Realignment in the Age of Healthcare Reform – Part I – Not-For Profit and Service District Hospitals
The healthcare industry is in the midst of a period of dramatic change. A number of factors are driving this trend, ranging from healthcare reform and its new delivery-of-care models such as accountable care organizations, to changes in reimbursement such as the movement from fee-for-service to value-based purchasing, bundled payment and other pay-for-performance mechanisms, to the advent of electronic health records. These changes have brought about considerable challenges for providers who must prepare for a future where they will be required to provide demonstrably higher quality care for more patients with less reimbursement. Among the industry’s varied responses to these challenges are a host of strategies that combine providers (hospitals, physicians, and others) into organizations which are more likely to thrive (or at least survive). Each of those strategies has a unique set of legal considerations, and this series of articles will discuss some of those issues.
For-Profits No Longer Lead Hospital Consolidations
Hospital transactions in the past were generally dominated by for-profit companies and characterized by conversions and acquisitions for cash of non-profit and other for-profit entities. More recently, non-profit hospitals have become proactive in acquiring hospitals and making strategic decisions toward expansion. For example, in the last few weeks Trinity Health and Catholic Health East announced an agreement to consolidate operations, creating a massive Catholic system with combined assets in excess of $19 billion. Similarly, Beaumont Health System and Henry Ford Health System have agreed to merge, establishing a new not-for-profit system with eight hospitals in Michigan. In Louisiana, over the last few years, Ochsner Health Systems has acquired a number of facilities in the Greater New Orleans area, Children’s Hospital merged with Touro Infirmary, and Lafayette General Medical Center acquired Gary Memorial Hospital in Breaux Bridge.
Louisiana Strategic Considerations
The State’s budget problems have combined with the national factors to motivate many hospitals to consider such partnership possibilities. Louisiana Medicaid recently eliminated disproportionate share payments for dozens of already vulnerable rural hospitals, substituting less dependable funding sources and putting these facilities in added jeopardy. Similarly, budget cuts to the LSU safety-net hospitals have forced the State to downsize their operations and seek public-private partnerships with community providers to help preserve care to the state’s uninsured.
Non-Profit Hospital Conversion
As hospitals begin to assess the potential for consolidation, a number of complex legal issues must be addressed. One of the first, in any transaction involving non-profit hospitals, is the potential need for approval by the Louisiana Attorney General. Generally, any “acquisition” requires review. This includes any transaction in which anyone obtains “ownership or controlling interest in a not-for-profit hospital, whether by purchase, merger, lease, gift, or otherwise, that results in a change of ownership or control of thirty percent or greater of either the voting rights or the assets of a hospital, or that results in the acquiring person holding a fifty percent or greater interest in the ownership or control of a hospital.” There is no exception for acquisitions by another non-profit, and a hospital owned by local government is considered a “not-for-profit hospital.”
The AG review process can be extremely time-consuming and expensive. It begins with the submission of a detailed application at least thirty days before conversion. Upon receipt of the application, the attorney general must publish a notice in the newspaper. The attorney general has sixty days to review it and approve or disapprove the application. During this timeframe, the attorney general must hold a public hearing and approve the transaction unless the requested transaction is found not to be in the best interests of the public because appropriate steps have not been taken to safeguard the value of charitable assets or to ensure that the proceeds of the transaction are used for suitable health care purposes.
Hospital Service District Issues
A hospital owned by a local governmental entity is considered a “revenue-producing utility” under Louisiana law. As a result, in addition to the attorney general approval process, the sale or lease of such a hospital must also be approved “by a vote of a majority of the qualified electors, voting at an election held for that purpose.” Such a public referendum adds a significant degree of uncertainty to any such transaction.
Approval of the attorney general, however, is only required for an “acquisition,” and the public referendum only required for the sale or lease of the hospital transactions involving service district hospitals can often be structured to accomplish the strategic goals of the parties without meeting these triggering definitions. For example, a “special services agreement” is an agreement specially designed for service district hospitals. The governing board of the hospital service district may enter into such an agreement to manage, operate, and administer a hospital, under the control of the commission for the benefit of the hospital service district. A special services agreement allows the hospital service district to continue to exist and to maintain a level of control over the operations while giving the new manager the freedom to run the day-to-day operations and retain the profits. Such agreements can contain many of the key elements of a true acquisition or merger while maintaining sufficient governmental control to avoid meeting the sale or lease test.
These are, of course, just some of the issues to be considered in hospital affiliation transactions. There are many others, and each additional provider type involved adds still more. Unfortunately, as the pace of restructuring continues to increase, dealing with these issues becomes inevitable. The next installment in this series will begin to review some of the legal questions posed by common physician affiliation strategies.