Due to increased levels of healthcare merger and acquisition activity, the Federal Trade Commission has said it has "redoubled its efforts" to prevent anticompetitive transactions. For this reason, hospital officials need to practice pre-transaction diligence in order to be prepared for potentially lengthy and in-depth reviews, especially when the FTC or a state attorney general can halt a transaction.
During a McGuireWoods webinar, Jim Riley, JD, healthcare attorney at McGuire Woods, discussed four steps hospitals can take to ensure transaction is conducted with thorough and complete due diligence.
1. Referral source relationships. Hospitals have a multitude of relationships that support their day-to-day operations such as agreements with vendors, ancillary providers, joint venture partners and physicians. Although officials should review each relationship agreement before a transaction, the most important is physician relationships. While the hospital-physician relationship is complex, the financial element should be of special interest pre-transaction. According to Mr. Riley, there are two main considerations for reviewing existing financial relationships. "Is compensation or rent at fair market value? And, are all arrangements documented?" Mr. Riley stressed the important of reviewing and thoroughly documenting financial agreements with physicians. "Condell Health Center in Libertyville, Ill., had to pay a $36 million settlement for allegedly making improper payments to physicians," said Mr. Riley. No hospital wants problems such as that to arise and complicate a transaction.
2. Billing and coding concerns. According to Mr. Riley, hospital officials need to review Medicare and private payor recoupment actions, Recovery Audit Contractor audits and internal compliance efforts. Again, the billing and coding should be documented so it may be called upon easily during regulatory review.
3. Payor relationships. According to Mr. Riley, the time to review the solidity of payor relationships is before a transaction. Resolving any payor disputes such as out-of-network benefits and renegotiating contracts could mean the difference between a fairly simple and largely complex transaction process.
4. Licenses, permits and accreditation. While it may seem obvious, many hospitals forget to review these basic elements of operation before a transaction. Due diligence necessitates that processes are thoroughly documented, so hospitals must assess recent inspections, surveys and audits, any upcoming expirations or renewals, certificate of need approvals and timing issues. "Timing issues are important because some states require lengthy notice or approval periods that can delay closing," said Mr. Riley.
1. Why is the board considering this transaction? According to Mr. Riley, the answer should be that the board conducted a thorough and well documented options assessment, and the board concluded this transaction is the best way — if not the only way — for the hospital or health system to survive. In addition, the board should show that this transaction is the best method for the hospital to position itself for success in the future.
2. Why did the board pick the particular suitor and structure? When officials are asked this question by an attorney general, they should be prepared to show that the board went to a broad market of buyers, arrived at a fair market value and selected the suitor and structure for clear, well-documented reasons that satisfy the board's fiduciary obligations.
3. Is the value to be received "fair market value?" According to Mr. Riley, the answer should be that through independent valuation and the transaction process the board achieved fair market value for the transaction
4. If the hospital is tax-exempt and if there will be proceeds from the transaction retained by the seller, how will it be used? "The answer should be that the board will ensure the funds are used in furtherance of the hospital's mission," said Mr. Riley.
1. Ensure board and committee minutes are complete.
2. Ensure all policies and procedures are up to date.
3. Gather anticipated diligence materials and governance documents.
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During a McGuireWoods webinar, Jim Riley, JD, healthcare attorney at McGuire Woods, discussed four steps hospitals can take to ensure transaction is conducted with thorough and complete due diligence.
1. Address four areas in the pre-transaction phase
The first step a hospital should take in preparing for regulatory review is to address the following four areas during the pre-transaction phase. According to Mr. Riley, hospitals that address these areas will be better prepared for the attorney general review.1. Referral source relationships. Hospitals have a multitude of relationships that support their day-to-day operations such as agreements with vendors, ancillary providers, joint venture partners and physicians. Although officials should review each relationship agreement before a transaction, the most important is physician relationships. While the hospital-physician relationship is complex, the financial element should be of special interest pre-transaction. According to Mr. Riley, there are two main considerations for reviewing existing financial relationships. "Is compensation or rent at fair market value? And, are all arrangements documented?" Mr. Riley stressed the important of reviewing and thoroughly documenting financial agreements with physicians. "Condell Health Center in Libertyville, Ill., had to pay a $36 million settlement for allegedly making improper payments to physicians," said Mr. Riley. No hospital wants problems such as that to arise and complicate a transaction.
2. Billing and coding concerns. According to Mr. Riley, hospital officials need to review Medicare and private payor recoupment actions, Recovery Audit Contractor audits and internal compliance efforts. Again, the billing and coding should be documented so it may be called upon easily during regulatory review.
3. Payor relationships. According to Mr. Riley, the time to review the solidity of payor relationships is before a transaction. Resolving any payor disputes such as out-of-network benefits and renegotiating contracts could mean the difference between a fairly simple and largely complex transaction process.
4. Licenses, permits and accreditation. While it may seem obvious, many hospitals forget to review these basic elements of operation before a transaction. Due diligence necessitates that processes are thoroughly documented, so hospitals must assess recent inspections, surveys and audits, any upcoming expirations or renewals, certificate of need approvals and timing issues. "Timing issues are important because some states require lengthy notice or approval periods that can delay closing," said Mr. Riley.
2. Prepare for four key attorney general questions
According to Mr. Riley, state attorneys general tend to ask four main questions. During the pre-transaction phase, hospital officials should address the following four questions:1. Why is the board considering this transaction? According to Mr. Riley, the answer should be that the board conducted a thorough and well documented options assessment, and the board concluded this transaction is the best way — if not the only way — for the hospital or health system to survive. In addition, the board should show that this transaction is the best method for the hospital to position itself for success in the future.
2. Why did the board pick the particular suitor and structure? When officials are asked this question by an attorney general, they should be prepared to show that the board went to a broad market of buyers, arrived at a fair market value and selected the suitor and structure for clear, well-documented reasons that satisfy the board's fiduciary obligations.
3. Is the value to be received "fair market value?" According to Mr. Riley, the answer should be that through independent valuation and the transaction process the board achieved fair market value for the transaction
4. If the hospital is tax-exempt and if there will be proceeds from the transaction retained by the seller, how will it be used? "The answer should be that the board will ensure the funds are used in furtherance of the hospital's mission," said Mr. Riley.
3. Identify key liabilities
Hospital officials should identify key liabilities or areas of concern to close the pre-transaction diligence process. "Hospitals need to evaluate unfunded pension or defined benefit liabilities, unions or collective bargaining agreements, real estate issues such as leases and owned real estate and insurance loss runs. These issues could upset a transaction, especially in the midst of an attorney general or FTC review," said Mr. Riley.4. Craft transaction message carefully, have proper documentation
Proper documentation will not only help with FTC and regulatory review but with community and stakeholder communications. Mr. Riley recommends that hospitals tightly control messaging and present the transaction to the community and stakeholders as a solution or path forward clearly. On the other hand, sellers should not minimize the severity of the situation or hide any information, such as information they failed to document properly or effectively evaluate. In order to document properly, a hospital board should follow these three steps to arrange documentation:1. Ensure board and committee minutes are complete.
2. Ensure all policies and procedures are up to date.
3. Gather anticipated diligence materials and governance documents.
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