Doug Hastings, Chair Emeritus of Epstein Becker Green, in the Washington, DC, office, was featured in an article titled “Legal Perspectives on Trends in Capital Access.”
Following is an excerpt:
“More and more, discussions about capital access are less about bricks and mortar,” says Douglas A. Hastings, JD, chair of the board of directors of Epstein Becker Green, PC, and a national expert on accountable care organizations (ACOs) and payment and delivery system reform.
“As hospitals face competition from consolidating hospital systems, increasingly large medical groups, companies with retail clinics, and others, access to capital has become less about the need for short-term cash and more about the need for capital for a longer-term survivability strategy,” Hastings says. “In many instances, what is triggering both change-of-control and non-change-of-control transactions today is strategic positioning for the volume-to-value transformation.”
In a conversation with hfm, Hastings discusses what to consider in determining whether to affiliate with another organization to improve access to capital, and the emerging trends in change-of-control and non-change-of-control transactions in today’s healthcare environment.
hfm: What are some important considerations in determining whether to affiliate with another organization to improve access to capital or support capital needs?
Douglas Hastings: One consideration is the immediacy of the need for capital—whether it is a short-term or a long-term need. If there is an immediate need for capital for either short-term survival or a costly project that can’t wait, it may drive the organization toward a sale or merger, versus a longer-term strategy that would keep the organization independent but better position it in the marketplace for revenue sustainability or growth over time. While a longer-term, market positioning strategy would not preclude a merger, a longer time horizon for capital might also lead to other forms of collaboration, such as through an ACO or network or contractual arrangement in which the parties are working closely together but haven’t merged.
hfm: Are certain types of affiliation transactions becoming more prevalent among hospitals that are seeking to affiliate primarily to boost their access to capital or support capital needs?
Hastings: Yes, both in terms of new types of transactions and new types of partners, and there’s a return to certain kinds of transactions we’ve seen at earlier stages of healthcare reform.
For example, we are seeing a re-exploration of non-change-of-control-type partnerships, collaborations, and affiliations, both between for-profit and not-for-profit organizations and among not-for-profits. We saw many of these in the 1980s and 1990s as a response to early managed care efforts. More and more, today, parties that are sufficiently capitalized in the short run are looking for ways that they can joint-venture or collaborate with other strong organizations to better position for a population health environment. That said, we’re still seeing a solid number of change-of-control transactions, too, involving both not-for-profit and for-profit organizations. Some of these deals involve two relatively equally positioned hospitals coming together to form a new system where they both become, in a sense, subsidiaries of the new system they form.
There also is renewed interest in the potential for hospitals and private-equity healthcare players to work together, which could simply take the form of some sort of capital infusion on a minority basis to a not-for-profit or could involve the acquisition and conversion of a not-for-profit hospital to a for-profit. Recently, we have seen large health systems partner with for-profit hospital companies or private equity players to create funds to purchase and operate smaller hospitals. But since the private equity company would not historically be in the hospital-operations business, like for-profit hospital companies are, this raises the question: How does that private equity investor make money by investing in a not-for-profit hospital or any hospital? How can the company turn that investment into a profit and ultimately have an exit strategy? These are questions that are being explored through some innovative arrangements.