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Legal Logistics

Karen Minich-Pourshadi, for HealthLeaders Media, August 15, 2011
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Before a partnership between a private equity firm and a nonprofit hospital or health system can even get to the management structure stage, it must go through several legal hurdles. Unlike other joint ventures, such as those between two not-for-profit entities, when nonprofit hospitals or health systems pair with private equity firms there is an added layer of legal and public scrutiny. Brian Miller, president and founder of the nonprofit Healthcare Private Equity Association and managing partner in the Chicago-based private equity firm Linden Capital Partners, explains that part of this scrutiny is based on a public perception that not-for-profit hospitals employ a more community-friendly business model than their for-profit
counterparts.

Many states have laws instructing officials to review proposals for for-profit acquisitions of nonprofit hospitals using a more rigorous set of criteria than is applied to other combinations, such as the joining of two not-for-profit hospitals. The criteria used covers three areas:

  1. ?Regulatory track record of the for-profit private equity acquirer
  2. ?Commitments the for-profit makes to continue affordable community access to the acquired hospital (covering both cost and breadth of postacquisition services)
  3. ?Maintenance of pre-transaction levels of services to the uninsured and underinsured

Moreover, as the not-for-profit hospital encompasses a large body of community assets, the transfer of it to private investors has significant public importance. Thus, a state’s attorney general often must review and approve the proposed pairing, focusing on four areas:

  1. Adequacy of the selling process (the rationale for selling, the selection of purchaser, and the negotiation of terms of sale)
  2. ?Fairness of the proposed   consideration
  3. Soundness of the proposed financing for the acquisition
  4. Conflicts of interest pertaining to board members, officers, key employees, and experts of the selling hospital, the purchaser, or any other party to the transaction

 

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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