In late March 2013, SCL Health System, a faith-based, nonprofit health care organization based in Colorado, and Univita Health, an experienced national provider of home-based care management, formed an affiliation to provide a smooth continuum of care for certain acute-care patients through discharge and during their recovery at home.

SCL and Univita are at the forefront of a growing trend in population health management strategies to decrease readmissions, rationalize the discharge process, establish care transition protocols and reduce lengths of hospitalization. These trends are driven by the push to look beyond the fee-for-service model to pay for performance.

Affiliations like the one between SCL and Univita may provide a unique opportunity for hospital systems and their partners to collaboratively access and develop a new business line. Such affiliations are generally structured as contractual arrangements or joint ventures and may be an effective way to measure patient impact. 

However, to be successful, the parties must address unique challenges on the legal, regulatory and business fronts, and are well-advised to engage in careful advance structuring and planning.

Choosing a Partner

It is vital to choose the right partner. Careful discussions and planning up front can allow both parties to understand how their cultures and values line up. This is particularly important when the two parties include a for-profit and a nonprofit entity, or when one party has a faith-based mandate. The planning process should move beyond ensuring a personality or culture fit: The parties should carefully think through and implement a governance structure and oversight process that will ensure operational efficiency and flexibility and minimize discord.

With a two-party joint venture, in particular, there is a premium on consensus. Often, one party becomes responsible for day-to-day control, working within mutually agreed budgets, policies and protocols, while both parties reserve the right to approve significant actions. These could include approval of capital and operating budgets, strategic transactions, and liquidation or dissolution of the venture. The parties will want to determine the scope of their shared governance and establish an escalating dispute settlement process that will facilitate a mutual resolution if a dispute arises.

Building a Structure

The affiliation will need to be structured carefully to comply with applicable laws, including the federal antikickback statute (42 U.S.C. §1320a-7b) and the federal Stark law (42 U.S.C. §1395nn), as well as state laws and applicable regulations. The Office of the Inspector General views joint ventures in particular as susceptible to fraud and abuse if the parties are in a position to make or influence referrals directly or indirectly to the other party or the jointly held company.

If the transaction cannot be structured to fit within the safe harbors available under the antikickback statute (which is often the case for these types of transactions), the arrangement should be structured to mitigate what the OIG views as "suspect features" of impermissible arrangements. It's important to obtain an independent appraisal of the arrangement from a valuator who is sensitive to the unique regulatory concerns of health care transactions.

Conducting the Business

Tax planning is also important, particularly if one party is a nonprofit health system that may become subject to business income tax due to the venture. A nonprofit partner will want contractual protections allowing it to preserve its tax status over the life of the affiliation or withdraw if need be. Bond or other financing covenants should be reviewed for compliance. One party's desire to consolidate financially with the combined venture may impact relative ownership and governance. The parties also will need to carefully review and comply with licensure and certification processes under state law.

It is also important to consider how the affiliation will affect each party's current or future business plans. Commitment is typically ensured through noncompetition and non-solicitation arrangements under which the parties agree to limit their individual activities within a defined geographic region to the extent those activities may compete with the venture. This can be combined with a "right of first opportunity": The affiliation has the right to pursue relevant business opportunities in the region before either party pursues the venture for itself.

The parties also should consider mutual confidentiality restrictions, compliant with applicable federal and state privacy and security laws including the Health Insurance Portability and Accountability Act. Delineating these restrictions may prove to be challenging, but it is essential that the parties do so at the outset.

Unwinding the Structure

Another key point in negotiation is the restrictions on transfer or assignment of interests as well as the exit strategy of the parties. A contractual affiliation is typically the easier structure to unwind, subject only to the previously agreed upon noncompetition obligations. In a joint venture, more consideration must be given to what will trigger a dissolution of the shared entity, and, more importantly, how the parties will extricate themselves. In certain circumstances, one party or the other may want to unwind the affiliation but continue the business on its own, by buying out its partner for an appraised, fair market fee. A "put/call" right or other unwind mechanism may define this process.
The drive for care coordination is pushing disparate providers to develop innovative, cost-efficient, patient-centered care delivery models. With careful planning, savvy hospitals and post-acute care executives can transform the challenges of the current health care environment into opportunities.

Chris Donovan is a partner and Adria Warren is senior counsel in the Boston office of Foley & Lardner LLP.