affiliation trends in health care: answers to key questions

February 4, 2015

Missouri Hospital Association

Affiliation Trends in Healthcare:Answers to Key Questions

Missouri Hospital Association Webinar

February 4, 2015

February 4, 2015


Agenda

5. How do we manage communication during an affiliation process?

4. How does an affiliation process work?

3. What form should our affiliation take?

2. Why should we affiliate?

1. Why are organizations affiliating?

February 4, 2015


Familiar Market Pressures

Recruitment & Retention

February 4, 2015


Era of Uncertainty

Second CurveValue Payment

Continuity of Care RequiredSystems of Care

Providers for PaymentIT Centric

Physician Alignment

First CurveFee-for-ServiceQuality Not RewardedPay for VolumeFragmented CareAcute Hospital FocusStand Alone Providers Thrive

Straddle

REVENUE DROPSMINIMAL REWARD FOR QUALITY

VOLUME DECREASES

NO DECISIVE PAYMENT CHANGEPAY FOR VOLUME CONTINUES

HIGH COST IT INFRASTRUCTUREPHYSICIANS IN DISARRAY

February 4, 2015


Spreading Risk

February 4, 2015


Agenda






February 4, 2015


Everyone’s Doing It!

February 4, 2015


Form Follows Function

February 4, 2015


Basis for Affiliation

Strategic Plan

Resource Needs

Affiliation Objectives

Affiliation Process Affiliation

Duty of Care

February 4, 2015


Organizational Needs and Objectives

Financial Integration

• Capital

• Competency

• Clout Clinical

Integration

• Standard of care

• Care coordination

• Access to patients

February 4, 2015


Shared perception of needs and objectives

Sense of urgency

Willingness to cede control

Regulatory restrictions

Political Climate

February 4, 2015


Form Follows Function

Define Business Aims and Outcomes

(Function)

Identify and Prioritize

Objectives

(Function)

Determine Scope

(Function)

Custom Design and Memorialize Structure

(Form)

February 4, 2015


Agenda






February 4, 2015


Varying Forms for Varying FunctionsC

ap

ita

l In

ve

stm

en

t

Integration/Control (Acquired or Given Up)/Stability

Clinical

Affiliation

Minority

Investment

Joint Venture

Management

Agreement

Joint Operating

Agreement

Asset

Purchase/Acquisition

Lease

Merger/

Membership

Substitution

Source: Strategies in Capital Finance, Volume 67 Fall 2011; Cain Brothers

Clinical Financial

February 4, 2015


Example Asset Purchase

PURCHASERSELLER

(Not-For-Profit)

Asset PurchaseAgreement with

Deal Terms

Purchased Assets

Equals Cash PlusAssumed Debt & Other

Liabilities

Purchase Value

Net

Proceeds

Repayments

Not-For-ProfitCommunityFoundation

Repayment ofNon-AssumedDebt andLiabilities

February 4, 2015


Example Membership Substitution Structure

SYSTEMPARENT SYSTEM

PARENT

Operating

Hospital(s)

After Closing

Amended and

Restated Articles

And Bylaws

Example

Medical Center

RelinquishedHospital(s)

Sole Member before

Transaction

Change of

Control

Agreement

Sole Member

OperatingHospital(s)

Sole Member

RelinquishedHospital(s)

OperatingHospital(s)

Example Medical Center

February 4, 2015


Example Merger Structure

HOSPITAL

SYSTEMHOSPITAL

SYSTEM

Potential

Acquiring

Subsidiary Example

Medical Center

Example

Medical

Center

After Closing –

Probable Structure

Merger

Agreement

Assets and

Liabilities

Transfer to

Hospital System

Before Closing

February 4, 2015


Virtual Merger Organization

Board of Directors with

Representatives from A&B

Example Virtual Merger Model

Organization A Organization BJoint Operating Agreement

Provides management services for A and/or B

February 4, 2015


Example Lease Structure

LESSOR

Example Medical

Center

LESSEE

Hospital

Management

Company

Leased

Hospital

Lease Agreement

Lease Payments

Retains

Ownership

Operations

Management

Revenues &

Expenses

February 4, 2015


Management Agreement

Hospital

System

Example

Medical

Center

Community

Advisory

Board

Hospital Revenues or Management Fee

Management Agreement

February 4, 2015


Example Joint Venture Structure

For-Profit or

Not-For-Profit

Partner

Example

Medical

Center

Management

Services Contract

Fee and Earnings

Going ForwardJOINT VENTURE

Governance &

Operations

Cash from Joint

Venture Establishment

and Earnings

Going Forward

Physical

Assets

And/or Cash

Contribution

Physical

Assets

And/or Cash

Contribution

20%-50%

Ownership

20%-50%

Board Representation80%-50%

Board Representation

80%-50%

Ownership

Net

Proceeds

Repayments

Not-For-Profit

Community

Foundation

Repayment of

Debt and other

Non-assumed

liabilities

February 4, 2015


Not Your Traditional M&A: Regional Collaboration

Merger?Acquisition?

Joint Venture?

Regional Hospital

Critical Access

Hospital

Community Hospital

AMC

Other Providers

February 4, 2015


Characteristics

• Two+ hospitals enter into formal relationship to share resources and capabilities with an eye toward clinical integration

• Participants together define common interests to be advanced through the Collaborative

• Each participant’s individual interests are respected and protected through the Collaborative’s governance structure

• Participants make some financial commitment to support the Collaborative’s operations, but each remains economically independent

Regional Collaboratives

February 4, 2015


Characteristics

• Participants retain management authority of their respective organizations

• Participants retain financial independence of their respective organizations

• Participants’ governance remains with their respective governing boards

Regional Collaboratives

February 4, 2015


Unique Governance Structureswith Common Characteristics

Balanced time, energy, and economic investments by participants

Balanced voting rights and reserved powers for participants

Shared vision and goals while recognizing participants’ unique priorities

Formal but flexible and adaptable rules of operation

Fair opportunity for all participants to engage and be heard

February 4, 2015


Motivations

“Independence Through Interdependence”

February 4, 2015


• Achieve economies of scale through joint purchasing and similar strategies

• Leverage current and future information technology investments

• Sustain members as they learn to thrive under new care models

• Design continuums of care for specific types of patients

• Improve quality of care through common evidence-based clinical guidelines

• Develop narrow networks for contracting purposes

• Defend against competition from larger integrated delivery systems

• Test the waters for more “involved” relationships

Motivations

February 4, 2015


Clinically Integrated Network

• Lean infrastructure to support provider accountability

• Core functions

– Promote evidence-based medicine

– Facilitate care coordination

– Negotiate and manage payer contracts

February 4, 2015


Promote Evidence-Based Medicine

• EBM = integrating individual clinical expertise with the best available external clinical evidence from systematic research

• Clinical protocols

– Identify (prioritize)

– Implement (education, technology solutions)

– Incentivize (financial consequences)

– Monitor (reporting on quality measures)

– Remediation (including punitive measures)

February 4, 2015


Facilitate Care Coordination

• Identify high-risk and rising-risk patients

– Disease registries

– Data analytics

• Aggressive interventions

– Patient-centered medical home

– Patient navigator/health coaches

– Remote monitoring

– Transitional care management/chronic care management

• Utilize patient engagement strategies for low-risk patients

February 4, 2015


Negotiate and Manage Payer Contracts

• Standard fee schedule

• Enhanced fee schedule – care management

• Narrow networks and tiered benefits plans

• Pay for performance

• Shared savings programs

• Bundled payments

• Partial capitation (e.g., primary care services)

• Centers of Excellence

• Global budgets

February 4, 2015


Negotiate and Manage Payer Contracts

• Hospitals’ employee benefits plans

• Direct contracting with employers

• Insurance

– Commercial

– Medicaid

– Medicare Advantage

– Medicare FFS

• Medicare Shared Savings Program (MSSP)

• Bundled Payment for Care Improvement Initiative

• Other demonstration projects

February 4, 2015


Understanding Basic CIN Economics

February 4, 2015


Recognizing the Unique Challengeof Engaging Physicians

February 4, 2015


Example Clinically IntegratedNetwork Organizational Structure

February 4, 2015


Agenda






February 4, 2015


Traditional Affiliation Process

Planning* Request for Proposal

• Identify affiliation team

• Develop the potential

partner list

• Begin internal due diligence

review

• Evaluate types of affiliation

to be considered

• Create communication plan

• Develop the Request for

Proposal (RFP)

• Describe key opportunities

• Provide history and key

information

• Identify characteristics of a

preferred strategic partner

• List affiliation objectives

• Describe procedures

governing affiliation process

• Solicit Confidentiality

Agreement (CA)

Stage I

February 4, 2015



Awaiting RFP

Responses

Evaluating RFP

Responses

• Web meeting with potential

partners

• Continued internal due

diligence

• Side-by-side comparison

• Comparison to affiliation

objectives

• Host on-site presentations

• Establish data room

• Manage due diligence

process

• Provide expectations to

each finalist

Stage II

February 4, 2015



Letter of Intent Partner Selection

• Report findings from due

diligence of partners

• Negotiate with partners

• Select partner for exclusive

negotiation

• Final due diligence

• Negotiation of definitive

agreement

• Hart-Scott-Rodino filing, if

necessary

Stage III

February 4, 2015


Developing a CIN

February 4, 2015


Launching a CIN

February 4, 2015


Operating the CIN

February 4, 2015


Agenda

5. How do we manage communication during the affiliation process?





February 4, 2015


Transparency Confidentiality

The Message

DEVELOPING

February 4, 2015


Assuring Consistency of Message

ONE VOICE

Facts Only

Objectives

Opportunity of the Affiliation

BOARD(S) OF DIRECTORS

CEO(S)

DEVELOPING

February 4, 2015


Requirements for Formal or Informal Approvals

• If using an ad hoc committee, define purpose and authority

• Review bylaws and other documents that address restrictions and requirements related to affiliation arrangements

• Establish mechanism to add potential partners to the process

COORDINATING

February 4, 2015


Receiving and Adjusting to Feedback

• Accept input – Adapt the message

• Don’t be dismissive or defensive

• Be prepared to explain should suggestions be rejected

• Adjust concept to accommodate worthy suggestions

• Defend concept and explain if suggestion is rejected

• Communicate that final decision resides with the board

COORDINATING

February 4, 2015


Crisis Management

• Develop a plan

• Follow your plan

• Address rumors head-on

• Use a single spokesperson

• Proactively address exposé pieces in press by coordinating news release with local media so it can “break” the story

COORDINATING

February 4, 2015


The Message

When do we start talking publicly?

• Traditional: When the decision is made to issue an RFP

• Collaborative: When the Governance is decided

Frequency of Communication?

• Monthly with board and physicians

• At major milestones in process

• When misinformation pushes the message off course

Method of Communication?

• News bulletins

• Letters

• Emails

• Dedicated web site

• Public meetings

• Videos

TIMING

February 4, 2015


Executing Communication Plan

• Importance of staying coordinated

• Establish internal communications network

• Communicate extensively

• Keep a pulse on constituencies

• Create a quick reaction team

• Avoid overreaction

February 4, 2015


Addressing Concerns

• Involve physicians in the process

• Ad hoc committee members

• Due diligence teams

• Facilitate inter-staff meetings with potential partner

• Remind physicians that the board is final authority but that their input is vital to the process

February 4, 2015


Martie Ross913.232.5145

[email protected]

affiliation trends in health care: answers to key questions

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