Health care joint ventures can create an important vehicle for combining resources and expertise, in addition to improving health care product and service access. However, these arrangements often come with complex legal, regulatory and operational challenges that may affect timelines and the profitability of these arrangements. Significant delays or modifications to the anticipated commencement of joint venture operations and the scope of operations may cost the parties in terms of both resources and goodwill. Below are five key factors that parties should consider early on in the negotiation process to establish reasonable timelines and reduce unnecessary friction between the parties.
1. Antitrust Matters
Health care joint venture arrangements often involve significant antitrust considerations. Parties contemplating a health care joint venture should consult with antitrust counsel early in the transaction planning process to determine what, if any, antitrust concerns are implicated and how the joint venture should be structured to avoid federal antitrust scrutiny while also accomplishing the business goals of the parties.
For example, certain health care joint ventures may require Hart-Scott-Rodino (“HSR”) Act filings. The HSR Act requires parties to transactions of a certain size to submit a pre-closing notice to the Federal Trade Commission (“FTC”), allowing an initial 30-day window to investigate the competitive impact of the proposed transaction before the parties can close the transaction. If the FTC identifies any competitive concerns, the FTC may request an additional 30-day review period (commonly known as a “Pull and Refile”), issue a “Second Request” subpoena for additional documents and information or even challenge the transaction on the merits as violative of the federal antitrust laws. Notably, it has become increasingly difficult to predict whether a transaction will be routinely approved or whether the HSR filing might trigger these follow-up requests for more time and/or information. The process to obtain such approval can be extremely time- and resource-consuming, and the parties need to consider the implications of uncertainty on the timeline associated with the proposed joint venture.
2. Scope of Due Diligence
The scope of due diligence each party intends to conduct and each party’s capacity to both produce and review diligence information can pose a major timeline variable. Each party should consider the types of risks associated with entry into the joint venture, its comfort with the potential for unforeseen or undiscovered issues and the resources it is comfortable with devoting to the due diligence process. While an in-depth diligence review of a party’s records and operations may limit the likelihood of unforeseen issues, diligence review can be complicated by:
- Cost. Both in-depth diligence review and analysis on the one hand and document production on the other have the potential to become quite costly.
- Time. A thorough due diligence review may be time-consuming, and the time constraints of one or more parties may impact the scope of review.
- Differences in Expectations. Joint venture parties often have different expectations and needs they wish to address in the diligence process. Disagreements over the categories and the level of detail in information to be produced may be a complicating factor.
- Relational Concerns. The diligence process has the potential to create relational issues between the parties. Particularly for parties who are less familiar with the diligence process, very lengthy and detailed diligence inquiries may sometimes trigger frustration with the process, a diminished interest in cooperation and reduced trust.
- Concerns About Sensitive Information. A party may also have concerns about the provision of access to certain sensitive information in diligence, and detailed inquiries may be taken as overly intrusive.
Each party to a health care joint venture should carefully assess the level of risk involved and the appropriateness of resource allocation to mitigate risk when deciding on both the scope of information requested and produced in diligence.
3. Experience with Similar Joint Ventures
Familiarity matters. The parties to a joint venture and their respective counsel and advisors’ comfort and familiarity with the particular joint venture industry and service type may significantly impact the timeline associated with the finalization of terms associated with the joint venture. Highly complex joint ventures may proceed with more ease when both parties (and their counsel) are familiar with the nature of the joint venture and the market conditions affecting the negotiation of the underlying agreements for such joint venture. Conversely, relatively simple arrangements can become more protracted and complicated when the opposite is true.
For example, certain types of lab-related joint venture arrangements may be relatively complicated; however, negotiation can be more straightforward if (a) one or both of the parties and their counsel are familiar with the type of transaction and each party’s likely pressure points; (b) the parties are able to refer to previously negotiated documents, which served a similar purpose; (c) the parties are familiar with the industry and therefore do not spend excessive time on points that are typically subject to limited negotiation; and (d) the parties are familiar with the document types (contribution agreements, operating agreements, management agreements, etc.) associated with that particular type of joint venture.
Conversely, if the parties or their counsel are not familiar with the type of deal, this can create substantial challenges in relatively straightforward deals. For example, a joint venture between a relatively small medical practice and a health care system might often be considered a simpler and straightforward type of joint venture. However, if the owner of the practice and the owner’s counsel are not familiar with the deal structure and terms, the parties have the potential to get bogged down in review, negotiation and explanation of documents, as well as spend time on terms and matters that may not be subject to substantial negotiation in similar deals.
4. Nature of Contributed Assets
Are the assets that are to be contributed cash or other assets? If no lenders are involved, cash contributions may be relatively straightforward and are typically easy to record. Other service or property contributions may lead to a variety of complications, including determining value, appropriately describing and effectively integrating the assets into the joint venture.
For example, suppose a joint venture party is contributing a lump sum of cash and a branch of its business while maintaining the remaining portion of its business. Depending on the details of the deal, the parties might agree that the lump sum of cash is to simply be documented on an exhibit to the joint venture governing document, with the sums to be wired to the joint venture bank account. With respect to the business line, (a) the contributing party will likely need to assess what assets are and are not a part of this business line and clearly define these assets; (b) the joint venture will need to be prepared to take over operation of that business line; (c) if the joint venture is providing services back to the original entity, it will need to enter into agreements with the original entity regarding the provision of the services offered by the contributed business line; and (d) other business and logistical terms will also need to be considered and resolved. Unlike the contributed cash, the contribution of a business line may have important implications on timing and strategy. Failure to appropriately plan the process associated with asset contribution is likely to result in unnecessary challenges.
5. Regulatory Requirements
The applicability of relevant laws and regulations, as well as the procurement of any necessary consents or disclosures in connection with the joint venture, may materially affect the anticipated transaction timeline and are important in determining the scope of due diligence. The likelihood of significant regulatory concerns, and how complicated those concerns are to resolve, will depend on the type of health care business associated with the joint venture.
For example, a smaller medical practice, which holds an interest in ASCs, other facilities and medical equipment, may be more likely to have potential regulatory issues arise in association with billing. The medical practice may have management and counsel who are less familiar with the regulatory environment, which could lead to the utilization of inaccurate or otherwise inappropriate billing practices. If an issue is uncovered, the parties may need to provide for a self-disclosure prior to closing, which may be time-consuming and may complicate what otherwise appeared to be a relatively straightforward, fast-moving deal.
The parties will also need to assess what license and permit consents or notices are required in association with the joint venture formation or change of ownership, and how such filings will affect the timeline. For example, many state pharmacy licenses may require a prolonged period of time to obtain on a preliminary application, but in the case of a change in control, they may require a more limited process.
Practical Takeaways
Health care joint ventures have the potential to unlock strategic value to organizations and the associated communities served, but require careful planning and consideration of potential issues in order to clearly set timeline expectations. By proactively addressing antitrust risks, diligence expectations, deal structure, partner familiarity, asset contributions and regulatory hurdles, parties can reduce delays and build stronger, more sustainable relationships.
If you have any questions or would like additional information about this topic, please contact:
- Liesl Muehlhauser at (317) 977-1438 or lmuehlhauser@hallrender.com;
- Katie Miller at (317) 977-1404 or kmiller@hallrender.com;
- John Bowen at (317) 429-3629 or jbowen@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
