Issue link: https://beckershealthcare.uberflip.com/i/289185
58 Transaction & Valuation Issues have already merged to form large entities capable of putting significant pres- sure on providers, this development will make the balance of power more equal, according to Moody's. However, a recent report from consulting firm Alvarez & Marsal stated con- solidation will give hospitals unprecedented pricing power and lead to mas- sive inflation. Hospital and health system acquisition of physician practices and other outpatient facilities is of particular concern, since profit margins are higher for outpatient services for commercially insured patients, accord- ing to the report. According to the Medicare Payment Advisory Commission, Medicare payments rates for surgeries are 74 percent higher in HOPDs than in ambulatory surgery centers. Overall, the report concluded consolidation could lead to a few providers gaining a stranglehold on hospital inpatient, outpatient diagnostic imaging and laboratory services. 9. Antitrust enforcement will continue to be a significant is- sue. Hospitals and health systems executing transactions continue to face antitrust scrutiny from the Federal Trade Commission and state agencies. One high-profile healthcare case involving Boise, Idaho-based St. Luke's Health System's 2012 acquisition of a 40-physician medical group was decid- ed recently: U.S. District Judge B. Lynn Winmill ruled St. Luke's violated anti- trust law when it acquired Saltzer Medical Group in Nampa, Idaho. St. Luke's was ordered to fully divest itself of the medical group's physicians and assets. Healthcare organizations lack clear guidance on how to pursue the triple aim (improve the health of populations, enhance the patient experience of care and reduce the costs of care) along with the necessary structural models to achieve it without violating antitrust law, says Steve Messinger, manag- ing partner and board member of ECG Management Consultants, a leading strategic healthcare consulting firm. "We have so many different agencies at the federal level and then there are the state agencies," he says. "The boundaries for antitrust enforcement have always been a tiny bit vague. The margins on the vagueness now are huge. Organizations are flying blind." However, Mr. Beith of Cain Brothers says the FTC has expressed more open- ness to market consolidation where "there is a compelling case to increase efficiencies (reduce costs), improve quality and access and where payors are supportive." He cited the CHS acquisition of two hospitals in the Scranton, Pa., market as an example. 10. Hospitals and health systems need to consider several fac- tors to ensure a transaction is successful. In order to minimize the odds of running into antitrust issues and other problems, healthcare orga- nizations preparing to execute transactions need to consider several factors. For instance, before initiating a transaction, they should ensure their board members are aware of their fiduciary duties under state law. Among other things, board members must carry out a full investigation of relevant details, ensure fair market value and evaluate alternatives and any competing offers. They must also detect and avoid all conflicts of interests, keep discussions about the transaction confidential and consider the implications the deal will have for the organization's mission. "Although the basic principles are similar, many of these issues vary on a state-by-state basis," says Mr. Walker of McGuireWoods. "Different states have taken different positions on the level and requirements for approval of these transactions." Hospitals and health systems must also conduct pre-transaction diligence, which includes ensuring its relationships with referring physicians and those physicians' family members don't violate the Stark and Anti-Kickback laws. "Our recommendation is hospitals as a good business practice and regard- less of whether they are contemplating a transaction or not, should carefully review all their physician relationships to ensure they are compliant," says Mr. Beith. "In addition, what may have been perceived to compliant at one point, may no longer by compliant under increasingly stringent regulations." Finally, healthcare organizations looking to carry out transactions should identify and quantify other key liabilities and concerns such as pension plan obligations, collective bargaining arrangements and real estate leases, which could have provisions that can significantly impact potential deals. Mr. Lupica of Newpoint says hospitals and health systems need to keep in mind what's truly important in executing a transaction. "So many of our clients begin by asking, 'How many seats do we get on the new board?'" he says. "Not the right question. Reserved powers trump the number of seats because they define what power resides in those seats. More importantly, post-closing contractual commitments trump all." He advises that "success begins at your first meeting to consider affiliation." "Set firm objectives with input from your stakeholders, and then carry them through the RFP, the entire negotiation, and the exact wording of the defini- tive transaction agreement," he says. n FTC Revises Hart-Scott-Rodino Premerger Filing Requirements By Helen Adamopoulos T he Federal Trade Commission has released revised thresholds for determining whether companies must notify federal an- titrust authorities about a transaction under the Hart-Scott- Rodino Antitrust Improvements Act. The HSR Act requires companies to notify federal officials if the size of the parties involved and the value of a transaction exceed the filing thresholds, and the FTC revises those thresholds annually based on changes in the gross national product. Although HSR filing fees have not changed this year, the thresholds used to calculate the fees have also increased. Here are the new 2014 thresholds and filing fee requirements, which take effect in February, 30 days after their publication in the Federal Register. 1. The transaction size threshold has increased from $70.9 million to $75.9 million. 2. The "size-of-person" thresholds have increased to $15.2 million in total assets and or annual net sales for one person and $151.7 million for the other person. 3. Transactions valued in excess of $303.4 million must be reported even if the size-of-person thresholds aren't met. 4. For an acquisition valued at $75.9 million to $151.7 million, the acquiring person must pay a filing fee of $45,000. 5. For an acquisition worth $151.7 million to $758.6 million, the ac- quiring person must pay a $125,000 filing fee. 6. For an acquisition with a value of $758.6 million or more, the ac- quiring person must pay a $280,000 filing fee. n