Compensation for medical directorships in nonhospital-owned group practices is greater than in hospital-owned practices for all specialties except primary care, according to a recent study. The Medical Group Management Association's Medical Directorship/On Call Compensation Survey 2009, based on 2008 data, found that the greatest discrepancy existed among nonsurgical specialists in nonhospital-owned practices that received $27,400 more annually than those in hospital-owned practices. Compensation also varied greatly across specialties, the survey shows.
Aetna has announced that it is adding 245 jobs at its New Albany facility as it expands to support new business. Hiring should begin in July. Aetna will make use of existing space in its approximately 162,000-square-foot facility in New Albany to house the new employees. Improvements will begin on the space in May and should be completed by July. Total capital investment for this expansion is projected to be $750,000.
Hospitals and ambulatory surgery centers have been at odds, vying for the same patient pool. Despite hospital and regulatory challenges to the business model, ASCs have withstood market pressures and continued to gain ground with funding from private equity firms as well as an 8.7% compounded annual growth rate between 2002 and 2008. Hospitals are now warming up to their former competitors, though, and looking at more joint venture arrangements with physicians and ASC operators.
There has been a shift in the market with smaller hospitals completing acquisition deals. John Reiboldt, of the Coker Group, discusses the market conditions and what it takes to make a purchase these days.
When Grady Memorial Hospital CEO Michael Young announced in March the layoffs of 140 employees at the Atlanta safety net hospital, he told the Atlanta Journal Constitution that some of the ousted workers were let go because they didn't mesh with his efforts to remake the "Grady culture".
The existing culture, he suggested, had been too tolerant of inefficiencies and was adversely affecting patient care. "It's an old and unsuccessful way to run a hospital," Grady's sixth CEO in three years told the AJC. "We need to bring new ways of doing things and new ways of thinking."
That may be true, but those words could come back to haunt Young if one of those employees feels they were unjustly let go for ill-defined "cultural" reasons. The fact is, layoffs are on the rise. So is litigation for wrongful discharge. Sacramento, CA-based emTRAiN, an HR compliance consulting firm, cites EEOC data showing that discrimination filings in 2008 were at the highest levels in the 44-year history of the commission, with age discrimination suits up by 29%, retaliation claims up by 23%, sex discrimination up by 14%, and racial discrimination up by 11%.
Janine Yancey, president of emTRAiN, says executives like Young have to be very careful about how they justify layoffs, or they may find themselves in court. "Certainly that doesn't sound like a very prudent thing to say and in these times you need to be very careful with all your communications," Yancey says of Young's remarks.
Yancey says Google used the "culture" argument in 2004 when it fired a 54-year-old operations director because he didn't fit with the company's emphasis on "youth and energy." His job was filled by a 30-something. Reid sued.
"They told him he didn't mesh with the culture, and he turned around and said 'Yeah, your culture is a bunch of 20-something-year-olds. I'm over 40 and unprotected,' " Yancey says. "It depends on how you define the culture. If the culture is a bunch of white males, sorry but you're not allowed to do that anymore."
Yancey says there are a lot of similarities between today's recession with its layoffs and litigation and the recession that dogged the early 1990s. "We have more implementation laws now than we did then and we have more severe conditions now than we did then," she says. "We can extrapolate back and look in the early 1990s where we had four to five years solid of impacted courts because of the high levels of HR litigation that was going on. We are all expecting the same or more this time around."
One tactic that ex-employees and their lawyers are using involves suing for back pay for meals and rest breaks.
"The trial lawyer will look at the possible discrimination claim and ask 'have you been paid for meals and rest breaks, or overtime?' We are seeing an increase in wage-and-hours class-actions as a result of all these layoffs," Yancey says.
There has also been a huge uptick—more than 50%—in the number of WARN Act lawsuits, Yancey says. Under that 1988 law, businesses with 100 employees or more have to provide a 60-day notice if they are going to layoff 50 or more employees.
If your hospital is planning layoffs, Yancey has a few suggestions that will position you to defend your actions.
First, develop a business criterion to use to select folks for layoffs. "Obviously salary can be one criterion but that can't be the only criterion because that is going to disproportionately weigh it toward older workers," she says.
Yancey also recommends evaluating your hospital's "core competencies" that make the organization run. "Do we need marketing? Do we need PR? There are some of those softer divisions that maybe aren't core competencies," she says.
Make sure that line managers are using that criterion when they are preparing a list of employees targeted for layoffs. Let the line managers provide the list, but check their work. "You have to check for any disproportional impact to the workforce," Yancey says. "Look for irregularities. Are you disproportionately impacting older workers, minorities, or females? If you are, take a second look and see if you can justify it from a business sense. If you can't, or if the numbers are too skewed, you might want to take a second pass."
Yancey, who is a consultant and an attorney, also recommends hiring a consultant and/or an attorney to look at the layoffs list before you make a final call. "This is not something you want to wing, especially in these times," she says.
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The twin hammers of the credit crisis and impending global recession pose significant challenges for healthcare organizations; particularly those that are smaller and others already challenged by capital shortages. As market turmoil makes capital elusive, most markets, including various sectors of the healthcare industry, will likely see acceleration in business failures, restructurings and in some cases, closures.
For companies caught in the turmoil, and particularly distressed companies, success will depend on how effectively boards use the tools available to them. Even before the current turmoil in the financial markets, healthcare providers—especially hospitals—have faced severe economic challenges. A 2008 report issued by Alvarez & Marsal found that more than half of the 4,500 hospitals analyzed were "technically insolvent or at risk of insolvency."
In some regions of the country, the situation is even more dire. In Southern California, more than 50 community hospitals have closed since 1996. And well before the current market conditions took root, a gap was developing between the financially strong and those with less staying power. Organizations with fewer resources, including the majority of the healthcare industry, are more dependent on cash flows, grants, and philanthropy for survival—all of which have become less abundant under current credit market conditions.
Larger healthcare systems enjoy the advantage of lower costs of capital, better economies of scale, and corresponding price leverage with vendors. These advantages, however, may not be enough for larger systems. At the same time, it is clear that smaller providers will remain challenged for the foreseeable future.
The bankruptcy option
As lifelines dwindle, the list of options for management typically grows to include the tools of bankruptcy and reorganization. Between distress and liquidation lies the opportunity for rational reorganization or consolidation. The U.S. Bankruptcy Code gives companies in financial distress tools that permit them to either continue operations as a going concern or to maximize the value realized on their assets through a sale process. A well-informed board of directors can use these tools to restructure debt and obligations in a work-out, or to sell the business free and clear of liens through an organized sale process. Meanwhile, for savvy acquirers, a distressed healthcare organization can offer assets and operations at a desirable price point. Ultimately, success depends on the ability to act in a timely manner.
Many roads can lead a board and its management to discuss bankruptcy alternatives, but the decision to pursue a bankruptcy strategy is never an easy one. As a company becomes increasingly capital-starved, the natural course is to seek additional capital through equity infusion or credit, or to find a friendly buyer. If none of these options work, bankruptcy may be the only remaining solution. The bankruptcy option can also arise through an acquisition discussion for buyers who are unwilling to go forward with a transaction due to successor liability and credit risks that can be addressed by a bankruptcy process. Or, bankruptcy may simply offer the practical protection and time required to get a transaction done before the company's cash needs outstrip availability. Lastly, unless the distressed company is a nonprofit and benefits from a specific exception under the bankruptcy code, creditors may force a company into bankruptcy.
Once a company files for bankruptcy protection, it becomes subject to the jurisdiction of the bankruptcy court. The court oversees the rights of the primary constituencies, which are the board of directors, the company's secured creditors, the unsecured creditors represented by a creditors' committee appointed by the United States Trustee's Office, and the United States Trustee's Office itself. For certain healthcare companies such as hospitals, the Bankruptcy Code can add a patient ombudsman and gives certain expanded rights to the community in which the hospital is located.
As a general matter, the primary negotiators on the company's side in any transaction are the company itself and the creditors' committee. The principal objective of the creditor's committee is to obtain the largest possible recovery for the creditors. Typically, the bankruptcy trustee and the creditors' committees will consider liquidating the assets for a cash purchase price and using the proceeds from that sale to discharge indebtedness or restructuring the existing debt and continuing operations of the hospital, including a sale of the assets. The benefit of the liquidation approach is that the creditors receive a sum certain, even if that sum certain is only 10% of the debt.
The benefit of a reorganization or sale of the company through a court-managed process is the greater value of the going concern. Liquidation gets another hard look late in cases where it appears to be the only viable option left if a reorganization has been thoroughly vetted and has failed. Correspondingly, Chapter 11 provides the debtor with the opportunity to control the restructuring or sale process as a "debtor-in-possession." This means that the debtor continues to remain in possession and in control of its assets throughout the bankruptcy process until a reorganization plan is confirmed or the assets are sold either via a bankruptcy sale under Section 363 of the Code or through a plan of reorganization confirmed pursuant to Section 1129 of the Code.
Section 363 sale
Section 363 of the Bankruptcy Code defines the rights that an organization has, acting as debtor-in-possession of its assets, to use its property while operating under the protection of bankruptcy. The most significant power granted to the debtor-in-possession is the power to sell some or all of its assets pursuant to an order of the bankruptcy court, free and clear of any interest in such assets, so long as one of five enumerated conditions set forth in Section 363 (f) is met. While there are exceptions in certain jurisdictions, examples of interests that can generally be stripped from assets in a sale pursuant to Section 363 include a wide variety of liabilities, such as liens, judgments, tort claims, vendor claims, tax claims, and equity interests. The liens and other interests once attached to the assets that are sold now attach to the proceeds of the sale in the hands of the seller, and are distributed to creditors and equity holders under the supervision of the Bankruptcy Court.
The goal of a Section 363 sale is to obtain the highest and best offer for the assets offered for sale by means of an auction process. Practically, a Section 363 sale can provide the means to complete an ongoing negotiated acquisition of distressed assets, or in a designed process whereby the debtor-in-possession seeks what is known as a "stalking horse" bidder, and in rare situations, through a process where the debtor-in-possession opens an auction to bids without a stalking horse.
Negotiating the 363 sale
In the typical scenario, the seller negotiates with the stalking-horse bidder, and enters into an asset purchase agreement with the debtor that serves as the floor against which other bids for the debtor's assets will be made at auction. The scope and depth of transactional documents in a Section 363 transaction vary a great deal from one transaction to the next.
As in a traditional deal, the agreements provide a framework for establishing consideration for the purchase, covenants to establish the obligations of the parties, and conditions to those obligations. In contrast to typical corporate deals, however, the nature of the bankruptcy process sometimes allows parties to go with significantly lighter documentation than would be typical in most transactions. Factors driving the paperwork reduction include the free-and-clear nature of the sale, the content and force of the parallel sale order, and the general absence of resources from which to derive meaningful post-closing remedies.
In exchange for coming forward and negotiating the initial asset purchase agreement with the debtor, the stalking horse is often granted certain bidding protections in the asset purchase agreement and the sale order to compensate it for the effort that it expended in negotiating the agreement and the risk that it will be outbid for the assets at auction. Examples of bid protections include typical corporate deal protection mechanisms, such as expense reimbursements, and break-up fees that must be paid by a successful bidder to the stalking horse if the stalking horse's bid is bested.
Effect on contracts
One of the best features of the Section 363 sale for a buyer is the power provided by Section 365 of the Bankruptcy Code, which permits a buyer to assume most executory contracts and leases without regard to non-assignment provisions or consent requirements in the contract itself. In other words, except where applicable law provides otherwise, the non-debtor party to an executory contract or lease with the debtor can be compelled to accept performance from a third party assignee—in this case, the purchaser—so long as the purchaser can provide adequate assurance of future performance and the contract or lease has been cured of defaults.
This tool allows the purchaser, through due diligence, to identify and in effect "cherry pick" either below market or otherwise competitive contracts that it would like to have assigned to it as part of the sale transaction while leaving above-market contracts behind with the debtor to be rejected. For a purchaser with established vendor relationships from other operations, the ability to selectively assume good contracts while leaving bad contracts behind can give the purchaser significant leverage when dealing with the debtor's current vendors who often are willing to waive claims or restructure existing contracts in order to obtain (and in a sense retain) business with the purchaser on a go-forward basis.
Sale motion
Following the entry into the asset purchase agreement by the buyer and the stalking horse, the debtor files a motion seeking the approval of the asset purchase agreement, the bid protections and bid procedures, and the stalking horse bid generally. The motion is typically served broadly on all creditors and other parties with interest in the case in order to put those with a potential interest or claim against the assets the opportunity to raise an objection and be heard.
Upon the approval of the bid procedures (which may be negotiated and modified if objections to the proposed procedures are filed by other constituencies in the bankruptcy case), the debtor will conduct an auction of its assets or seek approval of the stalking horse bid, if no other bids are received. If there is a stalking horse bid, the terms of its asset purchase agreement typically define the standard for agreement terms, with subsequent bids judged in a manner that includes a component of value tied to the extent to which a bidder is willing to increase value or decrease conditionality in the asset purchase agreement. Other bidders, if any, submit competing bids in compliance with the terms of the bid procedures order of the bankruptcy court, which in well-run processes requires the bids to be submitted days in advance of the auction.
Sale order
The bankruptcy court typically approves either the highest bid (if there is an auction) or the stalking horse bid (if there is not) at a hearing set by the court to approve the sale, after addressing objections filed by creditors and other interested parties.
The order that approves a sale under 363 is referred to, not surprisingly, as a "sale order." Often the negotiation of the final terms of the sale order can be as drawn out as the negotiation of the initial asset purchase agreement. If multiple objections to the sale were filed and ultimately resolved either through negotiation or by the bankruptcy court, each objecting party will participate in the drafting of the sale order to ensure that the resolution of its particular objection is properly addressed. Moreover, because the sale order often modifies or controls the language of the asset purchase agreement, it must be drafted carefully to reflect the terms of the transaction that were ultimately approved by the bankruptcy court at the sale hearing.
A bankruptcy court sale order is a powerful title clearing mechanism, providing a purchaser with a clean title to the purchased assets to the furthest extent of applicable law. Because the motion seeking approval of the sale is typically served on all interested parties in the case, the sale order provides a court order that the buyer can use as a shield against parties that assert new claims and interests in the assets after a sale closes.
Sale pursuant to plan of reorganization
In addition to Section 363, a debtor-in-possession can sell assets (typically all of its assets), pursuant to a plan of reorganization confirmed under Section 1129 of the Bankruptcy Code. The advantage to a sale through the plan process rather than the 363 process is the perception and possibility that the discharge of claims and interests through a plan is broader than through a sale order. Therefore, the title to assets obtained through a plan is even cleaner than via a 363 sale. The downside of the plan process is that it is significantly more involved, timely, and costly than a 363 sale and there is a trade-off between the expeditious nature of the 363 sale and the possibly broader protections of a sale process through a plan.
CMS: Medicare and Medicaid recoupment liability
The Centers for Medicare and Medicaid Services take the view that a buyer in a Section 363 sale that assumes the seller's Medicare provider number is a successor in interest to the seller, and is liable to CMS for the seller's recoupment and setoff obligations. The legal nuance is whether such rights are an "interest" such that they are discharged when the assets are sold "free and clear of any interest," as is typically the case with a setoff or an equitable remedy, which is the claim made in favor of recoupment. The weight of judicial authority supports the view that overpayment liabilities are a recoupment, and thus survive the Section 363 sale.
However, the result is less certain when there are special factors that present a danger to the success of the sale should the recoupment rights survive. As such liabilities can often be large for distressed healthcare providers, careful attention to the issue during the due diligence process is necessary for purchasers who intend to take the debtor's Medicare provider number as part of the sale transaction. Such purchasers should determine the scope of potential overpayment liabilities and account for these in pricing the assets.
For those purchasers who desire certainty with respect to cutting off overpayment liabilities, additional structural options exist apart from the due diligence and pricing option discussed above. First, if Medicare/Medicaid does not compose a significant percentage of the payer mix (or if the purchaser has significant free cash flow from other operations), the purchaser can apply for new provider numbers from the government. These provider numbers will be free from recoupment claims that might have been assertable against the debtor's number post-closing.
Other areas requiring careful diligence and review include the debtor's unemployment rating and environmental liabilities. In certain jurisdictions these already sensitive potential liabilities are not cleansed by the Section 363 sale, and can alter the economics of the transaction for a potential buyer.
Converting to physician joint ventures
While a number of not-for-profit hospitals have filed for bankruptcy protection in the last two years, in many instances, the organization could have been saved if the hospital and physician incentives had been aligned. In next week's article, Joseph Sowell III and John C. Tishler, partners with Waller Lansden Dortch & Davis, will focus on aligning incentives by converting ailing nonprofits into physician joint venture facilities.
J. William Morrow and Eric Schultenover are partners with Waller Lansden Dortch & Davis in Nashville, TN. They may be reached at will.morrow@wallerlaw.com and eric.schultenover@wallerlaw.com, respectively.
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As the new finance editor here at HealthLeaders Media, I'm on the scent of money wherever I can find it—even from the late-night local news, which normally only serves as a muted backdrop to my end-of-day routine. But I perked up the other night when a story ran about Nashville General, the city's only safety net hospital and the admitting hospital for Meharry Medical College. According to the local TV station, the hospital was hit with $70 million in expenses for uncompensated care in 2008, ending the year $3 million in the red. It interested me because that's a pretty large uncompensated care tab for a hospital with less than 200 beds. Having spoken to the hospital's CEO, Reginald Coopwood, MD, late last summer, I know that behind the scenes the hospital is working to increase efficiencies and improve care by doing thing such as implementing a multi-million dollar IT system that includes electronic health records.
Still, the upshot of late is a scuffle developing between the city—which is in the midst of its own fiscal belt-tightening and wants to cut payments by as much as 10% to the hospital—and a coalition, made up of area clergy, looking for cash anywhere to keep the hospital afloat. One solution being floated is to attract more insured patients to the hospital. That will be difficult, given the fact that HCA's flagship 615-bed Centennial Medical Center, 832-bed Vanderbilt University Medical Center, and 683-bed Baptist Hospital are virtually within sight of Metro General. The city has tried to drive more revenue to the ailing hospital. Last year Nashville's Metro Council passed a resolution waiving copays, coinsurance, and deductibles for city employees who received care at Nashville General.
At HealthLeaders Media, we've covered the problems of public and safety net hospitals extensively, including most recently in the March cover story of HealthLeaders magazine. What is happening in Nashville is far from unique, but it got me thinking about the amount of patient volume safety nets are seeing due to the tanking economy and wondering whether they've managed to make any inroads toward obtaining federal stimulus funds.
Larry Gage, president of the National Association of Public Hospitals and Health Systems, says safety net hospitals, not surprisingly, are getting socked. "Most safety net hospitals are now seeing significant numbers of additional uninsured patients, both in their outpatient clinics and in their emergency rooms. Some public hospitals are seeing as much as a 50% to 60% increase in need for services by the uninsured and underinsured," he says. Not only are there more patients, he adds, but many of these new patients never thought they would need a health safety net.
Gage does say that some public and safety net hospitals are working the insured population angle, as many are urging Nashville General to do, but it is by no means a short-term solution. "Many of our members, especially those which are staffed by medical school faculty, have created centers of excellence that can attract insured patients as well as uninsured or government-sponsored ones, but such programs often take years to develop and yield benefits," says Gage.
Like it or not, in this new economic climate, everyone is taking a hit. The most vulnerable are the smaller safety nets like Nashville General. Gage says some public hospitals and health systems have had no choice but to lay off staff and cut services in many parts of the country due to the "inability or unwillingness of state and local governments to finance this increased need."
While Gage is somewhat hopeful, at this point it doesn't seem as though the stimulus funds will offer much relief to hospitals like Nashville General over the long haul. The economic stimulus package signed into law two months ago, which funnels $150 billion or so to healthcare interests, provides an additional $268 million injection in DSH payments to safety nets across the country, a 2.5% increase by state. Tennessee, however, instead of receiving a DSH increase, has been given a $331 million Medicaid grant. In general, when it comes to the stimulus money, Gage says "much of that money flows through the states, which often have considerable discretion in whether or not to spend the funds for their intended purpose or just use the money to stave off cuts or balance the budget."
Gage says other funds are available, too. "Over and above the DSH increases, some safety net hospitals are drawing on a range of different new programs. Funds designated to improve health information technology are specifically targeted on the safety net," he says.
Safety net hospitals have multiple vulnerabilities in a downturn—the uninsured rise usually comes concurrent to tax revenue decreases for the municipalities they depend on. Some larger safety nets—such as Atlanta's Grady Memorial—may try to use the threat of their closure as pressure to prompt state and local governments, and in some cases even surrounding not-for-profit health systems to supply direct or in-kind aid. The key question for the industry to face is not just how to sustain smaller safety nets through the current downturn, but how to create positive revenue streams to lessen their vulnerability to the next one.
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Express Scripts announced it is purchasing WellPoint's pharmacy benefit management business in a $4.68 billion deal. The acquisition includes WellPoint's NextRx division, which serves 25 million Americans and manages more than 265 million prescriptions annually, and a 10-year contract for Express Scripts to provide services to WellPoint.
Lawmakers already face tough choices to come up with the hundreds of billions it would cost to guarantee coverage for all, and a lack of a vocal constituency won't help. Congress might decide to cover the uninsured slowly, in stages. The uninsured "do not provide political benefit for the aid you give them," said Robert Blendon, a professor of health policy and political analysis at the Harvard School of Public Health.
James Roosevelt Jr., president and CEO of Tufts Health Plan in Boston, writes that changes to physician payments are an opportunity to discuss quality standards for patients. Roosevelt warns there is no "one size fits all" when creating provider contracts, and Tufts uses a variety of payment models depending on the type of business, the provider, and the doctor's ability to invest in infrastructure to manage care.
