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AHLA's Speaking of Health Law
Key Considerations for Joint Ventures Between Hospitals and Specialty Operators
Danielle Bangs, Director, Veralon, and Kelley Taylor Hearne, Partner, Faegre Drinker Biddle & Reath LLP, discuss the growing trend of health systems entering into joint ventures and other forms of partnership with specialty operators. They cover the trends they are seeing in this area, legal and financial issues that need to be worked through as these partnerships are developed, considerations related to management and other ancillary agreements, and post-transaction considerations. Danielle and Kelley spoke about this topic at AHLA’s 2024 Health Care Transactions conference in Nashville, TN. Sponsored by Veralon.
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Speaker 2:Welcome everyone. I'm Danielle Banks, a director at velon . Uh , my work focuses on partnerships and , uh, m and a in the healthcare provider space. I'm joined today by Kelly Hearn. Kelly, do you want to introduce yourself?
Speaker 3:I'm a partner at , uh, bakery drinker, and I'm in the DC office, and my practice focuses on healthcare transactions.
Speaker 2:Kelly and I are , um, we are thrilled to be here today to talk about , um, joint ventures and other forms of partnership between health systems and specialty operators, which has certainly been a trend , um, of in increasing relevance. Um, just to note that, that this session is based , uh, loosely on , uh, a session that Kelly and I jointly conducted at this year's , um, um, a HLA 2024 transactions conference in Nashville. Um, so before we jump in to the discussion, I just wanna lay a little bit of groundwork in terms of what we are talking about when we say partnerships between health systems and specialty operators, whether that's an a SC company, an infusion platform, a home health operator, et cetera. So, so what we mean is a situation where there is shared ownership of, you know, a joint ventured service operating or business between the health system and the operator. And in that there's also , um, shared governance, which I'm sure we'll dig into a bit. And collaborative contribution of the resources and expertise and , um, other key assets and infrastructure to support the success of the partnership. So typically the, the specialty operator will be bringing the management expertise and function, but the health system is also usually bringing some assets, whether those are tangible or intangible could mean real estate, could mean key contracts , could mean , uh, important relationships. Um, but fundamentally both parties are really key to success , um, and realization of the strategic vision for the, the partnership . So , um, as I'm sure many of you listening are familiar with, these are , um, you know , these partnerships are really occurring across the continuum at this point. Uh , we're still seeing lots of focus on some of the longstanding areas for these partnerships. Um, thinking ambulatory surgery, urgent care, home health. Those are, those are good examples. Um, but also , uh, in many new areas that are coming into focus or , um, areas of increasing focus , uh, I think of , um, you know, partnerships with some of the value-based care enablers as an example in this bucket. Um, as well as, you know, things like behavioral health , uh, and other areas that , uh, we are seeing , um, you know, health systems take more of a, a look at partnership as a strategy. And, and some of those , um, you know , I'd say some of those evolving trends and where we're seeing that is really a function of how the industry is evolving , um, and where health systems are, are identifying that they need to fill , fill gaps in competency areas , um, and partnership being a way that can be more efficient , uh, in , in certain instances than developing a new business or service offering or capability on their own. So if you go back to the example of the value-based care enablers , um, you know, health systems increasingly are, you know, acknowledging the importance of, of a high performing physician network with, you know, the, the strong value-based care performance and ability to manage risk into their portfolio. Um, but many acknowledge that they, they don't have , um, among their tool set today the skillset and infrastructure and capabilities to grow their networks and drive performance at the level that they feel they need to in order to meet, you know, the demands of the industry as it evolves. And so that's, I think, really driving some of what we are seeing in terms of partnership interest with , um, that , uh, value-based care enabler segment of the industry. Um, so that's a little bit of context to set this. So Kelly , I'm interested, what are you seeing in, in trends , uh, in this space?
Speaker 3:I , I mean, I , I think it's, what I'm seeing is along the lines of, of what you're describing, Danielle, it's really kind of an expansion of the , um, areas of partnership. You know, when I first started doing these, they were , they did tend to , um, you know, fall within kind of some of the same buckets, dialysis, ambulatory surgery center imaging, and there's just really, you know, an expansion along the entire continuum of care. Um, again, like you, you mentioned, you know, both into , um, post-acute care as well as managed care and value-based care, and then even kind of very , um, specialty niches, you know, particular aspects of women's health. And so I think just like as you mentioned that as systems are realizing, you know, that some of these, you know, are just areas outside of their core competencies, it makes sense when there's a , um, a specialist in that area to really try to maximize the, the care that they can deliver to their patients by partnering with the specialists.
Speaker 2:Yeah , absolutely. And, and I, I think it's important to note that while, you know, both Kelly and I are , um, you know, hitting on the fact that not only are these partnerships increasing in, you know , their, their prevalence and, you know, becoming more common across , um, sort of all areas of the continuum and, and value-based care and managed care. Um, so they're, they're very popular at the moment, but it's important to note that , um, they're, they're not easy and they're not sort of a , a magic bullet. Um, and we both probably work on many, many more of these than actually come to fruition. And, you know, it's worth noting that oftentimes these partnerships fail to produce the intended values . So , um, they're really important to evaluate upfront and maybe, and to think about differently, you know, than how you would think about sort of a, a straightforward acquisition , um, or some other form of transaction. Because fundamentally, these, these partnerships are , um, you know, involve entering into a long-term relationship with another party. Um, and, you know, both parties are gonna have objectives that they will look to achieve, and they may be very different from one another. I think, you know, an obvious example is , uh, in, in the health system specialty operator partnerships, there's often the case that you're blending the objectives of a not-for-profit health system, which, you know, in addition to being not-for-profit, is also also diversified and has, you know, many different , um, healthcare needs and business needs that they're looking to meet. And, and the other party, you know, the, the specialty operator is typically very focused on one kinda niche area and often is, is for profit many times, you know, publicly traded or private equity owned or otherwise investor backed. And so, you know, that has different priorities and objectives from , uh, a financial return perspective. So, you know, I think if we think about one of the things that makes that , that's really critical to ensuring that these partnerships are successful is, is establishing that upfront , um, vision alignment and clarity on what each party is really trying to achieve. 'cause ultimately, like in, like in any relationship or partnership , um, concessions will, will need to be made along the way on both sides. Um, so making sure not only that you have a sort of collective vision for what you all want to accomplish in terms of growth and performance, but also that, you know, each understands and appreciates and respects the, the differing fundamental objectives of each party. And, you know, there's a , um, a pathway to, to balance those , uh, as, as you, you know, operate in partnership for the long term . And I think the other key piece here, which is another one of these sort of , I would say softer, softer considerations is that , um, partnerships just fundamentally aren't always easy, and not all organizations are , um, you know, always oriented towards being able to partner effectively. So I think, you know, really taking a hard look at, you know, from the, both the health system and the specialty operators perspective, whether they are set up to truly partner to make concessions, to compromise, to seed control where appropriate. Um, and, and that, you know, the specific to this specific partnership that there's a solid working relationships with the folks that are involved , um, on both sides that are gonna be sort of driving the decision making , but we see those as sort of kinda foundational , um, factors for making sure you're set up for success. Um, so Kelly, beyond these more foundational issues, what, what are you seeing? What do you see as, as the threshold and the big issues that that need to be worked through as these partnerships are developed?
Speaker 3:I think the main issue, or maybe the kind of the , the threshold issue that, you know, from which a lot of the governance , uh, architecture structure for the jv , um, follows is just control, you know, what level of control is, is gonna be seeded to the specialty provider to manage the service line. And what sort of level of operational control does the health system want to retain, you know, on, on the one hand, one of the primary reasons that a system would undertake a joint venture is because the system is, the service line is outside of its core competencies, and they wanna be able to rely upon the specialty provider's expertise in the area. Um, but oftentimes, you know , uh, health systems have a hard time relinquishing control, you know , particularly where their brand is being used. Um , they'll, they'll wanna have oversight of course, and, and control over clinical and quality matters as it's a reflection on them. And also if , if the joint venture happens to be located on their campus, again, that kind of is an additional , um, factor where it's, it , it's hard for them to relinquish control. And so while, you know, control, obviously a lot of times correlates to the percentage interest that a party is retaining it, it doesn't always necessarily , um, correlate like that. I've certainly seen lots of joint ventures where, you know , the specialty provider has a majority interest, and a lot of times that is the case, even where I've seen systems have, you know, much less than a 49% interest, you know, depending on their leverage in a particular transaction or, you know, again, kind of what level of , um, control they're , they're comfortable with seating. I've seen where those systems have retained a significant number of oversight , um, powers in connection with the joint venture just to main shape maintain that , you know , the sort of oversight that they feel is necessary for, you know, anything that's gonna be bearing their name on it. And so you understanding kind of what level of involvement the two parties wanna have in the operation. And the oversight of the joint venture then kind of dictates how the governance gets set up. I mean, typically in these sorts of joint ventures, there'll be a board and there'll be representatives from both parties on the board. Um, and, and then part of the discussion is trying to understand like what sort of decisions would go to the board for , um, its, its decision making and then, you know, what sort of day-to-day operational issues would just remain with the manager. And then, and then, you know, even in deciding which issues go to the board, you need to kind of work through, you know, what sort of issues basically require both parties to align on in order to take them. And usually these are crafted as super majority , um, voting rights where, you know, regardless of, of, you know, what the minority owner's percentages, or assuming that the minority owner's percentages above a certain threshold, there'll be a laundry list of issues that that partner wants to have a , a say in, in order, you know, for action to be taken in a joint venture. And it can be everything from big picture sale of the business amending the organizational documents, dissolution, bankruptcy to, you know, again, they can get more granular depending on the party's , you know, approval of expend expenditures over a certain dollar amount or outside of a , in certain variance from the budget approval of the budget , um, approval of additional capital contributions, certain hiring and firing of , of certain personnel, you know, involved in the joint venture. And so, again, there's a lot of discussion usually around these issues and, and it's very much dictated by kind of the role that both parties want to play. Um, and so, you know, that would be , um, again, sometimes just kind of understanding what sort of issues they wanna be involved in is, is, you know, helpful to be able to craft those rights. Again, a lot of times for the systems, they don't necessarily wanna be involved in kind of the nitty gritty operational issues. Again, that's why they've chosen to partner, but there'll be issues maybe of clinical matters or , um, you know, other quality , um, issues that they very much wanna have a role in, they wanna have more granularity on. So just flushing all of that out is, is important. And it's also important , um, to understand and align around each party's internal decision making requirements. Um, a lot of times that <laugh> those approval processes play into the timing of how decisions get made at the board because , um, you know, you've just got representatives from each organization on the board, but they not , might not be individually empowered to make these decisions unilaterally. So you've gotta kind of understand what sort of , um, approval process they have to go through on their end in order to approve certain actions . Um, so this is a generally how you see some of these , um, issues play out in the governance construct. And this, this really , um, flows into financial issues as well. I mean, part of, you know, what you need to flesh out in the organizational documents has to do with the respective financial obligations of the party , um, cap capital contributions, how much everyone's gonna be contributing and when those payments are made. And, you know, kind of a , a huge hot button issue always is , uh, just the issue of additional capital contributions. How can those, you know , uh, calls for additional capital be made? Is that something that the majority owner can just unilaterally do, or is that something that there, you know, needs to be , um, approval of both parties on? And then , um, you know , guarantees if guarantees are required in connection with any financing or , or other , um, obligations of the joint venture, you know , ensuring that those are , uh, proportional to percentage ownership from a compliance perspective. So, you know, again, some of the , um, ways that I've seen people try to work around some of these, I would say, you know, kind of more difficult issues to work out is just trying to, to understand what, what the , um, the concern is from both sides and then try to to craft a workaround that'll address both parties concerns. And I think capital contributions are a great example of that. I mean, it , you know, typically , um, you know, the minority o owner in a joint venture, you know , doesn't want to , you know, be required to make additional capital contributions unless they agreed to them. But on the other hand, majority owners wanna be able to ensure that the success of their investment is not , um, gonna be hindered by a minority owner that just might not be wanting to contribute cash at a particular time or, you know, is, is not interested in, in expanding in the business in the way the majority owner does. And , um, again, trying to understand what each party's concerns and perspectives are can help you try to craft a solution. You know, in a scenario like that , um, one compromise might be to require the consent of , um, of both parties for capital contributions , um, unless the capital contributions are required for just uninterrupted , uh, operation of the business or, you know, required for regulatory compliance so that you can't have a minority owner who's, who's blocking just the general operation of the joint venture, but you could have a minority owner , uh, have a say in whether or not the joint venture is gonna expand into another location and, and require additional capital from them . So it's just an example of how I've seen some of those financial issues , um, play out in the governance perspective. Um, and I guess, you know, from your perspective, Danielle , what sort of things do you think the parties need to take into account in perspective determining their financial contributions?
Speaker 2:Yeah, Kelly , thanks. And so many great points you just made. Um, so, you know, in terms of the, the financial contributions, I think one of the first , um, first considerations is what, what is the targeted, and I'll say economic ownership split, which I think to go back to Kelly's, one of the points Kelly made earlier, may or may not , um, you know, be a one for one connect one-to-one connection with the, the governance split. But from a, from a targeted economic ownership split , um, you know, I think it's important to establish what the , um, sort of targeted split is there. And that can be a function of , um, it could be a function of governance or control rights, but again, you know, there could be , um, a disconnection between those two. Um , but then you wanna think about, you know, each party's relative resources and ability to contribute to the capitalization, you know, initially, and then, you know , ongoing growth capital , um, for the partnership. There could be payer contracting , uh, strategy considerations. So if one party is bringing the preferable contracts and there's a desire to leverage those for the partnership, if, if that's feasible, you know, with that party's sort of contract terms, and they'd probably need to have , um, you know, a majority economic ownership. Um, and then revenue consolidation is another big one. And I think , um, Kelly touched on that, but particularly for some of the, you know, private equity and other investor backed parties in the specialty operator space, that's often a big , um, you know, consideration for them. So, so, so you need to have sort of a , a sense for what the targeted economic ownership is, and then you need to know sort of what assets are being contributed and what else you need in order to get the partnership going. So in certain cases, the partnership's gonna be more purely sort of de novo or startup and, you know, there could be some minor , um, you know, real estate asset or something being contributed by one of the parties, but, but a lot of it is going to be startup and new development. And in that case, you know , the financial contributions are gonna be a function of how much do you need to get this going? And then you're gonna look at that targeted economic ownership, and typically it will be capitalized, but a pro rata based on each party's , um, you know, relative targeted ownership. Um, in many instances, however , uh, there are, there are material contributions coming from one or both of the parties. So those could be real estate, it could be other sort of more specific assets, or it could be existing business operations. So if you have for instance , um, you know, a couple of urgent cares that you are operating today, if you're a health system , um, and you are entering into a partnership with a , you know, a specialty urgent care operator, it's most likely that you're going to wanna contribute those existing urgent care assets to the partnership, in which case, you know, that those assets, those existing operations would also have value. So if you are exi , if you are contributing assets , um, business operations or otherwise, those are typically going to be valued at fair market value. So , um, I'm not gonna go into evaluation 1 0 1 here, but , um, one of the things that's important to think about, particularly when we're thinking about the valuation of existing operations is that the value of those existing operations is, is , is gonna be based on sort of the, the, the status quo operation and a hypothetical buyer premise. And, and that really means that you're not going to conti consider the strategic value of what you're going to develop together through the partnership , um, when you are determining the value of that contributed , um, business or operation for the purposes of establishing, you know, each party's contribution. So , um, so that can be sort of a , a hard thing for , um, folks to reconcile when, you know, we're sort of establishing the value of each party's contributions. But, you know, I think at the end of the day, what what you wanna do is, is establish the fair market value of any assets that are being contributed. Um, and then you wanna think about what's left over in terms of additional capital and, you know, make sure that there's an appropriate balance between , um, the cash and assets contributed by each party relative to that targeted pro rata ownership split. So, so that's really what we, you know , from more of the sort of business and valuation perspective typically work through in , in terms of the financial contributions of each party. Um, but it is important to note that the, the capitalization and ownership split is just one kind of key consideration from a, from a financial perspective. Um, and one of the other big ones is to think about the, the terms of , um, any ancillary agreements that , um, are going into place , uh, that to support the partnership. And the big one that usually comes up here is , um, management agreements. So typically the, the specialty operator is managing the partnership. They really bring that specialized expertise. The health systems typically looking to them for that. And so , um, typically the, the partnership or the joint venture will enter into a management agreement with that specialty operator to manage , um, the partnered business. And , um, for those management services, the, the, you know, managing party will be compensated at fair market value. And so what that typically means is, in addition to ensuring that , um, they're being compensated for and, and, you know, appropriately reimbursed for all their costs to provide those management services, they also need to receive a fair market value markup on those services. So that is an important consideration , um, you know, on both sides, but particularly for the kind of value equation for the specialty operator , um, it's, it's ideally not going to be the biggest source of value for the managing party, but you know, that that margin , uh, that that's generated on the management services component is relevant for them. Um, and, and something that, you know, both parties tend to want to at least negotiate a little bit or, or think through to make sure it's sort of fair and appropriate on, on both sides. Um, but Kelly, the , you know, the, the financial terms of the, you know, management agreements or other ancillary , uh, agreements are just one piece. Uh, and then there are many, many other , uh, elements of those agreements that can take just as much, if not more time to negotiate than sort of the, you know , core , um, deal documents themselves. Um, so what, what, what are the key issues you see in those , um, you know, management or , or other ancillary agreements?
Speaker 3:One of the key issues that I think , um, is important to focus on is just building in a lot of specifics around the terms of the management agreement. I think that, you know , including a lot of specificity behooves both sides of the equation here. Um, just to make sure that everyone's on the same page as to what the manager's responsibilities and obligations are and what they aren't. You know, just so that there's a clear understanding going in of, you know, what the fees are are covering and, you know, drilling down , uh, and , um, on the kind of granular duties of the management , um, of the manager. And then also understanding the scope of the manager's delegated authority. And that , that issue kind of goes hand in hand with the governance issues we already discussed. And how much free reign is gonna be afforded to the manager to oversee the day-to-day operations. And what sort of oversight does the joint venture, you know , uh, vis-a-vis the , the health system partner , um, want to retain on on that operational management. And so again, a lot of times you'll see a SY system really wanna dig in on the clinical and quality oversight and, and have more granularity on their involvement on those, you know, maybe as opposed to some of the other financial or other , um, you know, administrative duties of the, of the manager. Um, but again, you know how much involvement a system wants to have can, you know , depends based on system to system. And again, another key issue is just whether the service line is located on the , um, on the system's campus. 'cause that that can also raise issues about, you know, whether hospital policies might also need to apply to the joint venture as well. Like, say for example , it's physically located on the campus and you know, on a hospital property, you know, that's being leased to the joint venture and maybe there are , you know, particular security policies that the hospital has on its , um, properties that we need to apply as well. So those are just things to consider in negotiating the management agreement. You know, obviously in connection with the management fee, just understanding exactly what is covered by the fee and what is separately reimbursable to the manager is also important to understand. Um, usually the, the cost of the personnel actually providing , um, the on the ground , uh, duties at the, at the facility are, are usually separately reimbursable, but maybe like back office , um, higher administrative support might be part of the management fee. And then again, another important issue just to make sure to include in a management agreement are audit rights , um, that are able to be exercised by the non-manager partner that the system can actually check to make sure that manager's doing everything it's supposed to be doing and, and making sure that, that the management agreement and the operating agreement provide for the system to be able to , um, unilaterally enforce those terms of the management agreement against the manager. 'cause otherwise, if it, if it's something that had to be done, you know, by agreement by the parties, then obviously the manager's not gonna really police itself . Um, so those are just important things I think to, to consider in connection with , um, you know , crafting the management agreement. And again, there's a lot of time spent on just understanding what, what the respective , um, duties are of the manager as well.
Speaker 2:Yeah, absolutely. And, and I think you've given, you know, at least a number of those are good examples of , um, you know, some of what we talked about in the beginning, which is the importance of understanding kind of each party's priorities and objectives. And, and that can sort of help give you a bit of a, a sense for, for what sort of provisions are gonna be more, most important to each and, and where, where there's really gonna be time spent in terms of, you know, negotiation of the, the management agreement, you know, whether those are the , um, you know, quality and performance indicators or certain duties. Um, so, so I just think, you know, another good example is sort of that foundational need to, to establish and understand upfront what, what each party is really going to get out of this. So you have sort of a, a view going into this of , um, where there may or may not be , um, you know, more challenging , uh, elements of the partnership to work through. Um, but I wanna transition for a minute . So we've talked about , um, a little bit more, we've talked about a little bit more about sort of the f formation and kind of , uh, foundational financial and structural considerations, but I wanna spend a little bit of time speaking to some of the considerations that are more relevant that may be more relevant post-transaction. So , you know, from a financial perspective, I think it's, it's really important because I spend a lot of time in the, you know, the, the deal negotiation and development process focusing on things like, you know, the, the value of contributions, the specific management fees , um, and, and that tends to get a lot of attention , uh, when these partnerships are being developed. But it, it's important to recognize that the real value , um, of the partnership is going to come through what the parties are able to accomplish together through the partnership. So really the strategic value , um, that is generated through the partnership and , um, it's really important to spend as much time and, you know, to do as much analysis as is sort of legally appropriate going into the partnership as you can to vet that you are able to create , um, you know, vet sort of the, the plan and the ability to execute on the partnership's vision. Um, really, you know, the, there would be no need to sort of enter into these kinds of partnerships if, if there weren't going to be value that was generated above and beyond sort of what either party could achieve on their own, whether that's through , um, you know, collaboration on growth, whether it's preferred rates, contracts from one party or another, the opportunities to diversify the business that they wouldn't otherwise have. Um, and sometimes, you know, particularly for the health system, there's also indirect , um, sort of value that will be created through the partnership . So , um, you know, if, if the partnership , uh, and, and the sort of service offering and, and performance and value that we created will have positive impacts, for instance, on , um, the health system's patient satisfaction overall, or if there's , um, and that could be through access or, or other, you know, avenues or , um, or if, you know, by through , um, introducing more , um, ambulatory offerings , um, and outpatient services, there's a positive impact on value-based care performance. You know, those are some other sort of considerations that are important to think about when we think about how each party is going to get value from the partnership. But, but at the end of the day, you know, both, both organizations are , um, agreeing to trade a portion of the margin that they theoretically could otherwise derive from the business on their own, because there's a belief that through partnering, they'll be able to generate more value than they are giving up in margins. So it's, it's really essential to not just think about sort of what's the value of this sort of contributed asset or this piece, but, but to diligence and spend as much time as possible upfront , um, vetting the feasibility of growth plans, future performance as is spent on the core financial elements of the deal terms. So that, you know, that to me, I think is something that , um, doesn't always get as much attention, but really, you know, is, is as important if not more than , um, some of the other sort of more foundational, typical , um, areas of negotiation that tend to take up a lot of time in the, you know, the deal negotiation process. Um, Kelly from a , from thinking about , um, you know, some of the deal terms that come into play , uh, and, and are particularly impactful post, you know, transaction, what comes to mind for you?
Speaker 3:They get hashed out in the negotiation of the agreement, but they really , um, have to do with how the parties are operating or, or what can happen, you know, after the joint venture is in play. So I'd say the first one has to do with restrictive covenants. Um, you know, as a threshold matter whether to include restrictive covenants like non-competes, non-solicitation provisions, development rights , um, you know, it , it, it may be that the parties want to rely on their financial alignment, you know, just the fact that they are financial partners here and, and not otherwise restrict the activities that they can undertake outside of the joint venture. But I would say more often than not, you do see restrictive covenants included in a joint venture where the parties are committing to, you know, be operating certain services within a certain geography through the joint venture and limiting the activities of , um, the parties outside of the joint venture in order to protect the business of the joint venture. Although not, it's not always that the restrictions are reciprocal because, you know , sometimes they have, well, obviously they have different businesses and they're, you know, looking to make sure that the restrictions are not gonna impede their ability to provide other services. So, you know, like a health system for example, is gonna wanna make sure that if this is a particular , um, service line, you know , uh, a niche service line, it's not gonna impede, you know, as a threshold matter, their ability to provide acute care in their hospital. That's, you know, definitely something they don't want to have impacted , um, by the, you know , the non-competes in the joint venture. Um, and, and, you know, on the other end of the spectrum, the specialty provider is going to wanna make sure that it has the ability to grow its business, you know, even within a particular geography, even if their joint venture partner doesn't look, you know, doesn't want to expand their business in that area. Um, and so again, the specialty partner might want that crafted more as a, a , you know, a right of development, a right of of opportunity that's given to the joint venture. And then if for whatever reason the joint venture doesn't , um, choose to expand in that area, that the, the specialty operator could go out and do it on their own outside of the joint venture. And then, you know, as with any non-compete, you're gonna need to look at, you know, each state's laws to understand what's enforceable in that state in terms of geographic scope, length of time, period for any tail period. Um, but , you know , this is definitely something to, you know, it's important to focus on and, and also to make sure to kind of think strategically and make sure that , um, a non-compete, you know, first of all carves out any , um, any activities that, that might otherwise fall within the scope of the restrictive covenant. But that come about through subsequent AC acquisitions. Uh , you know, what you don't wanna have happen is have, you know, this maybe smaller service line joint venture be negotiated with a non-compete and suddenly have the health system find out that they can't go forward with a larger merger or acquisition with another health system because that other system has, you know , um, activities that would otherwise breach the non-compete in that particular area. And, you know, you don't wanna be in a situation where a big deal is looking to have to go get a consent or a carve out from a smaller joint venture , um, in order to do the bigger deal. You wanna try to address that on the front end. Um, that , so that's one area of post transaction issues that I, you know, see kind of heavily negotiated. The other is just the idea of exit rights, you know, having kind of the , um, exit rights mapped out within the, the document , um, so that it's not just that the parties have to agree on, you know, what happens in the event of a breakup, but that there are certain circumstances that trigger the right for either party to be able to get out in certain circumstances, and they can be, you know, everything from kind of fundamentally breaches the agreement or compliance issues that would give parties the right to , um, to sell their interest or buy out the other party's interest. Um, but, you know, I've also seen where parties will negotiate, you know, puts or call rights that are triggered at certain time periods so that , um, you know, it just kind of provides a , um, a ripcord, if you will, for the , the joint venture partner to be able to get out after a certain amount of time if this just isn't working. Um, and usually there has to be some minimum amount of time the parties, you know, need to have been able to try to achieve a return on their investment. So that timeframe can vary based on the business, but you know, typically you might see anywhere from five to 10 years the right for parties to be able to trigger and exit, right? Again, just to be able to get out if it's just not working. I mean, another trigger that you might see is a change of control trigger. Um, you know, you're entering into this partnership based on your, you know, comfort level with the other partner and based on the, the due diligence you've done on the other partner. But what if that partner is no longer the partner that you thought they were and they've completely changed management or changed hands , they've been acquired. Um, those are important rights to try to , um, negotiate so that you don't end up, you know, stuck in a partnership with someone you didn't anticipate being a partner with partner . And then, you know, other sorts of rights that might get included in here as well, you know, would include termination of affiliate arrangements. Um, you know, again, kind of the fundamental premise of these sorts of specialty joint ventures is that the specialty operator is gonna be the manager of the joint venture. So if whatever reason that management agreement terminates due to , you know, a breach of, of the manager, that's usually gonna trigger , um, the right for parties to get out. Um, and then you might otherwise see, like if there's a tax exempt , um, system that's involved giving exit rights , um, if the joint venture jeopardizes the tax exemption of the system, and then just, you know, maybe other rights of first refusal or , uh, rights of first offer, drag along rights tag along rights that are built in to again, give flexibility to the partners to be able to , um, get out at futures Mm-Hmm , <affirmative> . Um, you know, and , and with that, I would say , um, you know, in terms of any kind of last final thoughts or words of wisdom on this subject , uh, the, the issue of exit rights really , uh, you know, ties to kind of what my, my overall words of wisdom would be, which is hope for the best, but expect the worst and plan for it. I mean, you know, despite the fact that there are lots of compelling reasons to enter into a partnership, you , you need to go into these joint ventures with eyes wide open as to what they entail. And so, you know, trying to map out a plan for how you're gonna accomplish that and map out , um, protections if it doesn't go the way that you are hoping that it is, is, you know, is gonna be the, the best way to try to approach it. It gives clarity to both parties as to, you know, how things are gonna play out. And it also, you know, gives the , um, the boards that you have to go back to, to, you know, in , in authorizing these joint ventures, some comfort that there's , um, you know, there are alternative plans if things don't go as, you know, as you're hoping. So again, kind of try to think through all the contingencies, plan for it, map it out in the documents, but then, you know, put your best foot forward. So, I don't know, Danielle, if you have any other , uh, thoughts or words.
Speaker 2:Yeah, no, Kelly's great. You know, I think all those things that you hit on, you know, you never want those sort of issues or, or terms to become relevant, but is certainly critical to ensure, you know, at the outset that you're protected if they do . So. Um, we are coming to the end of the ti our time, so similar to you, I , I'll share my, my final words of wisdom and, you know, I think I've hit on this in various ways , uh, throughout the podcast, but I would just say, you know, diligence, diligence, diligence , uh, but think broadly about it. So, you know, there's sort of obvious, all the obvious sort of standard forms of diligence, but don't forget to diligence the working relationship. Don't forget to spend time on the growth plan and the feasibility of executing on that growth plan. I know that can be hard, you know, especially if you're the health system and it's not your core area of expertise, but, but it's really essential to spend the time and resources upfront , um, you know, to make sure that you're going to be able to get the value out of this partnership that you're looking for, and that, you know, you're, you're set up and positioned to be able to execute on that plan. So, so those are my, my parting words. Um, uh, just wanna thank you all for, for, for listening today. Um, Kelly and I , uh, enjoyed extending our, our conversation , um, from this past year's , uh, A HLA Healthcare Transactions Conference. And we hope to see you all in Nashville , uh, next year for the 2025 A HLA , uh, healthcare Transactions Conference. So thank you all.
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