In a webinar hosted by McGuireWoods, Barton Walker, JD, healthcare attorney for McGuireWoods, discussed the importance hospital and health system officials should place on certain structural considerations of mergers, acquisitions and affiliations. Although there are a variety of structures for an acquisition or affiliation, each one has pros and cons that should be carefully considered. In addition, there are four structural considerations that can vary the transaction process and timeline.
Pros. A hospital selling its assets or merging with another hospital is a very common form of transaction. Often, a hospital is hoping to receive an infusion of capital or access to capital for improvements with this type of transaction. Another benefit is additional operational scale that a partner could offer. "Merging with another hospital or health system could bring greater management expertise and shift the risk to a presumably larger organization," said Mr. Walker.
Cons. Unfortunately, there are also drawbacks associated with this type of transaction. According to Mr. Walker when a hospital sells assets to or merges with another hospital, the selling hospital may lose the majority of its local control and be subjected to a change in its mission. In addition, if the hospital was a non-profit and the acquiring hospital is a for-profit, the hospital may undergo a structure change. "Another drawback would be the possibility of issues with the attorney general or Federal Trade Commission's review. Sharing the news of a sale or merger with the community can also be a challenge because it is a challenging message to deliver," said Mr. Walker.
2. Management or affiliation agreement
Pros. More and more hospitals are entering into affiliations with other hospitals or management agreements, which feature less integration than acquisitions. According to Mr. Walker, an affiliation or management agreement allows the hospital to retain local control and it is easier to "sell" to the community. In certain affiliations, top executives may be employed by the managing entity rather than the local hospital.
Cons. While this type of transaction allows the local hospital to maintain most of its existing governance, there is a limited amount of cash coming from the hospital partner. There may also be management company liability, said Mr. Walker.
3. Lease arrangement.
Pros. A lease arrangement divides the operations of the hospital and the physical plant or real estate. Leasing a hospital could shift the operational risk away from the hospital board to the leasing entity.
Cons. A key drawback for the board is that although the leasing entity operates the hospital, the board still owns the real estate and retains the risk associated with the physical facility of the building.
4 additional structural considerations
In addition to basic structural considerations, the following are four considerations that may impact the process and timing of the transaction.
1. Governmental entities. If one of the hospitals in the transaction is a local hospital authority or governmental entity, it is important to consider converting to a 501(c)(3) to ease the transition. "This is a typical structural element of many sale transactions," said Mr. Walker.
2. Tax-exempt entities. With tax-exempt entities, approvals may be required in connection with the disposition of charitable assets.
3. Physician employment. Terms of physician employment should be discussed regardless of the transaction structure. "The question of whether physicians will be employed directly by the hospital or another affiliated entity should be addressed," said Mr. Walker.
4. Regulatory considerations. Each state's regulations vary as to these types of transactions. According to Mr. Walker, hospital officials need to know whether the state's licensure law or certificate of need law requires an asset or equity purchase as well as whether the state law will restrict management or leasing agreements.
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Basic transaction and affiliation structures
1. Sale of assets/equity or mergerPros. A hospital selling its assets or merging with another hospital is a very common form of transaction. Often, a hospital is hoping to receive an infusion of capital or access to capital for improvements with this type of transaction. Another benefit is additional operational scale that a partner could offer. "Merging with another hospital or health system could bring greater management expertise and shift the risk to a presumably larger organization," said Mr. Walker.
Cons. Unfortunately, there are also drawbacks associated with this type of transaction. According to Mr. Walker when a hospital sells assets to or merges with another hospital, the selling hospital may lose the majority of its local control and be subjected to a change in its mission. In addition, if the hospital was a non-profit and the acquiring hospital is a for-profit, the hospital may undergo a structure change. "Another drawback would be the possibility of issues with the attorney general or Federal Trade Commission's review. Sharing the news of a sale or merger with the community can also be a challenge because it is a challenging message to deliver," said Mr. Walker.
2. Management or affiliation agreement
Pros. More and more hospitals are entering into affiliations with other hospitals or management agreements, which feature less integration than acquisitions. According to Mr. Walker, an affiliation or management agreement allows the hospital to retain local control and it is easier to "sell" to the community. In certain affiliations, top executives may be employed by the managing entity rather than the local hospital.
Cons. While this type of transaction allows the local hospital to maintain most of its existing governance, there is a limited amount of cash coming from the hospital partner. There may also be management company liability, said Mr. Walker.
3. Lease arrangement.
Pros. A lease arrangement divides the operations of the hospital and the physical plant or real estate. Leasing a hospital could shift the operational risk away from the hospital board to the leasing entity.
Cons. A key drawback for the board is that although the leasing entity operates the hospital, the board still owns the real estate and retains the risk associated with the physical facility of the building.
4 additional structural considerations
In addition to basic structural considerations, the following are four considerations that may impact the process and timing of the transaction.
1. Governmental entities. If one of the hospitals in the transaction is a local hospital authority or governmental entity, it is important to consider converting to a 501(c)(3) to ease the transition. "This is a typical structural element of many sale transactions," said Mr. Walker.
2. Tax-exempt entities. With tax-exempt entities, approvals may be required in connection with the disposition of charitable assets.
3. Physician employment. Terms of physician employment should be discussed regardless of the transaction structure. "The question of whether physicians will be employed directly by the hospital or another affiliated entity should be addressed," said Mr. Walker.
4. Regulatory considerations. Each state's regulations vary as to these types of transactions. According to Mr. Walker, hospital officials need to know whether the state's licensure law or certificate of need law requires an asset or equity purchase as well as whether the state law will restrict management or leasing agreements.
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