Why Start Down this Road? What is Happening and Why?

Transcription

1 Healthcare Consolidation, Merger, Affiliations What are the Differences and What Does this Mean to my Organization? Why Start Down this Road? What is Happening and Why? Healthcare acquisitions, mergers, affiliations, joint ventures shattered records in 2014 and 2015 Senior housing is leading the way transactions in both for profit and not for profit sectors Senior living market is still somewhat fragmented compared to hospital and insurance providers. On going growth strategies to achieve scale for contracting and efficiency, geographic coverage, continuum of care depth, future security. The need to expand use of technology, address management succession and expertise issues driving change in the industry Savvy consumers of the future demanding innovation Market motivated to manage larger populations as industry move towards risk contracting and population health initiatives It is about developing the right strategies and networks that benefit your community, seniors and their family needs 1

2 What Communities Are Saying This fits a space that is complimentary to our other locations. We see the affiliation as a way to strengthen and preserve the historic mission of a faith based group that has a great history. I think there is a cultural fit and the same values and goals. Steve Proctor CEO, Presbyterian Senior Living We are looking forward to sharing and expanding our expertise to better Cathedral Village to continue to provide the highest quality services and care. Cathedral Village CEO Dennis Koza Senior housing news Consolidation to rise for non profit Senior Living Operators in /15/15 Jason Oliva There Are Options Entity types and issues are very different and sometimes confusing to board of directors Mergers Acquisitions Consolidation For profit and not for profit joint ventures Professional Service and other contractual arrangements and other Alliances Help! What does this mean to me? 2

3 An Exempt Organizational Chart Charity 501(c)(3) 100% 100% 100% 100% 100% 60% 40% International Operations Foreign Captive Insurance Company Low Income Housing Foundation Senior Housing JV JV 100% 100% 80% Protection of Tax Exempt Status Unrelated Business Income Tax Control Private Inurement / Private Benefit 3

4 Merger Concept: One entity legally becomes part of the surviving The surviving corporation takes title to all of the assets and assumes all of the liabilities of the non surviving entity The acquisition of another company Advantages: 1. Adding value to the combined entity by eliminating redundancies and improving efficiency. 2. Removing a competitor from the marketplace. 3. Acquiring existing business and clinical processes which would be otherwise expensive to develop independently. 4. Accessing talented managers and employees without the need to engage in an extensive search and hiring process. Merger (continued ) Pitfalls: 1. Potential clashes between organizational cultures. 2. Apprehension among employees of both organizations about job security. 3. The purchase of the organization is the easy part; integrating the purchased organization is difficult. 4. Requires numerous people on both sides of the aisle to agree and be on the same page. The process to getting agreement can distract from the day to day operations of both organizations. 5. Once the decision is made, there is really is no chance of going back. 4

5 Merger (continued ) Key Issues: 1. Joint venture structure & choice of entity. 2. Tax planning if a for profit is involved. 3. Resource contributions. 4. Employee issues. 5. Control and divorce planning. Merger (continued ) Mechanics The board of directors of each precursor organization must develop and approve a plan of merger consistent with relevant state law The plan of merger also must be submitted to the voting members, if any, of each organization for their approval While the conditions for member approval vary from state to state, statutes generally require a vote of two thirds to effectuate the plan merger a number that can be difficult to reach for practical and political reasons 5

6 Acquisition of Dissolving Corporation s Assets Overview One entity dissolves and transfers select assets to acquiring corporation The acquiring corporation takes title to select of assets, and assumes select liabilities, of the dissolving entity. Benefits/Considerations May be strategically preferable Potentially less efficient transaction No transfer by operation of law Ability to shield from future liability BUT depends on structure of deal and set asides Acquisition of Dissolving Corporation s Assets (cont ) Mechanics The board of directors of dissolving organization must approve Voting members, of dissolving organization, if any, must approve Because the successor entity is merely absorbing the assets of another organization, a vote of the membership and accompanying state filings are typically not required for that corporation 6

7 Consolidation Overview Creation of new entity (new incorporation, Tax Exempt Status Application) Both predecessor entities dissolve and transfer assets or both entities merge into new entity Benefits/Considerations May be strategically preferable However, also more complex Mechanics Follow process for merger/asset transfer for all entities Why Consider a Subsidiary? Different exempt purpose Different boards from original organization New grants or revenue sources Liability protection Purchasing an existing business Unrelated business Future spinoff or sale Compensation and incentive plans State issues 7

8 Why NOT to Establish a Subsidiary? Cost of setup and maintenance of additional entities Intercompany accounting Short lived projects / lack of long term sustainability Public perception of entities State filing fees Intercompany Transactions Allocating common expenses Compensation and benefits of shared employees Allocation of space, utilities Overhead allocation of insurance, supplies, etc. Reporting compensation Fundraising entities Management entities IRC 512(b)(13) payments 8

9 Subsidiary Questions Taxable or tax exempt? If tax exempt, charitable or noncharitable? Flow through? 100% owned? What state should it be organized in? How much board overlap? Insider transactions Capitalization options Exempt Org Charitable Other C Corporation S Corporation Trust LLP General Pship Limited Pship C Corp Tax Paying entity Flow through entity Consolidation Form 1120 may be filed Allocation of surtax exemptions on Forms 1120, Schedule O Flexible year end Restrictive allocations Form 1065, no consolidation allowed Tax is paid at the member/partner level Year end determined based on year end of members/partners Flexible allocations 9

10 Limited liability for all members from debts Single member entities are allowed GP has personal liability for debts Must have multiple partners Can elect to be treated as a corporation Form 8832 SMs are generally disregarded entities; may have state filings State may restrict business types allowed to form as s Joint Ventures Concept: A joint venture is an arrangement with another company to cooperate in a way to improve the prospects of both businesses. The joint venture is created an number of ways through a formal agreement that identifies the roles, responsibilities, and money flows of each company. Advantages: 1. Entering related businesses that previously were difficult to enter 2. Gaining access to expertise without the need to hire more staff 3. Pooling of resources by both organizations 4. Sharing the risks of operations, risks, and financial responsibility 5. Establishing a presence in new markets 6. Unlike a merger, a joint venture can be unscrambled 10

11 Joint Ventures (continued ) Pitfalls: 1. Setting unrealistic objectives that are not clear in advance and are not aligned to a common goal 2. Coping with differing cultures, management styles, and working relationships that are in each organization 3. Managing communication with senior management so there is strong and consistent understanding of the objectives of the joint venture 4. Misunderstanding the roles of each company which causes poor tactical decisions 5. Requires excellent relationships between the senior management of each organization 6. Risks of disputes or divorce: 7. Risks of giving joint venture exclusive rights Concept: Professional Services Agreement (PSA) & Other Contractual Arrangements A formal contract between the community and a health system. A PSA is created through four basic agreements: a. Traditional Contracts for specific services & health system typically bills for services. b. Global Payment Contracts for broader disease/diagnosis categories and health system bills for services. Bundled Joint program? c. Practice Management Health system employs the providers while the community would employee the non caregiving staff. Health system bills for services. Note, this is not a common structure. d. Hybrid Community and health system mix and match services for clinical and administrative services. Note, this is a rare model. 11

12 Pitfalls: Professional Services Agreement (PSA) & Other Contractual Arrangements (cont ) 1. If structured incorrectly, the goals of the community and health system will not be aligned. 2. Community may not be comfortable giving up significant control over billing, management, and staffing decisions. Is there Trust? Is there Data? Other Forms of Combinations and Alliances Overlapping Boards or Shared Members Program Acquisition Shared Space and Resources Co location Shared Staffing Group Vendor Relationships 12

13 Some Strategic Questions to Consider 1. What is the primary reason for considering a JV or merger transaction (e.g., financial, operational)? 2. Will the transaction further the mission of the organization? 3. Will the transaction further the strategic plan? 4. Will the organization expand its current market share? 5. Will the organization be able to use the transaction to enhance operations? 6. Will the transaction result in cost efficiencies? Have you started this discussion? Education of the board Discussion with Board to consider exploring transaction options Management will evaluate alternative options and determine which direction to recommend. Management will bring the Board a recommendation direction to decide a course of action. 13

14 Wrap up Clear vision, goals and communication are key No one size fits all form for teaming and other combinations of resources Do your due diligence Understand what liabilities you are retaining, avoiding, or accepting Document that understanding in clear terms If things do go wrong, share the consequences Thank you for your time and participation! Lisa Hoglan, CPA Partner (253) Angie Fidler, CPA Senior Manger (206)