preparing your organization for affiliation or sale · pdf file3 5 ©2013 foley &...

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©2013 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

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Preparing Your Organization for Affiliation or Sale

Tuesday, March 26, 2013

2©2013 Foley & Lardner LLP

Presenters

Adria WarrenFoley & Lardner LLP Senior [email protected]

Richard K. ReinerAdventist Health SystemsExecutive VP, President/CEO Multi-State [email protected]

Michael A. Crabb III (Trey)ZieglerManaging [email protected]

Roger StrodeFoley & Lardner [email protected]

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NOTE: Those seeking New York & New Jersey CLE credit are required to complete the Attorney Affirmation Form. Two 5-digit codes will be announced during the presentation. Email the code to [email protected] to get a copy of the form. Immediately fill it out and return it after the program.


ADVENTIST HEALTH SYSTEM

March 2013

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One of the Largest Faith-Based Healthcare Systems in the US

44 Hospitals Operated in 10 States

2012 Total Operating Revenues of $7.3 Billion

AA/AA- Bond Rating

$517 Million in Capital Spending Annually (5-Yr Avg)

Serving More than 4 Million Patients Annually

More than 7,600 inpatient beds

55,000 Employees

8,500 Affiliated Physicians

Long-Term Care Division

Adventist Health System

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Altamonte SpringApopkaCelebrationDaytona BeachDeLandEustisKissimmeeLake PlacidLand O’ LakesOrange CityOrlando (2)Ormond BeachPalm CoastSebringTampa (2)Tarpon SpringsWauchulaWesley ChapelWinter ParkZephyrhills

Rocky MountainRegion

DenverLittletonLouisvilleParker

MidwestRegion

Bolingbrook Durand Glendale HeightsHinsdaleLa Grange Appalachia

RegionFletcherGreenvilleJellicoManchester

Georgia Region

CalhounSmyrna

FloridaRegion

SouthwestRegion

Fort WorthKilleenLampasasSan Marcos

AHS is a Diversified Company

Mid AmericaRegion

Kansas City


2012 Financial Overview

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2011 Actual

2012 Actual

2012 vs. 2011

%

Admissions 352,960 356,228 3,268 0.9%

Average Daily Census 4,388 4,405 17 0.4%

Inpatient Surgeries 97,975 98,314 339 0.3%

Outpatient Surgeries 144,966 145,654 688 0.5%

OP ER Registrations 1,139,542 1,217,133 77,591 6.8%

Gross OP Revenue 11.09 B 12.40 B 1.31 B 11.8%

Same Store Volume Statistics December YTD


2009 2010 2011 2012

Medicare - All 42.1% 42.6% 43.3% 43.4%

Medicaid - All 11.7% 12.9% 13.5% 13.6%

HMO/PPO 34.2% 32.7% 31.6% 30.8%

Other 4.4% 4.3% 4.3% 4.7%

Self Pay 7.6% 7.5% 7.4% 7.6%

* Based on Gross Patient Revenue

Payor Mix - December YTD

* Based on Gross Patient Revenue

* There may be rounding differences due to format

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* Same Store excludes Huguley and FH Wesley Chapel

Same Store Net Patient RevenueRate vs. Volume

* MIS Net Patient Revenue less Bad Debt per Adjusted Admission

Excludes EHR Payments and CMS Settlement


(Values in Millions)2011

Actual2012

Actual2012

Budget2012A vs

2012B

Total Operating Revenue 6,930 7,236 7,195 41

Salaries & Benefits 3,365 3,520 3,495 (25)Supplies 1,248 1,311 1,281 (30)Other Expenses 1,381 1,429 1,463 34Total Operating Expenses 5,995 6,260 6,239 (21)

EBDITA 936 976 956 20

Capital Costs 562 563 585 22

Operating Income 374 413 371 42

Investments 69 77 47 30EHR Incentive 56 58 0 58CMS Settlement 0 43 0 43Debt Change Impact (21) (82) (17) (65)Non-Operating Income/(Loss) (4) (3) (2) (1)

Net Income 474 505 398 107

* There may be rounding differences due to format. TOR includes Gains on Subs and JVs + Prior Year Medicare/Medicaid

AHS Management Income StatementDecember YTD

* There may be rounding differences due to format. TOR includes Gains on Subs and JVs + Prior Year Medicare/Medicaid

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* EBDITA Margin is reflective of the new income statement presentation with minority interest and LOR reflected below EBDITA* Values in Millions

Total Operating EBDITA Margin

637.0 656.4 704.0 773.9 854.5 935.8 976.0

* Values in Millions

AHS Investment Returns

AHS 1,082 M$ 50/50 Blend 1,021 M$

12 Year Total

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* New Method Reclassified Bad Debt to a Reduction from Revenue Beginning in 2011

Days Cash On HandDecember YTD

* 2010 is Weighted for the Addition of Bert Fish, Tampa and Helen Ellis and 2012 is Weighted for the Addition of FH Wesley Chapel

Debt to Total CapitalDecember YTD

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* Cash includes Cash, Inv., & Funded Depr. and Long-Term Debt includes LTD & 50% Capital Securities

Total Cash to Long-Term DebtDecember YTD


AHS Facilities

2000 A- (negative) Baa1 (stable) 332001 A- (stable) Baa1 (stable) 362002 A- (positive) A3 (stable) 372003 A (stable) A3 (positive) A (stable) 372004 A (positive) A2 (stable) A (positive) 382005 A+ (stable) A2 (stable) A+ (stable) 382006 A+ (stable) A2 (positive) A+ (stable) 362007 A+ (stable) A1 (stable) AA- (stable) 352008 A+ (stable) A1 (stable) AA- (stable) 362009 A+ (positive) A1 (positive) AA- (stable) 362010 AA- (stable) Aa3 (stable) AA- (stable) 412011 AA- (stable) Aa3 (stable) AA- (stable) 402012 AA- (stable) Aa3 (positive) AA (stable) 40

FitchS&P Moody's

AHS Ratings History

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Existing Partnerships


PorterCare + CHI (Centura Health)

4 AHS Hospitals

Metroplex Health System + Scott & White

2 AHS Hospitals

Huguley + Texas Health Resources (JV Closed May 2012)

1 AHS Hospital

Emory Adventist + Emory Healthcare

1 AHS Hospital

Takoma Regional + Wellmont Health

1 AHS Hospital

Partnership Experiences

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Trey Crabb, Managing DirectorB.C. Ziegler & Co.(312) 705-7272

Twitter: @healthbanker

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IMMEDIATE CONSIDERATIONS

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U.S. Not-for-Profit Healthcare Outlook Remains Negative– Increased need for capital relating to plant modernization

and IT systems– Greater limitations on access to capital (and higher costs)

for lower rated credits– Increased reimbursement pressures across all payers– Large unfunded pension liabilities– Benefits of tax-exemption under pressure– Benefits of economies of scale, including increased

bargaining power with suppliers, payers and labor

Source: Moody’s Investors Service, March 4, 2013



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What are your transaction goals?– Do you want to maintain services in the community?– Do you want a partner to invest in the community?– Do you want to maintain jobs at the hospital?– Do you want to minimize ongoing losses?– What about our current executive management?– Should we just try and create a foundation?

What kind of transaction or affiliation will best serve your hospital and community?

– Sale– Consider joint ventures or partnership affiliations– Cashless affiliations can increase access to capital, improve credit,

market share, scope of services and economies of scale– Governance will play a major issue in determining the transaction

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What is your timeline?– Transactions of this type can often take 12 months to close– Not-for-profit to for profit hospital deals may take longer

due to regulatory hurdles, both State and FederalDo you need an advisor?

– What is hard to quantify is “what do we not know?”– Too often hospitals engage help to help them “seal the

deal” and they’ve already picked a partner– What feels like the most obvious candidate may be wrong

for reasons not clear at the start of the process


ONCE YOU’VE DECIDED TO SELL -PREPARATION IS KEY

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Preparation can mitigate the risk that a transaction’s closing will be delayed or sidetrackedIf issues arise during due diligence, responses and solutions are readily availableIf issues are disclosed early, the bidder’s price for the hospital or health system will have accounted for these issues, thus, avoiding a last minute repricingClosing proceeds quicklyWhat preparation should be undertaken?

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RELATIONSHIPS WITH REFERRAL SOURCES

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Highly regulated with huge potential financial issues if not in complianceLook closely at anti-kickback statutes and Stark lawExample of transaction issues:

– 2010 $30 million settlement by Detroit Medical Center for engaging in improper financial relationships with referring physicians

Steps to take now:– Identify physician and institutional referral sources– Evaluate whether financial relationships exist– Assess whether the relationship is compliant with the anti-kickback statute, Stark law and

applicable state laws – is it “arms length?”– Specific relationships to look at:

Physician employment agreementsLeasesMedical director agreementsSupply agreements with physicians

– If you find a non-compliant relationship, correct it ASAP


BILLING AND CODING

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Be able to demonstrate that issues identified in old billing and coding audits have been addressed and remediatedConsider re-auditing to demonstrate complianceEven minor exposure may look significant to a buyerBe sure revenue cycle management systems are up to date

– Net collections = Net Patient Revenue?

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LICENSES, PERMITS, AND ACCREDITATIONS

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All government permits should be up-to-date and unrestrictedClose out any recent suspensions or investigations by regulatorsBe aware in advance whether a change of ownership transaction will impact any healthcare licenses or permits

– This is particularly important if you are considering a stock vs. asset transaction which may affect the transfer of licensure (i.e. notice and approvals)

Showing improved policies or successful follow-up audits can evidence that issues have been resolved to a potential acquirer


BOND AND DEBT ISSUES

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Many times hospital transactions are motivated by recent bond covenant defaults or being over leveredQuestion: Will we be able to satisfy our current debt and otherobligations in a transaction without a restructuring or other settlement?Engage in a review of bond and debt issues with counsel to understand the full range of options before considering a transaction

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COMMERCIAL INSURANCE RELATIONSHIPS

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When looking at payor contracts, hospitals considering a buy-side transaction focus on Medicare and Medicaid contracts firstHowever, commercial insurers pay for a significant portion of healthcare in the U.S., so knowing these contractual relationships is essentialKey Issue: The structure of the waiver and discounting of patient co-payments and deductibles

– How do the commercial insurers treat out-of-network policies that apply to patients who visit out-of-network providers

– What happens in the case of non-compliance?A seller should consider a preemptive change since buyers will prices compliance into a transaction

– If the policy if compliant, make sure it is well documented to the satisfaction of a potential buyer


CULTURE OF COMPLIANCE

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Be prepared to respond to certain inquiries including:– Does the compliance plan address all of the hospital’s risk areas?– When was the compliance plan last updated?– Does the hospital have an active compliance officer and privacy

officer?– Do key employees complete healthcare compliance training

regularly?– Do hospital board minutes reflect senior management’s attention to

healthcare compliance issues?– Has the seller made a systematic attempt to solicit compliance

issues from employees and partners through compliance hotlines and other approaches?

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CONTRACTS

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Core contracts to be reviewed:– Vendors– Suppliers– Customers– Payers– Lessors– Lenders

Hospitals must identify and review these contracts and be prepared for contract provisions that can cause challenges, particularly those regarding:

– Assignment– Change of control– Liability– Restrictive covenants (non-competes and non-solicits)– Termination

Understand whether loss or suspension of payment under contracts will create cash flow issues for the buyer


PATIENT PRIVACY ISSUES

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HIPAA and the Health Information Technology for Economic and Clinical Health (HITECH) Act should be a compliance focus for all hospitalsFailure to comply with patient privacy laws result in both civil monetary penalties and reputational harm

– ExamplesSeptember 17, 2012: Massachusetts eye and ear care provider paid $1.5 million to settle potential HIPAA violationsJune 26, 2012: Alaska Department of Health and Human Services paid out $1.7 million to settle HIPAA violations in addition to taking corrective actions

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OTHER ISSUES

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Avoid taking on new multi-year contracts– Information Technology

Avoid non-maintenance construction/physical plant improvement commitments/spendWork closely with board of trustees/board appointed committee to establish prioritiesCreate a small working group of transaction deal team membersConfidentiality/sunshine issues


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THE SALES PROCESS: TYPICAL TIME TABLE

• Six to twelve months is the estimated timeframe to closing

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CASE STUDY: MARQUETTE GENERAL HOSPITAL

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Scenario:– Financially stressed not-for-profit hospital in Michigan with 275 beds– Goals of transaction:

Shore up debt and pension liabilitiesUpdate aging plantsImprove quality Stem patient outmigration to nearby Wisconsin market

Process:– 26 potential partners were identified– 10 proposals were submitted– Acquired by Duke LifePoint (DLP JV) for $483 million

Result:– $350 million on capital improvements and physician recruitment– $23 million donation to Marquette General’s foundation– Eliminated MGHS’s debt– Continued employment for all current MGHS employees

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Compelling Legal Issues

Roger StrodePartner

Foley & Lardner LLP

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Compelling Legal Issues

Board Process

Material Governmental Approvals and Material Third Party Consents

Due Diligence and Compliance


Board Duties

Board members are fiduciaries and have certain duties to the entity when considering a transaction:

– Duty of Care– Duty of Loyalty

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Board Duties—Duty of Care

Duty of Care—Act in an informed, good faith manner when participating in board decisions; exercise the care of an ordinarily prudent person in a like position.

– Business Judgment Rule—decision to be sufficiently informed, in good faith and in the honest belief that the action taken is in the best interests of the organization, and is made by disinterested trustees

– Often the focus of BJR is on process


Board Duties—Duty of Loyalty

Duty of Loyalty—Trustee to exercise his or her power in good faith and in the best interests of the hospital and its mission, not in his or her own interests or the interests of another person or entity

– Consider any conflicts of interest, such as offers of employment from the buyer

– Trustees also must maintain the confidentiality of the process and any decisions made by the Board

– Particularly challenging for physician trustees

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Board Duties—Practical Approach

Focus on an informed affiliation process– Use a subgroup of the Board to evaluate affiliation options– Feed the Board “the elephant a spoonful at a time”– Understand what the Board doesn’t know

Focus on the mission of the hospital and its service to the communityBe skeptical and ask questions—don’t simply accept whatever is tossed at youHire subject matter experts (e.g., legal counsel, financial advisors)Ferret out conflicts early in the process and require that any Board members with significant conflicts recuse themselves


Cy Pres and Charitable Trust Issues

Hospital affiliations or sales may trigger state laws/doctrines aimed at protecting tax exempt assets

– Sales of not-for-profit assets to for-profit use more likely to implicate such statutes

States (through statute or practice) may require some level of state review—often through the Attorney General

– May require “approval” in some state (e.g., PA and Ohio)– May also require court approval (e.g., PA Orphan’s Court)

Highly recommended that the State AG be contacted early in the process so as to avoid “surprise” or embarrassment

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Cy Pres and Charitable Trust Issues

AG will be interested in:– Identity of the buyer and whether the buyer is the type of

organization that will preserve the mission of the selling hospital

– The process used to reach the ultimate decisionProcess sometimes more important than the decision

– The price, if any, to be received for the hospital and whether the price is fair

Consider appraisals and/or fairness opinions

– How the net transaction proceeds will be usedOften, a foundation is established to hold proceedsMany AGs require that foundation fund only “health care” needs


Antitrust Laws

Particular focus of the Federal Trade Commission these days

– Rockford Memorial/OSF Transaction – Promedica/St. Luke’s Transaction– Phoebe Putney Transaction

Regulators looking at impact of a transaction on both hospital services and physician servicesIf acquiring entity not already in the market, substantive antitrust concerns are lessened

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Antitrust Laws—HSR Filing Issues

If each of the transaction parties are large enough and the transaction itself is large enough, the parties will be required to make an HSR Filing with the Federal Trade Commission and Department of Justice

– Size of Parties Test– Size of Transaction Test

Both parties required to fileIf filing necessary, take care in the creation of so-called “4(c)” documentsOnce an HSR filing is made, the transaction cannot be consummated until the HSR waiting period has expired (either by passage of time or through early termination)


Antitrust Laws—Practical Tips

If concern over market concentration, consider hiring an economist to do a market study

– HHI analysis– Diversion analysis

Payors are likely complaining parties—consider engaging with payors and large employers to explaining the benefits of the combinationConsider adopting and following antitrust protocols

– May help avoid “gun jumping” (i.e., the premature exchange of competitively sensitive information)

– May help avoid creation of problematic 4(c) documents

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Other Material Consents

Other Governmental Consents– CON/COE– Licensure

Consider Need for Following Consents– Bond Holder Consent– Other Material Lenders– Capital Lessors– Significant Physician Groups

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Due Diligence and Compliance

Sophisticated affiliation partners (whether or not “buyers”) are very concerned about liability around coding, billing, Stark Law violations and Anti-Kickback risksSophisticated affiliation partners will undertake significant amounts of due diligence in order to sort out risksHighly recommended that sellers undertake their own due diligence review of themselves prior to marketing the hospital in order to uncover any potential significant risks

– Issues discovered late in sale process can cause deals to unwind

– Purchase price will never go up, only down

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Q&A Session

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