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Joint ventures and collaborations across healthcare services

The myriad challenges brought about by the continuing march from volume to value,1 not to mention the uncertainty2 due to the changing political landscape3 , has prompted many health systems to take a critical look at what can be done to stay ahead of trends, or at least, not get run over by them.

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 Most health systems are, or should be, pursuing strategies to meet the demands brought about by value-based care models.4 In light of the evolving demands on health systems, mega-mergers and joint ventures are continually in the news, surprising no one. Traditional transactions between hospitals and health systems continue unabated.5 These mega-mergers and joint ventures don't reveal the whole truth, however, of how health systems are responding to the imperatives brought about by current healthcare reform trends.

Slightly less visible, but certainly just as significant, are joint ventures and collaborations between health systems and specialty-focused operators.

Different structures and names are used depending on the facts, circumstances and needs of the parties, such as a traditional joint venture model, contractual-based or service line collaboration, or a hospital in hospital lease, to name a few, but the intended results are the same: standardize care, improve patient outcomes and increase access and capital efficiency. While not an exhaustive list, each of these imperatives is a priority in its own right in a value-based world.

Why can't a health system do this alone? Why partner? Historically, many would — but in today's capital constrained environment, there are many items on the strategic agenda, competing for limited resources. Partnering allows for more immediate, risk-adjusted access to knowledge and resources.

From the health system's perspective, specialty-focused operators can be found across the services continuum. Health system needs are diverse and vary from market-to-market. Focused joint ventures and collaborations allow health systems to respond to local needs with best-in-class development, management, and operation.

For example, suppose a health system has fully allocated their capital and bandwidth, but needs to quickly respond to local market trends by creating an access point in a high-growth area. Ideally, acute care services could be provided, not just outpatient, specialist and primary care services. The health system doesn't need or want another large facility. The solution? Create a microhospital, developed and managed by a microhospital operator.

Dialysis is another common service line that, for health systems, may be better and more efficiently delivered through a collaborative approach, as managing the costs and complexity of care for dialysis patients is difficult on both an inpatient and outpatient basis. It is no surprise that Fresenius, DaVita and others partner with health systems to joint venture, operate, and manage inpatient and outpatient dialysis services.

Outside of the specific acute care episode, it is difficult to find a service area where joint ventures and collaborations aren't occurring. Renton, Wash.-based Providence Health Care, along with King of Prussia, Pa.-based Universal Health Services and Kirkland, Wash.-based Fairfax Behavioral Health, recently announced the groundbreaking of a 100-bed freestanding behavioral health facility joint venture in Washington to capitalize on the "experience and resources" of the partners.6 Prior to the ACA, for-profit operators and nonprofit health systems may have found themselves competing more directly, as opposed to collaboratively investing in the communities they serve.

Examples abound. HealthSouth and Memorial Hospital in Gulfport, Miss., recently partnered to jointly operate and manage Memorial's inpatient rehabilitation hospital in Mississippi. One of the primary reasons cited for the joint venture was the increasing and continued focus by Medicare on the standardization of rehabilitative care.7 Other industry verticals include home health, long-term acute care hospitals, and skilled nursing facilities. Mechanicsburg, Pa.-based Select Medical and Grand Rapids, Mich.-based Spectrum Health recently announced a partnership to operate an LTACH in Michigan to provide "best-in-class" care8 to patients, while Mechanicsburg, Pa.-bsaed Vibra Healthcare and Methodist Richardson (Texas) Medical Center partnered to open the first LTACH in their area in 2016.9

While outpatient services such as urgent care, diagnostic imaging, physical therapy and outpatient surgery have long been joint ventured, they are not immune from the current trend, with continued collaborations activity reported. Los Angeles-based RadNet and West Orange, N.J.-based Barnabas Health expanded their joint venture in New Jersey in partial response to accountable care organizations, in order to deliver a "fully integrated imaging network,"10 while Dallas-based Baylor Scott & White and Dallas-based AccentCare are partnering to deliver home health services across North Texas.11

Given the variability with the parties involved, types of services provided and resources required, the current trend of joint ventures and collaborations may involve a wide variety of structures and agreements. In any case, the goals and objectives of the parties will influence the final form, subject to the constraints inherent in the deal. If the collaboration involves an upfront sale or joint venture of a service line, a contribution agreement and operating agreement may be needed, as well as a management services or administrative services agreement to govern the go-forward operation of the service line. Governance, rights and restrictions, exit or unwind provisions and the like all need to be specifically addressed, among others.

If the primary goal is to introduce more efficient operational and financial management, and local certificate of need laws or other financial constraints preclude adding bed capacity, a hospital-in-hospital lease may be an effective vehicle for collaboration for some inpatient service lines.

Historically, a service line transaction really meant divestiture of a non-core service for a health system. With the continued move toward value-based care modes, health systems are bringing valuable contributions to the deal in the form of services provided or access to intellectual property, networks and brand name.

With nonprofit health systems and potentially referral sources involved, the applicable regulations are extensive and the consequences of inappropriately structuring or aligning organizations can be severe.12 In particular, any compensation paid or economic benefits involved in these transactions must be consistent with fair market value, in addition to the transaction being commercially reasonable.

Fair market value for any particular transaction, management or administrative services agreement, lease, or other arrangement should consider all aspects and terms of the deal. Considering there is no standardized "deal," pitfalls are numerous. For example, specific unwind provisions and structure (puts, calls, etc.) or buy/sell terms included in an operating agreement, may affect the value of the parties' ownership interests. If a portion of a hospital's facility will be utilized, simply looking at the service line's exclusively occupied square footage may not be enough to adequately calculate the total square footage involved, considering building access and common areas. In addition, the fully allocated cost of utilities and other expenses are often overlooked but should be factored in (i.e., lease on a gross basis, as opposed to triple net).

Another layer of fair market value complexity centers around the health system's contributions to the collaboration. While valuing administrative or other services can be straightforward, valuing whatever intellectual property or intangible assets will be contributed by the health system may not be. While negotiating the deal, the parties may generally understand that health system intellectual property will be involved, but not well enough to describe it in detail, much less determine the value implications. The process of determining fair market value of any intangible assets will certainly bring this to light. Sometimes, a health system's intangible asset contribution may be quite substantial, which can lead to unforeseen consequences at the 11th hour, whether or not the assets are being contributed in-kind, or structured as an on-going arrangement.

With the continued march toward value-based care, joint ventures and collaboration trends are likely to continue for the foreseeable future, as will the complexity introduced by the regulatory environment. Identifying and navigating any challenges is therefore imperative to the success of the deal, and should be approached carefully.



HealthPayer Intelligence: Private Payers Follow CMS Lead, Adopt Value-Based Care Payment (2016, October 17). Retrieved June 30, 2017, from https://healthpayerintelligence.com/news/private-payers-follow-cms-lead-adopt-value-based-care-payment
Fitch: US Healthcare Outlook Stable Despite Political Uncertainty. (2016, December 06). Retrieved June 30, 2017, from http://www.businesswire.com/news/home/20161206005918/en/FitchUS-Healthcare-Outlook-Stable-Political-Uncertainty
3Japsen, B. (2017, May 24). How Trump's Budget Cheapens Value-Based Care. Retrieved June 30, 2017, from https://www.forbes.com/sites/brucejapsen/2017/05/24/how-trumps-budget-hurts-value-based-care-and-population-health/#1bb46b4e4997
4 Value-Based Payment Readiness. (2015, June 3). Retrieved June 30, 2017, from https://www.hfma.org/value-basedpaymentreadiness/
5 Barkholz, D. (2017, April 29). Hospital mega-mergers hit fast and furious in Q1. Retrieved June 30, 2017, from http://www.modernhealthcare.com/article/20170429/MAGAZINE/170429835
6 Providence Breaks Ground on a New Eastern Washington Behavioral Health Hospital. (2017, May 1). Retrieved June 30, 2017, from http://www.providence.org/about/news/2017/05/providence-breaks-ground-on-a-new-behavioral-health-hospital
7 HealthSouth Corporation and Memorial Hospital at Gulfport Launch Joint Venture to Own and Operate Inpatient Rehabilitation Hospital. (2017, April 3). Retrieved June 30, 2017, from http://investor.healthsouth.com/press-releases/press-release-details/2017/HealthSouth-Corporation-and-Memorial-Hospital-at-Gulfport-Launch-Joint-Venture-to-Own-and-Operate-Inpatient-Rehabilitation-Hospital/default.aspx
8 Select Medical And Spectrum Health Form Joint Venture To Provide Long-Term Acute Care To Grand Rapids Community (2017, March 30). Retrieved June 30, 2017, from http://www.prnewswire.com/news-releases/select-medical-and-spectrum-health-form-joint-venture-to-provide-long-term-acute-care-to-grand-rapids-community-300431675.html
9 Vibra Healthcare and Methodist Richardson Medical Center Announce Opening of Richardson's First Long Term Acute Care Hospital. (2016, June 22). Retrieved June 30, 2017, from http://www.vibrahealthcare.com/about-us/newsroom/vibra-healthcare-and-methodist-richardson-medical-center-announce-opening-of-richardsons-first-long-term-acute-care-hospital
10 RadNet and Barnabas Health Announce a Significant Expansion of their New Jersey Imaging Joint Venture. (2015, August 10). Retrieved June 30, 2017, from https://www.radnet.com/radnet-and-barnabas-health-announce-a-significant-expansion-of-their-new-jersey-imaging-joint-venture
11 Baylor Scott and White Health, AccentCare to Form Joint Venture. (2017, April 10). Retrieved June 30, 2017, from http://accentcare.com/baylor-scott-white-health-accentcare-to-form-joint-venture/
12 The Three-Headed Monster of Healthcare Fraud Enforcement: The False Claims Act, Stark Law, and the Anti-Kickback Statute. (n.d.). Retrieved June 30, 2017, from https://www.americanbar.org/publications/tyl/topics/health-law/three-headed-monster-healthcare-fraud-enforcement-false-claims-act-stark-law-anti-kickback-statute.html


More articles on transaction & valuation:
LHC Group, Christus Health to form joint venture: 6 things to know
55 hospital transactions and partnerships in July
Mount Sinai partners with Contessa Health to expand home care program

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