We are pleased to introduce a new Ropes & Gray podcast series, Recent Trends & Developments in Health Care Joint Ventures. With increased regulatory scrutiny by state and federal regulators of mergers and acquisitions in the health care industry, joint ventures present a valuable alternative to traditional acquisition strategies for expansion and diversification of services, access to capital, and deployment of technological, business, and management resources. The series will examine recent trends, new developments, lessons learned and best practices for various types of joint ventures.
On this opening episode, health care partner Stephanie Webster moderates a discussion with health care partners Adrianne Ortega and Ben Wilson on why joint ventures have become increasingly popular in the health care industry as well as current trends in joint ventures.
Transcript:
Stephanie Webster: Hello, and welcome to today's podcast. My name is Stephanie Webster, and I'm a partner in Ropes & Gray's health care practice group based in Washington, D.C. I represent health care clients on complex payment and compliance issues. With me today are Adrianne Ortega and Ben Wilson, partners in Ropes & Gray's health care practice group.
This is the first in what will be a series of podcasts focusing on joint ventures (JVs) in the health care industry. We strongly suggest you tune in for the entire series. In this first episode, we'll talk about why joint ventures are becoming so popular. We'll also hit on a few interesting examples. Finally, we'll discuss some of the top business and regulatory considerations for joint ventures.
Adrianne, Ben, thank you very much for joining me today.
Stephanie Webster: In recent years, the health care industry has experienced significant changes, which have been further accelerated by the pandemic, it seems. Shifts in health care delivery, regulation, and expectations of providers have created opportunities and imperatives for health care entities to develop new approaches to delivering and financing care. In this context, we're seeing that many health care entities are shifting away from traditional M&As and instead turning to joint ventures for expansion and diversification of services. Why do you think this is the case, Adrianne?
Adrianne Ortega: We've seen increasing interest in joint ventures for a few reasons. First, in uncertain market conditions, such as the market conditions we have endured for the last few years, the resources, competition, and degree of integration required for mergers and equity acquisitions just may not be feasible. As a result, investors, clinical partners, and industry stakeholders are seeking alternative growth opportunities. Joint ventures offer a way for potential partners to explore new opportunities with less risk and commitment.
Ben Wilson: That's right, Adrianne. JVs also offer access to capital, skills, management resources, and technology. JVs can also be an effective tactic to enhance service offerings rapidly without a build or buy event. I don't need to tell you that regulatory scrutiny of health care M&A is high right now. Regulators are leery of provider consolidation. This is another reason traditional M&A may be less feasible, and JVs more attractive.
Stephanie Webster: We seem to have also seen the rise of JV arrangements to facilitate collaboration in evolving care models, such as value-based care—do I have that right?
Adrianne Ortega: That's exactly right, Stephanie. Entities are entering into arrangements for the purpose of expanding value-based care models. Value-based care models and reimbursement policies continue to change and require collaboration among providers. Joint ventures around value-based care models can diversify financial and operational risk. One example of a joint venture in this space is the arrangement between Humana's CenterWell Senior Primary Care and Welsh Carson. Ben, could you walk us through that one?
Ben Wilson: Of course, Adrianne. CenterWell is the largest senior primary care provider. Welsh Carson is a private equity firm that actively invests in health care and technology. CenterWell and Welsh Carson established a $1.2 billion joint venture to create 100 new value-based care primary care facilities for seniors through 2025. This JV expands upon an existing collaboration that is currently deploying up to $800 million of capital to open 67 clinics and support their ongoing operations. Under the JV agreement, CenterWell will receive a management fee, including performance-based incentives, for the management of all joint venture clinics. In addition, the agreement includes a series of put and call options for Humana to acquire Welsh Carson's interest in the joint venture beginning in 2028—or five years after the opening of each cohort of the clinics—and through which Welsh Carson may require Humana to purchase its interest in the joint venture beginning in 2030 or seven years after the opening of each cohort of clinics.
Adrianne Ortega: Thanks, Ben. Separately, we are also seeing joint ventures in the value-based care space specifically related to specific disease or conditions management, for example, for kidney care patients or specifically for children. These arrangements often allow providers to access data and analytics to better manage and coordinate patient care. For example, Blue Cross Blue Shield of Minnesota entered into an innovative value-based agreement with VillageHealth (a DaVita integrated kidney care subsidiary) to deliver care to kidney care patients.
Ben Wilson: That's a great point, Adrianne. The parties in that arrangement sought to coordinate care into one integrated care model. That model emphasized primary care and early-stage interventions. It sought to incentivize improved care of high-risk populations at lower costs. It also sought to improve clinical outcomes through reduced hospitalizations and increased use of outpatient and home dialysis. In another example, CareSource entered into an arrangement with The Children's Care Network, a clinically integrated network, to improve pediatric health outcomes in Georgia. The value-based care agreement emphasized a proactive approach based on prevention and focuses on physical, social/emotional, developmental, and behavioral health conditions through promoting preventative services including screenings aimed at identifying at-risk children.
Stephanie Webster: Thanks to you both. Moving on, we have also seen behavioral health entities enter into arrangements with each other and with larger health systems to expand access to behavioral health services. Could you share your perspective on that development?
Adrianne Ortega: We're seeing a lot of activity in the behavioral health space. Acadia Healthcare, for example, entered into a partnership with Nebraska Methodist Health System to build a 96-bed behavioral health hospital. Acadia is one of the largest standalone behavioral health care providers in the U.S, and this is one of several partnerships that Acadia has announced this year.
Ben Wilson: That's right, Adrianne. Acadia also announced that it formed a joint venture with SolutionHealth, the parent company of Southern New Hampshire Health and Elliot Health System. Together, the two companies will begin construction of a 144-bed inpatient hospital in southeastern New Hampshire. Additionally, Tampa General Hospital, Lifepoint Behavioral Health and USF Health recently announced that they will partner to construct the first and only freestanding academic medical behavioral health hospital in Florida—that's expected to open in 2024.
Adrianne Ortega: These types of joint ventures provide behavioral health operators the means to enter a geographic market and access more integrated health services. Additionally, joint ventures can also help traditional health systems with behavioral health access shortages.
Stephanie Webster: That's all very interesting, Ben and Adrianne. How about digital health and health care analytics—has there been expansion on that front in the world of joint ventures?
Adrianne Ortega: Yes, Stephanie—this trend has definitely expanded to joint ventures. Joint ventures at the intersection of health care and technology facilitate alternative care sites and modalities and create opportunities for disruptors. There's also a significant focus on data and leveraging and using data analytics to better manage care and determine which patients could most benefit from care management services.
Ben Wilson: That's right. For example, K Health entered into an arrangement with Cedars-Sinai Medical Center for use of its AI technology for virtual agent and primary care services. K Health is an app and web platform that uses artificial intelligence to combine professional medical knowledge with patient clinical data. K Health and Cedars-Sinai are developing an app that connects to the startup's AI and leads to a chat with a health system-credentialed doctor or nurse. The app, expected to go live by the end of 2023, will also be linked to the system's electronic medical record system, Epic. Data sharing arrangements between the parties show the continued importance and increasing value of patient data.
Adrianne Ortega: That's a great example, Ben, and a really good point. K Health has also collaborated with the Mayo Clinic to develop an AI diagnosis model intended to help doctors identify better hypertension treatment for their patients. This builds on another ongoing collaboration between the organizations established in 2020, in which the parties noted they plan to focus on improving and accelerating the deployment of virtual care models to improve patient-centric care in the Mayo Clinic Platform.
Stephanie Webster: Thanks, Ben and Adrianne. We've discussed the increase in interest in JVs in the health care industry and walked through a few examples of trends and transactions. Shifting gears, what should companies that are interested in JV arrangements consider when entering into these partnerships?
Ben Wilson: One of the first considerations for the parties is the stickiness of the relationship. Joint ventures provide a low-commitment means for organizations to explore innovative offerings. That low commitment also means that, no matter how compatible a partnership may be, companies should consider applying withdrawal limitations to avoid either party from withdrawing at the expense of the other party. Further, parties should consider which unwind triggers to put in place to ensure that, in the event the parties do want to unwind their transaction, there's a process in place to do so.
Adrianne Ortega: That's an important point, Ben. Relatedly, parties should also consider carefully negotiating exclusivity provisions before and after the transaction closes. Specifically, these provisions can outline how the parties can expand or exit the arrangement, as well as take the form of "rights of first refusal" or "rights of first offer" in the event either party wants to expand the services provided under the joint venture arrangement with another party or wants to provide a related service. Parties should also negotiate and reserve certain powers for each and consider general governance strategies. For example, carefully considering the composition of the board overseeing the joint venture. Dispute resolution and other enforcement mechanisms can also compensate for minority ownership or representation on the board.
Stephanie: Thanks for those business and structural tips. What about regulatory considerations?
Ben Wilson: To name a few, providers should consider any fraud, waste, and abuse issues that could arise. They should consider ownership of data and other intellectual property created through the arrangement. And they need to consider potential regulatory consents or approvals.
Adrianne Ortega: That's right, Ben. Joint ventures may include referral and financial relationships that could implicate the Stark Law and remuneration that could implicate the Anti-Kickback Statute (AKS), which could result in False Claims Act and Civil Monetary Penalty liability. For example, when evaluating Stark Law risk implicated by the parties, we should always determine whether a referral relationship between joint venture participants for Designated Health Service (DHS) exists and, if so, whether an exception applies.
Ben Wilson: That's right, Adrianne. In terms of AKS, AKS prohibits willful paying, soliciting, or receiving of any remuneration to induce or reward referrals of patients for items or services payable by federal health care programs. Partners should evaluate any existing or proposed referral arrangements by and between the partners and the JV entity to determine whether AKS or state law corollaries may be implicated. The parties should analyze the arrangement to determine whether safe harbors are available. Common joint venture safe harbors include small investment interests, investments in underserved areas, ambulatory surgery centers, bona fide employment arrangements, space and equipment rental, and personal service and management contracts safe harbors. If a safe harbor is not available, the Department of Health and Human Services Office of the Inspector General will analyze the relationship using a facts and circumstances test that determines the risk to federal health care programs (for example, interference with clinical decision-making, increased cost/utilization, patient safety/quality concerns, or unfair competition).
Adrianne Ortega: In addition to these fraud, waste, and abuse considerations, partners who seek to enter into the digital health space should consider which party owns the underlying data created and what both parties are permitted to do with the data. Data rights and obligations can also be imposed through HIPAA, state information privacy regimes (CCPA) or other contractual obligations.
Ben Wilson: That's right, Adrianne. Additionally, in general, partners should consider current and proposed use and disclosure of protected health information in relation to the JV arrangement to ensure compliance with HIPAA and corollary state privacy laws. Lastly, even though JVs require few governance changes, and thus, regulatory change of ownership requirements are often not triggered, and the parties are thus able to avoid lengthy regulatory approvals, nonetheless, certain regulatory approvals are triggered by joint ventures. For example, the Hart-Scott Rodino Act may still be implicated, and JVs may trigger other health care transaction review laws (for example, new laws in California, Massachusetts, and Washington—visit Ropes & Gray's resource center).
Adrianne Ortega: Right, and in fact, operators may consider partnering with providers with a footprint in a certain market who have experience with local regulatory agencies and processes.
Stephanie Webster: Thank you so much, Adrianne and Ben, for this timely discussion of joint ventures. For those of you listening who would like more information on the topics discussed today during this podcast or our health care group more broadly, please don't hesitate to contact us. This podcast is the first in a series discussing joint ventures. Our next podcast will address in more detail key considerations for successful joint ventures. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple, Google, and Spotify. Thanks again for listening.
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