hospitals need to watch out for, Mr. Cockrell said. For instance, unions and collective bargaining arrangements could pose an obstacle.
"The presence of significant unfunded pension or defined benefit liabilities, for some partners who have their own pensions, may not be as material of an issue," he said. "Or it may be a very big problem for an acquirer that doesn't have any of those sorts of those liabilities."
Providers should also consider their real estate leases and owned real estate, he said. Otherwise, they could end up partway through the transaction process only to discover their real estate deed includes provisions that won't allow the merger or acquisition.
Similarly, any restrictions on the hospital or health system's assets could stop or slow down a transaction. It's best for providers to know about them before jumping into the process.
"It doesn’t mean there aren't workarounds for those issues, but it may involve going to the attorney general or even into court to get relief from some of those limitations," he said.
Providers must give some thought to disclosing any litigation or government investigations to a purchaser or transaction partner. And overall, they should make sure their documentation is in order and thorough.
In the pre-transaction phase, hospitals should ensure their board and committee minutes are complete and their policies and procedures are up-to-date, in addition to gathering anticipated diligence materials and governance documents, Mr. Cockrell said.
He advised providers not to leave these steps until the last minute.
"It's not uncommon for community hospitals to have rather shaky minutes and policies and procedures and a really kind of diffuse body of documents," he said. "It's best to pull those things together in advance, that can be a really challenging process to jam into a two-week timeframe."
More Articles on Hospital Transactions:
4 Healthcare Transaction Trends to Watch in 2014
GWU Hospital Considers United Medical Center Takeover
HMA Shareholders to Vote on CHS Deal in January