During the second quarter of 2011, there were 32 hospital merger and acquisition deals, up six percent from the first quarter and up three percent from the same quarter last year. As the volume of mergers remains steady, hospitals looking to form a permanent partnership with other healthcare organizations need to know the legal basics before jumping into the M&A pool. The following six legal aspects should be a part of any hospital's checklist if it is considering a merger now or in the future.
1. Confidentiality. The first step for any hospital wanting to initiate a merger is a confidentiality agreement, says Steve Eisenberg, JD, partner at Baker Hostetler. Additionally, that confidentiality agreement states that the two parties are exclusively working together for the foreseeable future. "The reason parties want to make it exclusive is because they are investing a large amount of resources," Mr. Eisenberg says. "Often times a no-shop, or exclusivity, clause will start off discussions." The exclusivity deal usually lasts a designated amount of time established by the two interested parties, ranging from six months to a year.
2. Antitrust. "Whenever you're talking mergers or affiliations, antitrust is a big concern," Mr. Eisenberg says. "Whether the two parties will have monopolistic power in a certain region depends on the size of the organization and the nearby competition." Nearby competition is especially important because lawsuits can surface if one entity feels it is getting pushed out of the market. For example, Deborah Heart and Lung Center in Brown Mills, N.J., filed an antitrust lawsuit against the University of Pennsylvania Health System, Virtua Health and others. The lawsuit said those healthcare organizations allegedly transported patients needing interventional cardiac procedures to places other than Deborah based on an alleged contract. Chris Swift, JD, partner at Baker Hostetler, says a hospital should always double-check any antitrust issues, especially as accountable care organizations and other affiliations will become even more commonplace.
3. Governance. Every hospital merger or acquisition must undergo some type of review from a governance body, but that can vary depending on the type of hospitals involved. For example, if a non-profit entity is selling assets to a for-profit entity, the state's attorney general will be involved due to taxpayer contributions as well as ownership issues of that non-profit's property. Mr. Swift adds non-profit hospitals entering merger deals have to be careful, as many people who have donated property or money to the non-profit will want to know what will happen to their contributions. "When you start converting a non-profit entity to a for-profit entity, you can imagine the community might get upset, and the donors might get upset," he says.
4. Liabilities. Mr. Eisenberg says both sides must understand the liabilities the selling entity party has, such as any unfunded pensions and retirements and outstanding debt. "That debt has to be paid off," he says. Mr. Swift notes that the acquiring entity typically will not want to be responsible for certain legacy liabilities, such as collective bargaining agreements, retired medical benefits and professional liability claims. However, the acquiring entity is usually on the hook for many of those issues.
5. Federal Trade Commission's increased scrutiny. "Under the Obama administration, the FTC has taken a more activist enforcement," Mr. Eisenberg says. "They've really been looking at market consolidation issues and issues with respect to the availability or monopoly of service lines, and compared with three years ago, it's a much different playing field." He adds the current FTC landscape could lead to more intervention or extensive reviews of controversial transactions, such as the ongoing dispute of the potential Phoebe Putney Memorial Hospital and Palmyra Medical Center merger in Albany, Ga. In this case, the FTC was granted a temporary injunction to bar the merger from happening to show the ramification of a potential monopoly and higher healthcare costs for patients in the Albany, Ga., area.
6. Pre-acquisition steps. Mr. Eisenberg says numerous hospitals are taking a "pre-acquisition" step before initiating a full-blown merger, such as sharing or affiliating service lines. He says this is very common within the physician practice realm, and specialists are getting nervous because primary care physicians control referrals for specialists. However, he doesn't see this trend going away anytime soon.
Related Articles on Hospital Transactions:
5 Foundational Questions for Hospitals Acquiring Physician Practices
To Sell or Not to Sell: 3 Considerations for Leaders of Struggling Hospitals
6 Observations on Investment, Mergers and Acquisitions in Healthcare
1. Confidentiality. The first step for any hospital wanting to initiate a merger is a confidentiality agreement, says Steve Eisenberg, JD, partner at Baker Hostetler. Additionally, that confidentiality agreement states that the two parties are exclusively working together for the foreseeable future. "The reason parties want to make it exclusive is because they are investing a large amount of resources," Mr. Eisenberg says. "Often times a no-shop, or exclusivity, clause will start off discussions." The exclusivity deal usually lasts a designated amount of time established by the two interested parties, ranging from six months to a year.
2. Antitrust. "Whenever you're talking mergers or affiliations, antitrust is a big concern," Mr. Eisenberg says. "Whether the two parties will have monopolistic power in a certain region depends on the size of the organization and the nearby competition." Nearby competition is especially important because lawsuits can surface if one entity feels it is getting pushed out of the market. For example, Deborah Heart and Lung Center in Brown Mills, N.J., filed an antitrust lawsuit against the University of Pennsylvania Health System, Virtua Health and others. The lawsuit said those healthcare organizations allegedly transported patients needing interventional cardiac procedures to places other than Deborah based on an alleged contract. Chris Swift, JD, partner at Baker Hostetler, says a hospital should always double-check any antitrust issues, especially as accountable care organizations and other affiliations will become even more commonplace.
3. Governance. Every hospital merger or acquisition must undergo some type of review from a governance body, but that can vary depending on the type of hospitals involved. For example, if a non-profit entity is selling assets to a for-profit entity, the state's attorney general will be involved due to taxpayer contributions as well as ownership issues of that non-profit's property. Mr. Swift adds non-profit hospitals entering merger deals have to be careful, as many people who have donated property or money to the non-profit will want to know what will happen to their contributions. "When you start converting a non-profit entity to a for-profit entity, you can imagine the community might get upset, and the donors might get upset," he says.
4. Liabilities. Mr. Eisenberg says both sides must understand the liabilities the selling entity party has, such as any unfunded pensions and retirements and outstanding debt. "That debt has to be paid off," he says. Mr. Swift notes that the acquiring entity typically will not want to be responsible for certain legacy liabilities, such as collective bargaining agreements, retired medical benefits and professional liability claims. However, the acquiring entity is usually on the hook for many of those issues.
5. Federal Trade Commission's increased scrutiny. "Under the Obama administration, the FTC has taken a more activist enforcement," Mr. Eisenberg says. "They've really been looking at market consolidation issues and issues with respect to the availability or monopoly of service lines, and compared with three years ago, it's a much different playing field." He adds the current FTC landscape could lead to more intervention or extensive reviews of controversial transactions, such as the ongoing dispute of the potential Phoebe Putney Memorial Hospital and Palmyra Medical Center merger in Albany, Ga. In this case, the FTC was granted a temporary injunction to bar the merger from happening to show the ramification of a potential monopoly and higher healthcare costs for patients in the Albany, Ga., area.
6. Pre-acquisition steps. Mr. Eisenberg says numerous hospitals are taking a "pre-acquisition" step before initiating a full-blown merger, such as sharing or affiliating service lines. He says this is very common within the physician practice realm, and specialists are getting nervous because primary care physicians control referrals for specialists. However, he doesn't see this trend going away anytime soon.
Related Articles on Hospital Transactions:
5 Foundational Questions for Hospitals Acquiring Physician Practices
To Sell or Not to Sell: 3 Considerations for Leaders of Struggling Hospitals
6 Observations on Investment, Mergers and Acquisitions in Healthcare