Facing Potential Challenges in a Joint Venture

LegalDuring The Ambulatory M&A Advisor’s recent webinar on joint ventures between hospital health systems and urgent care, Joshua Kaye, partner with the law firm DLA Piper, and Lee Resnick, MD, CMO, of WellStreet Urgent Care address the important topic of potential challenges that both parties can face during the joint venture process.  Resnick and Kaye examine both the regulatory and operational sides of the issue so that parties entering joint ventures are able to see the situation from all angles.

According to Kaye, one of the key challenges of a joint venture will circle around the terms of the ongoing governance between the parties.  In particular, the level of control that one party may have, relative to the other party.

“That can come from anything from the board composition and who controls the board, to certain decisions with respect to key matters such as the ability to bring on any additional debt, or entering into payor contracts, or entering into contracts with affiliated parties.  All of those ongoing types of operational governance decisions are things that need to be sorted through between the two joint venture partners as part of the negotiation of the operating agreement,” Kaye says.

“In many instances, the parties, particularly if it is their first joint venture, without having had any type of a historical relationship, can come to the table with a very different set of expectations between each other.  The ability to collaborate and work through those issues, is in many instances, a challenge.”

Additionally, Kaye adds that questions around whether or not the joint venture is really focused on a single site, or, is the venture about a broader platform, for which the parties are going to agree on mutual exclusivity can be a challenge as well.  In some instances, exclusivity can be a tremendous competitive advantage, but in other instances, it could be a tremendous challenge as well if you are not partnering with a system or a management company that sees and views the same type of growth as the other party.

Capitalization is also a situation that can be presented as both a challenge and potential liability.

“How much funds will each party contribute to the venture?  In some instances, a health system may feel that its brand itself should be the value that is being contributed.  There are potential healthcare and regulatory fraud and abuse concerns, however, that could implicate.  That is not something that should be treaded on lightly.  At the least, it should be addressed to ensure that the parties are looking at it from the same perspective, in terms of making sure that the company is properly capitalized, and equally important, in the case that one company is putting in more capital than the other, that they are not tripping across any fraud and abuse concerns by doing so,” Kaye says.

The EHR/EMR system is an area that both Kaye and Resnick address in their views on challenges.

“The EHR and how integrative that system will be to the urgent care platform relative to the hospital, may also be a challenge that needs to be sorted through.  Will the urgent care system, particularly if it is already operating, continue to have its own EHR system, or is it going to be required to migrate onto the hospital system.  If so, how will patient records and the ownership of those patient records, be handled both during the venture, and equally important, if there was a separation, how will they be addressed,” Kaye says.

Resnick says his views on the issue come from a bit of a different perspective than Kaye’s as an operator and a clinician.

“I think the operational challenges fall into two main buckets. One is what I call “Org structure,” and the second being ”work flow.”  In org structure, you essentially have to have an organizational structure to support the relationship.  It is hard to gage exactly what that means and how many more resources you need to service that relationship.  A lot of that depends on whether you are the sole provider of urgent care services or one of many.  In our situation, we are the sole provider for urgent care services in our healthcare partner.  We have to service that relationship in a number of ways.  That changes your org structure and adds corporate overhead.  The bottom line is that there is a significant cost to conserving the relationship.  You have to consider that cost moving in because you want to understand what the return is on that investment,” Resnick says.

Perhaps a bit more important, is the impact to urgent care work flow, he says, adding that in his opinion, urgent care work flow and health system work flow are diametrically opposed.

“Quite frankly, urgent care was founded on the principle of doing healthcare differently, not doing it the way that health systems do it.  While health systems are doing a much better job recently of improving efficiencies, and improving the flow of patients through the network and through encounters, they are still a far way off.

That is critical, and the reason why it is costly to the urgent care can be shown through simple math.  At the end of the day, if the work flow, including the EMR adds five minutes to patients, and you see 50 patients per day, you have lost 250 minutes of productivity.  Time is money, very much so in the urgent care space where every patient counts and the number of patients that throughput is entirely dependent on work flow and efficiency,” Resnick says.

Specifically to the EMR issue, Resnick says that health system EMRs are not designed around work flow.  They are designed around data gathering, meaningful use, and government regulations.

“This creates a tremendous problem for an urgent care operator if they don’t have experience doing it.  It takes some time; it takes a level of sophistication to take a health system EMR and make it urgent care friendly.  If you don’t have the energy to do that, then don’t get into the game, at least if their requirement is to integrate their EMR,” Resnick says.

As a final thought, Kaye says that going into a venture, it is imperative to know that if it doesn’t work out,  what restrictions if any, would be imposed on one party to be able to sell their interest to either a private equity fund or another strategic buyer.

“Health systems can be very sensitive in terms of who they are partnering with and that may impose restrictions on a joint venture partner’s ability to sell,” Kaye says.

For an entire look at the webinar, click here.

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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