AGG Takeaways from 2017 AHLA Health Care Transactions Conference

The annual AHLA Health Care Transactions Conference provides valuable insights into transaction strategies, commercial developments, and legal issues affecting contemporary health care transactions, as well as unique opportunities to network with key deal players, including health care executives, attorneys, valuation experts, and other health care consultants and advisors. The 2017 conference was no exception. Hosted in Nashville, Tennessee from April 26-28 at the Gaylord Opryland Resort and Convention Center, the conference provided extensive content options and multiple networking opportunities. Read on for high-level take-aways from a selection of the myriad sessions available at this content-rich conference.

1. Keynote Address: Lessons Learned from the Demise of the American Health Care Act: What Happened and What that Means for the Future

This presentation provided an in-depth discussion of the key issues that led to the demise of the American Health Care Act (AHCA), the bill proposed by House Republicans to repeal and replace the Affordable Care Act (ACA). The presentation discussed a number of issues, including the impact of the CBO report, the Freedom Caucus, and the Tuesday Group on the proposed legislation. It provided an informative comparison of the ACA and AHCA. Ultimately, without making any specific predictions, the presenter forecasts that the months ahead will be an interesting one for healthcare.

2. The Art of the Deal: Getting Your Deal Done

This presentation shared an overview of a typical deal, from early stage issues, through regulatory considerations when structuring the deal, to the definitive documentation. The presenter recommended strategies for risk minimization, including that buyers should strive to know their sellers as well as possible, and that thorough due diligence benefits buyers and sellers alike. He noted that in his experience, the deals that tend to succeed are most often those in which the pricing is appropriate, there is early alignment of expectations, there are no major diligence surprises, and the post-closing transition and integration are well-planned-for and go smoothly.

3. The Due Diligence Tightrope: Getting the Right Deal Done

This presentation focused not just on getting the deal done, but on getting the right deal done. Among the helpful insights was a matrix concept to apply to issues identified in due diligence. Advancing along the axes of “Threat to Deal Value” and “Threat to Deal Execution,” the presenters discussed issues that may be: 1) Pause Points, or low-impact, routine concerns arising in the normal course of business; 2) Synergy Risks, or risks and issues that will challenge realization of deal value; 3) Deal Breakers, which are significant threats to partnership feasibility; or 4) Non-Starters, which are externally-imposed barriers to deal execution. In addition to identifying these various categories of risks, the presenters discussed options for dealing with each category of risk, from “do nothing” for low-risk Pause Points, to “walk away” for high-risk Non-Starters. Other strategies to consider include: prioritizing resolution for integration activities; pausing for further exploration; building in contingencies; adjusting capital commitments; altering the purchase price; or modifying the deal and/or the governance structure.

4. Leveraging Technology for Due Diligence

This presentation emphasized the importance of using technology to decrease cost. Budgets for legal spending are shrinking, and technology can be leveraged to increase efficiency and decrease cost so that the focus of vendor engagement can center on the value-add of skills, insights, analysis, and recommendations. With increasing client demand to shift focus away from “what is the law” and more toward advising on what they should do, counsel should take a critical view of current processes and identify ways in which technology can improve value. The presenters shared the perspective that outside counsel’s role is to facilitate business decisions, not just to inform on the law, in part because so much technology is available to get to the point of “what is the law.”

As new technologies are implemented, the focus should be on “humanizing the extraordinary” and “systemizing the ordinary.” In other words, use humans for creative thinking, forming relationships, integrating unrelated concepts, and understanding emotions and human irrationality, but use technology for routine and redundant tasks, calculations, searches, and sequence and pattern identification. Leveraging new technologies can make a target more appealing to potential buyers, can provide targeted intelligence regarding who may truly be interested in a deal, and can result in time and financial efficiencies that are not possible with outdated methods.

5. Survival of the Fittest: Antitrust Investigations Start to Finish

This presentation addressed developments in the law that have been seen over the past year in antitrust litigation. Several key cases involving hospitals, and several involving physician groups, provide insight into the current state of the law (for example, the Pinnacle/Hershey case, the Advocate/NorthShore case, and the CentraCare Health/St. Cloud Medical Group case).

Although the FTC is the main agency acting in the provider merger space, state attorneys general have also increased review and enforcement activities. The presenters shared some signs to watch for that may determine whether a deal will get close antitrust review. In the hospital context, a “4 to 3” or “3 to 2” hospital acquisition, especially in rural areas where most health care in that area is provided by these players, is likely to see scrutiny. In addition, any deal that sees complaints from a health plan, competing hospitals or physician practices, or disgruntled physicians or other health care practitioners is more likely to face scrutiny. And as always, parties should be attune to documents that raise red flags (for example, an e-mail that discusses the ability of the merged entity to have better leverage against health plans in negotiations, or to increase prices). In the context of physician practice deals, red flags include increased payor rates through: actual price increases, especially with no arguable increase in quality; moving acquired physician practices to existing contracts with higher negotiated rates; and moving ancillary services to higher hospital-based rates.

In addition to identifying red flags, the presenters also outlined some factors that can serve to mitigate the risks, including the presence of strong competitors in the same market (even if the market is concentrated), growing competitors, the existence of supportive or neutral payors and third-parties, and a clear, pro-competitive, and well-documented rationale for acquisition. In addition, educating leadership and management about the potential for risk, and what that means regarding the investments needed to position the deal for the best chance of getting through an antitrust review, is a critical step for a successful process.

6. Until Death Do Us Part: Health Information Technology Considerations in Transactions

This presentation addressed issues to consider related to health information technology when evaluating and conducting diligence on transactions. Health information technology provisions are essential and are growing in importance; more and more, software and technology are underpinning the care process and are not just afterthoughts. Also increasing with the importance of health information technology in care are the concerns around security risks and the privacy of health data. As relationships become more complicated (e.g., ACOs, clinically integrated networks, population management entities, care management services), the necessity for careful health information technology diligence is increasing as well.

Some key points to consider when evaluating a target include: ensuring that business associate agreements are appropriate and that the same business associate agreement template has not been used for all relationships; thinking about licensing concerns, e.g., whether the technology vendor will provide transition services to the new entity; which party is going to be responsible for ongoing technology; and, if there is a problem, who will bear the responsibility and costs of resolving them. Further, entities should consider (both for themselves and any targets) whether there are other entities or individuals with whom they have previously shared data, whether duplicative copies of data have been destroyed as appropriate, and whether policies, as well as clear procedures, are in place to address these types of concerns. Finally, organizations should be keenly aware of privacy and security concerns, including whether a HIPAA-compliant security risk analysis has been conducted and updated as required (remembering that this is different than a gap analysis and is one of the first things OCR will ask for in the case of an investigation or audit), and that breach reports should be requested and reviewed (and that the absence of any breach analyses or reports is actually a significant red flag).

7. MACRA Changing Considerations in Health Care Transactions: Understanding the New Law and Its Ramifications

Much has been written and presented on the complex concepts of MACRA, MIPS, and APMs. This presentation gave a clear, helpful overview of some of the key components of this framework. In short summary, the presenters explained that: MACRA replaces the sustainable growth rate formula and focuses on payment for quality and risk shifting; MIPS involves measurement against peers; and APMs entail significant downside risk. Despite complexity and downsides, these programs are important for providers to understand, not just in the Medicare context, but more broadly as well, since they are likely to drive payment across the payor mix. As providers become familiar with the standards and requirements that are available, providers should strategically consider how to get their scores as high as possible. Note that scores will be publicly available, so they will have implications for providers’ brands. Providers should closely evaluate which measures to report, and should consider using those where they are scoring better than everyone else, and not necessarily where they think they will just score highly (as many other providers may score highly in that category as well, thus reducing its impact on any particular provider’s score).

8. Establishing Commercial Reasonableness in an Unreasonable World

This presentation provided an overview of key commercial reasonableness considerations, including how to prove commercial reasonableness and pitfalls in this type of valuation. The lecture began with an overview of relevant case law, including Covenant Medical Center, Tuomey and Bradford. The overall difficulty in commercial reasonableness is that there is no single, concrete definition. Thus, providers should: (1) document the need for a physician’s service (at the beginning of a transaction and throughout); (2) ensure that duties do not overlap; (3) ensure that the physician performing duties is qualified (but not overqualified) for the duties; and (4) to the extent possible, use standard compensation provisions and standard contract terms (e.g., not a 30-year contract).

9. Provider-Based Status in the Context of Transactions

This presentation provided an overview of the current regulations that govern provider-based status. The core regulatory requirements to qualify for provider-based status have not materially changed since they first went into effect in 2002. The recent changes have been to the payment models available, but the underlying requirements remain the same. Given the new importance of qualifying for grandfathered status under the new payment rules, providers may want to consider a more careful read of the underlying regulations to ensure that they remain in compliance and do not lose status for grandfathered locations.

One area of the regulations that may merit closer attention is the definition of “campus.” Historically, providers have leaned heavily on the 250-yard rule. But given the recent changes in the payment rules, providers may want to consider the other prongs of the definition to see if additional locations that do not meet the 250-yard rule could fall under the more favorable umbrella of “on campus” after all. Providers should also carefully consider the details of the regulatory requirements, including the importance of appropriate naming conventions for the provider-based departments. Certain providers have encountered great scrutiny and push-back from MACs for names that include terms such as “affiliate” and have thus been considered not to sufficiently link the department to the main provider. The new payment regulations mean that providers must carefully guard the grandfathered status of their existing off-campus provider-based departments if they want to retain the prior payment structure, so exacting compliance with the underlying regulations has taken on new importance since provider-based status, once lost, cannot be regained.

In the context of transactions, buyers should consider whether they can be paid for services rendered at the acquired site the way that they have anticipated or that the site has been paid in the past, as this could have a significant impact on the financial viability of a deal. Buyers should run the numbers on how they will be paid following a transaction, and should pay careful attention to regulatory compliance as part of their due diligence review.

10. Building a Chassis for Growth through Affiliations

Over the past several years, providers have experienced decreased inpatient admissions, increased outpatient visits, increasing operating expenses, and an uncertain political climate. These factors have led many providers to explore affiliations, ranging from mere co-branding and service line affiliations, to joint operating agreements and member substitutions, all the way to full-fledged acquisitions. The lecturers discussed the use of an affiliation agreement to outline the structure of the affiliation and the powers of each board. For example, the affiliation agreement may set forth that the parent organization has broad powers to determine system branding, system-wide leadership (e.g., CEO), strategic planning and approval of budgets and debt, while the member organizations would reserve power over the member CEO and medical staff members. Affiliations overall can provide several benefits, including shared services and overhead, joint payor contracting, debt restricting, standard IT deployments, and several more.

11. MSO Resurgence in the Post-Merger Mania: Promoting Tools to Link Providers

Implementing and moving forward with a clinically integrated network (CIN) takes time, capital, and strategic partnerships. Management services organizations (MSOs) are playing a larger role in offering providers (including physicians, IPAs, and PHOs) a springboard toward integration. The MSO model appeals to physicians who feel they need to integrate their practice but don’t want to join a large group practice or become a salaried employee of a hospital. MSOs can provide a number of joint services, immediately, that will not run afoul of the antitrust laws, such as back office management and administrative services that provide real value to CIN participants, particularly during the pendency of the CIN trying to achieve true clinical integration.

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