Health Systems and the Benefits of Early Dispute Resolution

Innovation, regulation and evolution in the health care industry have all spawned complex business arrangements that span financial, operational and professional services issues. As with any other sophisticated business, there are tension points among financial sponsors, corporate management and health care professionals, all of whom can be parties to multifaceted and complex agreements. Many of these tension points are predictable and have become common in certain types of arrangements in the health care industry.

Given this predictability, health systems can employ strategies to anticipate, resolve and restructure arrangements before they escalate into full-blown disputes and litigation.

Early neutral intervention is key to handling internal disputes before they grow to unhealthy proportions.

Anticipating these issues and structuring the contracts to require professional intervention—i.e., mediation or dispute resolution—can be the difference between successfully navigating foreseeable tensions and ending up in expensive, unsatisfactory and potentially destructive litigation.

A health system’s dispute resolution mechanism should be as robust as possible, defining both the types of issues and the process that it can muster to help achieve a successful resolution to those issues. Frequently, early professional intervention can result in a more satisfactory outcome and help to preserve long-term relationships and services within these agreements.

Here are a few examples of the tensions that arise across financial, operational and commercial agreements.

Contract, Compensation and Management Issues

Recent changes in state and federal laws are designed to facilitate, among other things, coordinated health care. These changes invite strategic alignment transactions such as hospital acquisitions, affiliations, joint ventures, clinically integrated networks (CINs) and accountable care organizations (ACOs).^[1] These alignments are structured and governed through various contracts, which remain in effect post-transactions. Examples of internal issues, based on real-life scenarios, include the following.

Health system acquisition of primary care and specialty practices and groups

Many hospitals or health systems employ primary care and/or specialist physicians under professional services agreements, which use fair market value and wRVU-based^[2] compensation structures. Other types of these agreements employ different value-based compensation models. In some instances, this includes bonus or additional compensation based on revenues or post-EBITDA numbers that measure the acquired group’s profitability to the acquiring entity. It’s not unusual for the acquired group to seek adjustment of the compensation component after several years, taking into account the group’s performance and actual value to the enterprise over time.

Management is not always enthused or willing to participate in the reevaluation and renegotiation of the group’s performance and contribution, and the corresponding adjustment to its members’ compensation. This frequently leads to tension and unhappiness by and among the specialty group members, who sometimes threaten to depart, either individually or en masse, and to seek recourse from the health system.

Joint ventures in certain health care fields

Joint ventures are used to form and expand services in certain health systems, including dialysis, radiology, ambulatory surgery, cardiac catheterization and other specialty facilities. These joint ventures typically include partnerships between and among business management and clinicians and/or other health care providers. Commentators have noted certain benefits of this model, which can also be tension points in commercial relationships: sharing business risk, access to professional management, access to favorable supplier-payor contracts and increased access to and competition in the market.^[3] Other issues between joint venture partners include access to administrative infrastructure, access to clinical initiatives and medical professionals, control over operation and strategic decisions, sharing of profits and professional fees, and compliance and regulatory issues.^[4]

It’s common for one of the joint venture partners to be a physician or group of providers, which serves as medical director of patient care and clinical operations. This opens the door to tensions concerning the physician[s] receiving profits as a joint venture partner, but also earning compensation in their professional capacity. This arrangement can likewise blur the line and create disagreements over who controls operational and management functions, on the one hand, and who has final decision and discretion on medical issues and patient care, on the other hand.

Investors and Financial Sponsors vs. Management: A Divergence of Interests

Internal tensions between investor/non-independent board members and management over enterprise growth and operational strategies

Private equity (PE) investment in health care increased dramatically over the past decade.^[5] Capital markets remain busy with public financings in the health care and biotech spaces.^[6] Special purpose acquisition companies (SPACs) also have become prominent actors in health care public financings. According to a recent article by attorneys at McDermott, Will & Emery, “[The year] 2020 saw a dramatic increase in the number of SPAC IPO filings, and more importantly, the completion of several SPAC merger transactions, often coupled with simultaneous PIPE [private investment in public equity] financing transactions.”^[7]

SPAC and PE investors often join the boards of directors of health care companies that have gone public. These investors typically are non-independent board members, as they have a direct financial interest in the company’s market cap and financial performance.

Disagreements can emerge between PE and SPAC board members, on the one hand, and executive management of the company, on the other hand, over capital allocation, operations and growth strategies. The former may desire that the company focus operations and expansion to achieve immediate financial gains, while the latter may seek to steer the company toward long-term growth and stability.

There may also be disagreement between PE and SPAC board members, who acquired stock through founder shares or public shares, and senior management, who receive stock and options as part of executive compensation, over how immediate proceeds from the IPO and/or positive performance should be distributed. The former, citing among other things risk from their initial funding, want the lion’s share of immediate profit to be distributed to them. The latter, citing their sweat and hard work, seek reward, outside of their stock grants and options, for the operational successes their management leadership achieved.

These tensions can cripple promising health care ventures and undermine progress toward effective management and system growth.

Conclusion

Recognizing that there are financial, operational and compensation incentives that need to be as fully aligned as possible upfront, even though they may diverge over time, and proactively moving to structure a process to resolve disputes as soon as they emerge, are crucial to protecting the health system’s long-term success and the sustainability of its internal agreements.

Christopher Keele, Esq., is a full-time mediator and arbitrator with JAMS. He has deep experience in a broad range of commercial and complex litigation, with emphasis on health care and business disputes.

Disclaimer: The content is intended for general informational purposes only and should not be construed as legal advice. If you require legal or professional advice, please contact an attorney.

^[1] See “Financial Stabilization and Recovery for Rural and Safety Net Hospitals Post-COVID – New Developments and Options Going Forward,” Andrea Ferrari, Alaina N. Crislip, Gary Torrell, David A. Weil, American Health Law Association, September 22, 2021.

^[2] A “wRVU” is a “work relative value unit,” which is a value-based method using patient and/or procedure quantities.

^[3] See “Dialysis facility joint ventures – current structures and issues”, James B. Riley, Jr., Robert Pristave, McGuireWoods LLP, Nephrology News & Issues, July 2005.

^[4] Id. These include predominantly Stark Act and Anti-Kickback Statute issues.

^[5] See “Private Equity and Health Care Investments: How Has COVID-19 Impacted Deal Flow?” Arielle Schmeck, American Health Law Association, September 15, 2021.

^[6] See “Transformational Healthcare Collaboration Opportunities Emerge from COVID-19 Pandemic,” Mark Selinger, Gary Emmanual, Jennifer Geetter, Vernessa Pollard, Steve Bernstein, Lisa Mazur, Kevin Miller, Michael Ryan, Joshua Spielman, Kristian Werling, McDermott Will & Emery, The US-Israel Legal Review 2020.

^[7] Id. at page 89.