Page 0February 4, 2015
Missouri Hospital Association
Affiliation Trends in Healthcare:Answers to Key Questions
Missouri Hospital Association Webinar
February 4, 2015
Page 1February 4, 2015
Missouri Hospital Association
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?
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Missouri Hospital Association
Familiar Market Pressures
Recruitment & Retention
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Missouri Hospital Association
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
Page 5February 4, 2015
Missouri Hospital Association
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?
Page 8February 4, 2015
Missouri Hospital Association
Basis for Affiliation
Strategic Plan
Resource Needs
Affiliation Objectives
Affiliation Process Affiliation
Duty of Care
Page 9February 4, 2015
Missouri Hospital Association
Organizational Needs and Objectives
Financial Integration
• Capital
• Competency
• Clout Clinical
Integration
• Standard of care
• Care coordination
• Access to patients
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Missouri Hospital Association
Shared perception of needs and objectives
Sense of urgency
Willingness to cede control
Regulatory restrictions
Political Climate
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Missouri Hospital Association
Form Follows Function
Define Business Aims and Outcomes
(Function)
Identify and Prioritize
Objectives
(Function)
Determine Scope
(Function)
Custom Design and Memorialize Structure
(Form)
Page 12February 4, 2015
Missouri Hospital Association
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?
Page 13February 4, 2015
Missouri Hospital Association
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
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Missouri Hospital Association
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
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Missouri Hospital Association
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
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Missouri Hospital Association
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
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Missouri Hospital Association
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
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Missouri Hospital Association
Example Lease Structure
LESSOR
Example Medical
Center
LESSEE
Hospital
Management
Company
Leased
Hospital
Lease Agreement
Lease Payments
Retains
Ownership
Operations
Management
Revenues &
Expenses
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Missouri Hospital Association
Management Agreement
Hospital
System
Example
Medical
Center
Community
Advisory
Board
Hospital Revenues or Management Fee
Management Agreement
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Missouri Hospital Association
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
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Missouri Hospital Association
Not Your Traditional M&A: Regional Collaboration
Merger?Acquisition?
Joint Venture?
Regional Hospital
Critical Access
Hospital
Community Hospital
AMC
Other Providers
Page 22February 4, 2015
Missouri Hospital Association
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
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Missouri Hospital Association
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
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Missouri Hospital Association
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
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Missouri Hospital Association
Motivations
“Independence Through Interdependence”
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Missouri Hospital Association
• 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
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Missouri Hospital Association
Clinically Integrated Network
• Lean infrastructure to support provider accountability
• Core functions
– Promote evidence-based medicine
– Facilitate care coordination
– Negotiate and manage payer contracts
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Missouri Hospital Association
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)
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Missouri Hospital Association
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
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Missouri Hospital Association
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
Page 31February 4, 2015
Missouri Hospital Association
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
Page 33February 4, 2015
Missouri Hospital Association
Recognizing the Unique Challengeof Engaging Physicians
Page 34February 4, 2015
Missouri Hospital Association
Example Clinically IntegratedNetwork Organizational Structure
Page 35February 4, 2015
Missouri Hospital Association
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?
Page 36February 4, 2015
Missouri Hospital Association
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
Page 37February 4, 2015
Missouri Hospital Association
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
Page 38February 4, 2015
Missouri Hospital Association
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
Page 42February 4, 2015
Missouri Hospital Association
Agenda
5. How do we manage communication during the 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?
Page 43February 4, 2015
Missouri Hospital Association
Transparency Confidentiality
The Message
DEVELOPING
Page 44February 4, 2015
Missouri Hospital Association
Assuring Consistency of Message
ONE VOICE
Facts Only
Objectives
Opportunity of the Affiliation
BOARD(S) OF DIRECTORS
CEO(S)
DEVELOPING
Page 45February 4, 2015
Missouri Hospital Association
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
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Missouri Hospital Association
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
Page 47February 4, 2015
Missouri Hospital Association
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
Page 48February 4, 2015
Missouri Hospital Association
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
Page 49February 4, 2015
Missouri Hospital Association
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
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Missouri Hospital Association
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