Recent Trends & Developments in Health Care Joint Ventures: Nonprofit/For-Profit Joint Ventures

On this third episode of Ropes & Gray’s Recent Trends & Developments in Health Care Joint Ventures podcast series, health care partners Tim McCrystal and Adrianne Ortega discuss recent trends in partnerships between nonprofit and for-profit entities, as well as important business, structural, and legal issues for nonprofit/for-profit joint ventures.

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Transcript:

Adrianne Ortega: Hello, and welcome to today’s podcast. My name’s Adrianne Ortega, and I’m a partner in Ropes & Gray’s health care practice group. I advise clients on health care transactions, regulatory, and governance matters. This podcast is part of our Ropes & Gray joint venture podcast series, focusing on joint ventures in the health care industry. Our topic today is nonprofit/for-profit joint ventures. With me today to discuss this topic is Tim McCrystal, co-chair of Ropes & Gray’s health care practice group. Tim regularly advises health care organizations on joint ventures.

Tim McCrystal: Looking forward to our discussion, Adrianne.

Adrianne Ortega: Tim, in our first podcast in this series, we discussed trends in joint ventures, including the rise in joint ventures in the health care industry. Do you see this trend in joint ventures between nonprofit and for-profit entities, as well?

Tim McCrystal: Yes, we are seeing an increase in joint venture activity between nonprofit and for-profit entities. Several factors are driving these trends, one being market conditions. Coming out of the pandemic, many nonprofit health systems continue to experience high costs, particularly labor costs. These costs are increasing at a time when health systems are facing the end of the federal stimulus and provider relief funding, and operating revenues generally have not kept pace with cost trends. This makes it difficult for nonprofit hospitals and health care systems to pursue larger, formal mergers and equity acquisitions or for nonprofits to deploy the capital sufficient to launch into a new business segment.

Adrianne Ortega: This is where alternative transaction structures, like joint ventures, can be a great alternative. As we touched upon in the first podcast of this series, joint ventures generally require less capital investment than mergers and acquisitions. Joint ventures may be an attractive option for nonprofit organizations to focus on desired areas of growth without the capital and operational commitment required of more integrated combination transactions or de novo business operations.

Tim McCrystal: That’s right. Another driver, which we touched on in the previous podcast, is the health care industry’s continued push towards value-based care, with payers increasingly shifting from fee-for-service to value-based payments. Health systems may be in need of capabilities to promote care coordination, improve clinical outcomes, and reduce overall medical costs. Often, it is for-profit entities like disruptive start-ups in the value-based care space that can provide these capabilities. And joint ventures can provide an opportunity for health systems to access these capabilities quickly and without significant capital investment.

Adrianne Ortega: Great points, Tim. Some of those capabilities can be in the form of digital health and other technology. Partnerships with digital health companies and software developers can present an opportunity to bring together clinical expertise and comprehensive sources of patient data from a nonprofit partner and technical expertise from a for-profit partner.

Tim McCrystal: That’s right. Another driver of nonprofit/for-profit joint ventures can be antitrust considerations, which is an area of increased regulatory scrutiny. Concern regarding private equity investments is also on the rise. Furthermore, states have increasingly passed laws regulating competition, access, quality, and cost—these laws provide state regulators the authority to review and approve certain transactions. (See Ropes & Gray’s dedicated resource center).

Adrianne Ortega: Thanks, Tim. Are there noteworthy examples of nonprofit/for-profit joint ventures that you are seeing in the market?

Tim McCrystal: Yes, in one recent example, MaineHealth, a nonprofit integrated health system, and agilon health formed an arrangement to allow MaineHealth to enter into value-based contracts, primarily in the Medicare Advantage space. As part of this arrangement, MaineHealth will contract through agilon health’s risk-bearing organizations. The partnership is intended to support MaineHealth in transforming into a value-based care system within 12 months.

Adrianne Ortega: It’s an interesting model, Tim. Agilon health has been primarily involved in physician group contracting. Here, we have a nonprofit health system expanding into the sort of innovative models that physician groups have been leveraging.

Tim McCrystal: That’s right, Adrianne. It appears MaineHealth sees the advantage of agilon health’s capabilities and the opportunities to coordinate care and manage costs of its primary care network.

Adrianne Ortega: What are other examples you have seen of nonprofit/for-profit joint ventures in the value-based care space?

Tim McCrystal: Another example that highlights a different angle of the push towards value-based care is the arrangement between UMass Memorial Health Ventures, an arm of the hospital, and Welsh Carson, an experienced investor in the health care industry. Together, the partners formed Mass Advantage, a new Medicare Advantage health plan focused on insuring beneficiaries in Worcester County, Massachusetts. The plan offers beneficiaries access to the UMass Memorial system and its providers.

Adrianne Ortega: That is an interesting example, Tim. There, UMass Memorial Health was able to partner with a for-profit investor as part of its effort to expand along the care continuum and strengthen payor and provider integration.

Tim McCrystal: Another example is the recently announced arrangement between CVS Health and Long Island-based Catholic Health. In that arrangement, the parties partnered to participate in Medicare’s ACO REACH initiative, and together the parties—through their respective ACOs (accountable care organizations)—will jointly assume accountability for the health care of almost 40,000 Medicare fee-for-service beneficiaries. Here, a health system partnered with a different type of health care disruptor, CVS Health, to improve care coordination, implementing services such as home-based care programs, transportation support, and programs designed to improve social determinants of health. The parties also plan to focus on improving primary care by creating new health care delivery offerings, such as same-day access, multidisciplinary chronic condition care management programs.

Adrianne Ortega: That example is interesting because it involved another version of the joint venture model: two ACOs coming together to jointly assume risk. Part of that arrangement includes another trend we discussed: digital health capabilities. Specifically, it makes use of CVS data analytics and technology to support patient care delivery.

Tim McCrystal: Yes, that’s right. In another example, Mayo Clinic and nference, a Cambridge-based biotechnology company, formed a collaboration to develop health care solutions in areas such as biomarker validation in oncology, EKG diagnostics in cardiology, and digital pathology. This collaboration combines nference’s data analytics expertise with the clinical and research expertise of Mayo Clinic’s physicians and scientists. Mayo Clinic launched the Mayo Clinic Platform with the goal of improving health care through data-based insights. The Clinical Data Analytics Platform is the first venture under this platform, and nference is Mayo Clinic’s first Clinical Data Analytics Platform partner.

Adrianne Ortega: Thanks, Tim. Let’s turn to structural considerations.

Tim McCrystal: There is a lot to consider here. Joint ventures between nonprofit and for-profit organizations may be structured in a number of different ways, which depend on the purpose of the partnership, certain considerations that apply to all joint ventures, as well as special considerations that apply specifically in the context of nonprofit/for-profit joint ventures.

Adrianne Ortega: What are some of the key considerations for nonprofit/for-profit joint ventures? Some of the key considerations that come to mind are tax-exempt status, governance, restrictive covenants, dispute resolution, and duration and exit provisions.

Tim McCrystal: Let’s start with tax-exempt status. The vast majority of JVs we see are ancillary JVs; whole entity JVs, where a nonprofit essentially places all of its operations into a JV with a for-profit entity, are pretty unusual. Understanding that whole entity JVs are unusual, if we do encounter them, the key consideration is that the JV must further the nonprofit’s exempt purpose, and the nonprofit must exercise sufficient control over the JV to ensure it exclusively furthers its exempt purpose.

Adrianne Ortega: How does the analysis change for ancillary joint ventures?

Tim McCrystal: In general, a tax-exempt organization engaged in an ancillary joint venture with a for-profit organization that is formed as a tax partnership generally does not jeopardize its tax-exempt status merely because it engaged in the JV, even if it does not have a majority control over the venture. There are important considerations for nonprofits, however. First, the tax-exempt organization must receive fair value in exchange for its contributions to the joint venture to avoid conferring an impermissible private benefit on the for-profit co-venturer. This includes contributions for which the nonprofit receives credit in the joint venture and also with respect to any services arrangements put in place between the nonprofit and the for-profit or the joint venture entity itself.

Adrianne Ortega: Thanks, Tim. It is an important point to underscore—the nonprofit must receive fair value consideration for anything of value that the nonprofit contributes to the joint venture, and the nonprofit must receive fair value for any services arrangements that are put in place. Nonprofits should document all intercompany arrangements closely to ensure compliance with tax-exempt requirements.

Tim McCrystal: That’s right, Adrianne. The tax-exempt co-venturer could also generate unrelated business taxable income (“UBTI”). This means that the nonprofit would have to pay tax on any UBTI. But, the IRS has no prescribed percentage limit or amount of UBTI. Ultimately, whether a nonprofit has engaged in too much unrelated business activity is a facts and circumstances determination. That said, it is important that all nonprofits monitor this type of activity, including unrelated business activities carried on throughout the organization, not just through JVs.

Adrianne Ortega: Thanks, Tim. Let’s shift gears to discuss governance. The joint venture could be structured such that the nonprofit partner formally exercises control, but many joint ventures have 50/50 ownership, and some are structured so that the for-profit investor owns a majority of the joint venture. In cases of equal ownership or where the for-profit investor is in the majority, other measures can be put in place to achieve good governance and a voice of the nonprofit in governance of the joint venture.

Tim McCrystal: I’d also point out that even if the nonprofit has a minority stake, requiring a majority of the nonprofit’s appointees to the joint venture board to establish a quorum or supermajority voting for specific actions can promote good governance. Several other measures may be implemented to provide a voice in governance to the nonprofit partner. This could include the power to review and approve strategic decisions pertaining to budgets and strategic transactions, for example, as well as amendments to the joint venture agreement, contractual arrangements, and board appointments and removals. A nonprofit partner may also maintain informal control through a certain unilateral decision-making authority, including with respect to the scope and location of service offerings, audit rights, and the supervision of the joint venture’s actions.

Adrianne Ortega: Great points, Tim. It seems as though, even if purposes are aligned in the joint venture, there could still be the potential for conflict when it comes to each partner’s potential for competition with the joint venture.

Tim McCrystal: That’s right, Adrianne. To avoid certain conflicts between the joint venture and its partners—particularly where the partners share similar lines of business with the joint venture—the partners should evaluate their duties with respect to business opportunities that may compete with the joint venture. Specifically, partners should consider what types of business opportunities should be preserved for the joint venture through clearly defined covenants not to compete.

Adrianne Ortega: Great points, Tim. These covenants may require each partner to present certain business opportunities to the joint venture prior to independently seeking such opportunity outside of the joint venture, including in relation to employee and customer solicitation. But, joint venture partners should limit these covenants to the least amount of protection required for viability of the joint venture. For example, covenants could be narrowed to the specific type of business activity or a specific geography.

Tim, as a related point, how should nonprofit and for-profit parties to a joint venture consider exit strategies?

Tim McCrystal: This is an important point, Adrianne. Nonprofit participants may not have as much experience as for-profit participants in these types of joint ventures, and it is important to consider an exit strategy at every stage of the enterprise. Without clearly articulated joint venture duration and exit provisions, the partners could encounter significant delays when they eventually seek to withdraw from the business arrangement, which may lead to prolonged financial loss and partner tension. Especially where for-profit partners may have shorter-term strategic timelines than their nonprofit partners, partners should determine whether the joint venture will terminate at a specified date or upon completion of a specified objective. Nonprofits can avoid costly disputes at the end of a relationship by deciding, up front, which partners will take which assets with them when they leave the partnership or at least specifying a process for making such determinations, including puts, calls, and related buy-out provisions.

Adrianne Ortega: Well said, Tim. Thank you so much for talking with me about these important topics. For those of you listening who would like more information on the subjects discussed today during this podcast or our health care group more broadly, please don’t hesitate to contact us. As a reminder, this podcast is the third in a series discussing joint ventures. Our next podcast will address payor/provider and provider/provider 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. Thank you again for listening.