Critical Considerations in Healthcare Affiliations

by Foley & Lardner LLP

The trend of affiliations between healthcare providers (we use the term “affiliation” to include all manner of transactions, including mergers, acquisitions, joint operating arrangements, etc.) continues at a rapid pace. Continued economic pressure brought on by decreasing Medicare reimbursement and the perceived need for scale and diversification of service offerings have healthcare providers, including many hospitals and health systems, across the country engaged in all manner of affiliation discussions in hopes of increasing access to capital, securing relationships with physicians, developing stronger management teams, achieving synergistic cost savings and the like. For many organizational leaders, the issues presented by a possible affiliation are those of first impression. Our experience tells us that prior to engaging in affiliation discussions management and leadership of any healthcare enterprise should gather answers to several critical questions, each of which is detailed below.

Is affiliation the appropriate strategy for our organization?

In the early 1990s, Alan Greenspan spoke of “irrational exuberance” when referring to the bubble. It is safe to say that there are many, today, who are irrationally exuberant about the prospects of affiliation. While for many healthcare organizations, some sort of affiliation may be the appropriate strategy thoughtful consideration must be given to all manner of alternatives prior to settling on a decision to affiliate. This type of analysis is not only sound business practice but, as will be discussed below, is consistent with the various duties that leadership owes to the organization.

What duties, if any, does the executive leadership owe (to the organization or others) when considering an affiliation strategy?

Leaders of healthcare organizations owe various duties to their organizations (and sometimes others, such as bondholders and other creditors) regardless of whether or not the hospital is considering an affiliation. In the context of a business combination, the exercise of these duties becomes increasingly important. Paramount among these duties is the “duty of care” which requires directors and officers to act prudently in light of all reasonably available information in overseeing a healthcare organization’s business and making decisions on its behalf. Specifically, when considering an affiliation, this duty of care requires that directors and officers:

  1. Obtain and consider all information relevant to the potential affiliation partner and the transaction.
  2. Engage the appropriate experts, which may include investment bankers, economists, accountants and legal counsel, and give careful consideration to their advice to ensure that they understand the transaction and its implications.
  3. Ask questions, seek information, probe and be skeptical.
  4. As noted above, consider all reasonable alternatives.

By doing these things, an organization’s directors and officers should be able to invoke the so-called “business judgment rule” which gives deference to their decisions and protects their actions by presuming them to be made in good faith, on an informed basis and in the best interests of the organization.

What approvals and consents must be obtained prior to consummating a transaction?

Healthcare affiliation transactions often present a number of regulatory hurdles and can require the approval or consent of multiple constituencies, not the least of which are the United States and the state (or states) in which the participants to the transaction are located. For example, transactions among competitors of a certain size often require that the participants file pre-merger notices with the Federal Trade Commission and United States Department of Justice under the Hart Scott Rodino Antitrust Improvements Act and to wait for the expiration of a statutorily mandated period of time (usually 30 days). Furthermore, certain states require that the parties to an affiliation transaction, especially those involving tax-exempt organizations, seek the approval of the state Attorney General and, possibly, a local court of equity. Moreover, applicable state licensure and/or certificate of need laws may require additional state approvals. In addition to the above, hospitals and health systems with tax-exempt and other debt may need to seek the approval of bondholders and other creditors. Leadership and governance of an organization considering a transaction is well advised to consult legal counsel and financial advisors early in the deliberation process to understand the full scope of approvals, consents and filings that must be received and/or made prior to consummating any deal.

Healthcare affiliation transactions are complex and multi-layered. An organization considering a transaction is well advised to give careful consideration to the questions outlined above. The answers to these questions will provide leadership with a sound basis for moving forward in its deliberations.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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