Affiliation Trends in Health Care: Answers to Key Questions

PYA Principal Martie Ross recently presented as faculty for the Missouri Hospital Association's Center for Education webinar, "Affiliation Trends in Health Care: Answers to Key Questions."

1. Affiliation Trends in Healthcare: Answers to Key Questions Missouri Hospital Association Webinar February 4, 2015

2. Agenda

3. Familiar Market Pressures Recruitment & Retention

4. Era of Uncertainty Second Curve Value Payment Continuity of Care Required Systems of Care Providers for Payment IT Centric Physician Alignment First Curve Fee-for-Service Quality Not Rewarded Pay for Volume Fragmented Care Acute Hospital Focus Stand Alone Providers Thrive Straddle REVENUE DROPS MINIMAL REWARD FOR QUALITY VOLUME DECREASES NO DECISIVE PAYMENT CHANGE PAY FOR VOLUME CONTINUES HIGH COST IT INFRASTRUCTURE PHYSICIANS IN DISARRAY

5. Spreading Risk

6. Agenda

7. Everyone’s Doing It!

8. Form Follows Function

9. Basis for Affiliation Affiliation Duty of Care

10. Organizational Needs and Objectives

11. Political Climate

12. Form Follows Function

13. Agenda

14. Varying Forms for Varying Functions Capital Investment 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

15. Example Asset Purchase PURCHASER SELLER (Not-For-Profit) Asset Purchase Agreement with Deal Terms Purchased Assets Equals Cash Plus Assumed Debt & Other Liabilities Purchase Value Net Proceeds Repayments Not-For-Profit Community Foundation Repayment of Non-Assumed Debt and Liabilities

16. Example Membership Substitution Structure SYSTEM PARENT SYSTEM PARENT Operating Hospital(s) After Closing Amended and Restated Articles And Bylaws Example Medical Center Relinquished Hospital(s) Sole Member before Transaction Change of Control Agreement Sole Member Operating Hospital(s) Sole Member Relinquished Hospital(s) Operating Hospital(s) Example Medical Center

17. Example Merger Structure HOSPITAL SYSTEM HOSPITAL 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

18. Virtual Merger Organization Board of Directors with Representatives from A&B Example Virtual Merger Model Organization A Organization B Joint Operating Agreement Provides management services for A and/or B

19. Example Lease Structure LESSOR Example Medical Center LESSEE Hospital Management Company Leased Hospital Lease Agreement Lease Payments Retains Ownership Operations Management Revenues & Expenses

20. Management Agreement Hospital System Example Medical Center Community Advisory Board Hospital Revenues or Management Fee Management Agreement

21. Example Joint Venture Structure For-Profit or Not-For-Profit Partner Example Medical Center Management Services Contract Fee and Earnings Going Forward JOINT 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 Representation 80%-50% Board Representation 80%-50% Ownership Net Proceeds Repayments Not-For-Profit Community Foundation Repayment of Debt and other Non-assumed liabilities

22. Not Your Traditional M&A: Regional Collaboration

23. 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

24. 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

25. Unique Governance Structures with Common Characteristics

26. Motivations “ Independence Through Interdependence ”

27. 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

28. Clinically Integrated Network Lean infrastructure to support provider accountability Core functions Promote evidence-based medicine Facilitate care coordination Negotiate and manage payer contracts

29. 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)

30. 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

31. 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

32. 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

33. Understanding Basic CIN Economics

34. Recognizing the Unique Challenge of Engaging Physicians

35. Example Clinically Integrated Network Organizational Structure

36. Agenda

37. 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

38. Traditional Affiliation Process 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

39. Traditional Affiliation Process 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

40. Developing a CIN

41. Launching a CIN

42. Operating the CIN

43. Agenda

44. The Message DEVELOPING

45. Assuring Consistency of Message ONE VOICE Facts Only Objectives Opportunity of the Affiliation BOARD(S) OF DIRECTORS CEO(S) DEVELOPING

46. 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

47. 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

48. 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

49. The Message TIMING

50. Executing Communication Plan Importance of s taying coordinated Establish internal c ommunications n etwork Communicate extensively Keep a pulse on constituencies Create a quick reaction team Avoid overreaction

51. 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

52. Martie Ross 913.232.5145 [email protected]