Becker's Hospital Review

56 Transaction & Valuation Issues "The one big potential exception to this is Medicare-related liabilities. These can be more difficult to shed and by default follow the Medicare number, if it is assigned to the buyer. In transactions where a tax-exempt hospital or health system is selling its assets, it is fairly common to estab- lish a charitable trust with all or a portion of the proceeds for the purpose of furthering community health needs." Increasingly, the healthcare organizations involved in a transaction will adopt a joint venture model, under which a larger hospital and a smaller hospital both hold ownership in a new entity. Although the larger hospi- tal takes a bigger ownership stake, both parties have equal board repre- sentation within the new entity. Finally, hospitals and health systems can also pursue various "alternative" transaction models that fall short of a full merger or sale. One of those structures is a management services agreement, under which a health system usually provides management services to a hospital for a fee. This model has various advantages such as better contracting services for the hospital, but it also has potential downsides such as less success in real- izing scale efficiencies. "There are also quite a few health systems that utilize a joint operating model, where the parties to the combination contractually agree to al- locate governance and economic concerns in a specific way without ac- tually moving assets or ownership from one legal entity to another," Mr. Walker says. "The parties are almost fully integrated from an operational, financial and governance perspective, but retain some vestiges of their separate legal existence. This is a flexible structure with lots of potential for customization, but is certainly not uncomplicated from a legal per- spective." 6. Hospitals and health systems are increasingly choosing non-ownership collaborations. Rather than executing full-on mergers or acquisitions, some prominent healthcare organizations such as the Rochester, Minn.-based Mayo Clinic and the Cleveland Clinic have decided to pursue non-ownership collaborations and affiliations, allow- ing smaller hospitals and health systems to retain local control while giv- ing them access to a larger organization's resources and expertise. According to Hammond Hanlon Camp, healthcare providers are pur- suing non-ownership partnerships more and more in order to reap the benefits of joining forces without going through an actual merger and re- linquishing ownership. This trend goes hand-in-hand with organizations becoming more strategic in their transaction decisions; it's also particu- larly applicable where antitrust concerns exist, according to Mr. Beith. "Systems affiliating with local hospitals are learning that ownership is overrated," says Mr. Lupica of Newpoint. "Knowing and achieving mu- tual objectives gets both parties more traction than squabbling over who holds the keys." 7. Physician medical groups remain "hot commodities" for health systems, hospitals and public companies, according to irving levin and Associates. Hospital acquisition of medical groups continues to grow, and overall healthcare sector deals involving physician medical groups increased five percent year-over-year to 20 deals in the fourth quarter of 2013. That's also a 33 percent increase from 15 deals announced in the third quarter of 2013. However, reports from Deloitte and Jackson Healthcare have stated medical group acquisitions declined after reaching a peak in 2011, which saw 108 deals between hospitals, independent delivery systems and other acquires. By contrast, in 2012, there were only 70 reported medical group acquisition deals. However, Jackson Healthcare reported physicians who identified as hospital-employed rose from 20 percent in 2012 to 26 per- cent in 2013. 8. Consolidation will give hospitals and health systems more bargaining power with payers. As hospitals continue to join forces, they will gain more bargaining power with health insurers, according to a report from Moody's Investors Service. 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