In the past three to four years, health system transaction activity has significantly slowed, due, in large part, to the unavoidable COVID-19 response efforts hospitals faced. Now, in this post-pandemic era, hospitals are reemerging and reengaging as active players in the transaction sphere — particularly when it comes to joint ventures, as McGuireWoods discussed during an Aug. 2, 2023, webinar. Expect this upward trend in hospital joint venture arrangements to continue, especially given the need for alignment among healthcare entities in this current climate with a focus on value-based care and clinical collaboration.
Read on for five key things to know about the landscape impacting hospital joint venture arrangements.
The economic landscape provides ripe opportunities for hospital joint ventures. The current economic landscape presents daily challenges that health systems, and the healthcare industry as a whole, continue to face. It is no surprise that current operating margins for health systems are extremely tight. In this post-pandemic era, health systems are experiencing increased staffing costs, inflationary pressure, supply-chain disruptions and higher rates of uncompensated care, all while facing a cessation of COVID-19-related funding and a decline in inpatient admissions. These drivers, coupled with decreases in reimbursement and higher capital requirements, create a unique opportunity for hospitals to structure strategic arrangements with joint venture partners designed to tackle these challenges.
Health systems are experiencing decreased revenue and stagnant demand for employment across specialties while also facing an increased demand for higher salaries. The revenue across many health system specialties has decreased while the average salaries across these specialties have increased, creating economic hurdles for health systems.
Collaboration among providers and suppliers is key. Due to the challenges referenced above, collaboration and alignment are critical to ensuring patients receive the most comprehensive clinical care. Health systems are uniquely positioned to capitalize on value-based care initiatives due to their inpatient, outpatient and ancillary service line offerings, as well as their relationships with physicians and payor alignment strategies. These attributes are attractive to joint venture models that allow healthcare providers to strategically align and round out their service offerings while remaining prominent players in the market. One such area of collaboration and alignment is outpatient growth. The more outpatient options available, the more flexible health systems can be in taking advantage of this growth and collaboration to establish themselves as leaders in the market while also providing increased satisfaction among the physician and patient populations.
Health system joint ventures are not “one size fits all.” Alignment strategies, including joint ventures, come in a variety of forms. The form that is right for each system is based on the clinical and business challenges the system seeks to combat. Factors such as organization size, geography and payor/provider relationships, among others, often shape the structure of joint ventures and can offer flexibility with regard to such structuring. While joint ventures still take the shape of a “traditional” model, which often involves the creation of one or more new legal entities owned by the joint venture partners (e.g., surgery centers), partial joint venture strategies—such as clinically integrated networks, co-management agreements, real estate arrangements or co-located service line arrangements—are on the rise and provide unique opportunities for alignment across provider types. These alignment strategies need not be mutually exclusive; however, each such strategy has its own regulatory, antitrust and financial considerations that health systems must consider.
Thoughtful regulatory analysis is necessary to ensure health system joint ventures are appropriately structured. The partnership of two healthcare providers through a joint venture arrangement undoubtedly provides valuable clinical alignment opportunities; however, such partnerships are also subject to a complex web of legal and regulatory considerations. Accordingly, joint venture partners must carefully analyze and navigate healthcare laws, including the federal Anti-Kickback Statute, the federal Stark Law, corporate practice of medicine laws, licensure laws and their state law counterparts. Additionally, the Office of the Inspector General has taken an interest in the various alignment strategies, providing guidance on how certain arrangements can and cannot be structured. Further, all joint venture arrangements also must consider heightened antitrust scrutiny, which, in recent years, has blocked several proposed arrangements. Understanding and analyzing these legal complexities from the outset will best ensure a compliant collaboration that achieves beneficial goals for health systems, physicians and the patient population.
While COVID-19 and the financial landscape have certainly posed challenges for health systems throughout the past several years, the current backdrop provides a unique opportunity for hospitals to align with other providers to round out their current service line offerings and increase collaboration and alignment among their providers for the benefit of their patient population. Joint venture arrangements provide flexibility in structuring to achieve those goals but must be carefully analyzed at the outset to ensure compliance with all applicable laws. Accordingly, hospitals looking to joint venture should consult experienced legal counsel prior to entering into the alignment strategies discussed in this article.
For more information regarding the hospital/health system space or any other healthcare sectors, please contact one of the authors.