On this fifth and final episode of Ropes & Gray's Recent Trends & Developments in Health Care Joint Ventures podcast series, health care partner Stephanie Webster moderates a discussion with health care partners Brett Friedman and Ben Wilson on two alternative partnership models for health care joint ventures: clinically integrated networks and professional services agreement models. They look at how these two alternatives both compare and differ from a traditional joint venture partnership as well as share their perspective on why health care entities might choose to enter into any one of these arrangements.
Transcript:
Stephanie Webster: Thanks for joining us today. This is the fifth and final episode of Ropes & Gray's podcast series doing a deep dive into health care joint ventures ("JVs"). In this series, we discuss salient trends and issues, early-stage joint venture considerations, considerations for nonprofit versus for-profit joint ventures, considerations for provider and payor joint ventures, and a number of other topics.
Today, we'll be delving into different structural models for joint ventures as well as alternative partnership models, including clinically integrated networks and professional services agreement models. In this podcast, we'll offer some considerations to help you determine which model could be right for your partnership.
My name is Stephanie Webster, and I'm a health care partner in our Washington, D.C. office. I lead the firm's hospital and health system revenue initiative and co-lead its administrative litigation initiative. My practice focuses on cutting-edge administrative and federal court litigation as well as payment-related regulatory compliance issues for health care clients, most often involving Medicare, Medicaid and other federal agency programs.
I am joined today by Brett Friedman, a partner in the New York office of Ropes & Gray's health care practice group. His practice focuses on government insurance programs, digital health, accountable care, and value-based payments and regulatory compliance. Before rejoining Ropes, he led the New York State Medicaid Program. Also, today, I'm joined by Ben Wilson, a partner in the Boston office, and co-leader of the public finance practice. Ben's practice focuses on transactions, regulatory and strategic counseling in financing for health care and higher education institutions.
With that background behind us, let's get started. When we talk about models for joint ventures, what does that typically mean for providers, payors or other health care entities? Brett, I want to turn to you first.
Brett Friedman: Yes, happy to take that one, Stephanie—and thanks for introducing the topic. As was covered on previous podcasts, we are noticing that JVs are increasing in prominence in recent years. It's because of uncertain market conditions, such as those caused by COVID-19, the resources, the competition, the degree of integration required for mergers and equity acquisitions that just may be infeasible now. As a result, investors, clinical partners and industry stakeholders have sought alternative growth opportunities that joint ventures provide. They offer a way for potential partners to explore new opportunities with less risk and commitment that would be typical of a merger. As we've mentioned in the previous podcasts in this series, we are seeing this happen for a number of reasons.
- The first is that there's just less risk involved. Lower commitment means a greater appetite to embrace new opportunities such as those coming out of the federal government or states. Health care entities can maintain their organizational autonomy, which is critical for future capital or liquidity events.
- JVs also offer access to capital, to skills, to management resources and technology that an entity can't grow themselves.
- It can also enhance service offerings that are rapidly growing, without a buy or a build event.
- And finally, regulatory scrutiny of health care mergers and acquisitions is really elevated right now, whether through the FTC or state material transaction laws (that other Ropes & Gray podcasts are covering), so that makes JVs and other models like JVs more attractive to some partners than traditional M&A.
Ben, do you have any different perspective on that, or is your thinking aligned?
Ben Wilson: I am aligned—thanks, Brett. When you say, "joint venture," most people have a particular legal structure in mind. They imagine that you will form a new legal entity and give each JV partner an ownership share. That new entity is the JV. It holds the key business assets, employs the personnel and carries out all the business of the joint venture. There are obviously a lot of details to figure out along the way, but that is the traditional structure most people think about across any industry—it's classic, familiar and unmistakable.
In health care, there are two other models that you should know. These different models address different legal and practical issues associated with providing licensed or professional medical services and, perhaps more importantly, getting paid for them.
- The first other model is a professional services agreement model. This can help avoid the hassle associated with standing up a brand new health care entity that has its own assets, employees, payor agreements and the like. To do so, you take an ordinary old professional services agreement and layer on financial and other terms that give you joint venture-like characteristics.
- The second model is a clinically integrated network. This allows independent physician groups and other provider organizations to retain their independence and autonomy while also joining forces to provide better care, implement information systems, reduce costs and pursue value-based care strategies. Clinically integrated networks are designed to do just that without going out of bounds from an antitrust and health care regulatory perspective.
Stephanie Webster: You've mentioned that the dominant structural models that we're seeing include
- creating a new, jointly owned legal entity;
- entering into a professional services agreement; and
- participating in a clinically or financially integrated network.
Bottom line: why would providers enter into joint ventures in these respective categories?
Brett Friedman: I mean, there's really a simple answer, Stephanie. It's because they can partner with payors or in payment opportunities in ways that they would otherwise be unable to do so.
Stephanie Webster: Thanks, Brett. I'm interested in exploring other reasons health care entities are pursuing these different models.
To start, Brett, could you tell us a bit more about the ownership structure of a traditional joint venture?
Brett Friedman: I'd be happy to, Stephanie. As Ben mentioned earlier, a joint venture structure is when two or more partners create a jointly owned, new legal entity, and that legal entity operates or coordinates components through which physicians or other clinical professionals will provide professional services.
We typically see ownership that is split evenly, the 50/50 joint venture, or unequally—you could have a minority or a majority owner. If you have an equal 50/50 joint venture, the parties must agree on all management decisions concerning the JV, and you can get deadlocks.
In an unequal or a minority-majority joint venture, you've got one majority owner and one minority owner, and the majority owner typically makes all the day-to-day decisions or has major blocking rights, but the bigger decisions, the super-majority decisions, will require the consent of the minority owner.
The gains and losses of a joint venture are typically distributed proportionate to their respective capital interest and in some ways, the health care anti-kickback safe harbors require it, and it provides in many ways the highest degree of integration because you've built or you've created this new legal entity, this new thing.
So, as a result—and Ben, if you want to discuss more—I think there are a lot of pros and cons to this traditional joint venture model.
Ben Wilson: That's right, Brett. This is the default model for good reason. Right off the shelf, with next to no special effort, you get a decent vehicle with a lot of features of alignment built in. The new joint venture lets you jointly contribute resources, share profits and losses in a tax-efficient way, hold assets, enter into contracts, and employ personnel. You also get a built-in process for jointly making decisions together. Since there's a separate legal entity, you also get limited liability protection. Perhaps most importantly, just about everybody will understand this traditional model—that means it will be easy to explain to senior leaders, board members, regulators and others.
It is definitely a good first place to look, but in the end, it isn't always the best choice. It might not be easy (or wise) to gather up the assets and people the business needs and just drop them into a new jointly owned legal entity—hospital service line joint ventures, for example. There might also be a good reason for the joint venture not to hold certain contracts, like payor contracts.
Finally, the structure can just be a bit cumbersome to manage. You may end up doubling up on meetings and paperwork. Partnership tax can get complicated.
So, these are some reasons why the traditional joint venture model might not work as well.
Stephanie Webster: Thank you. What model might you recommend for potential health care partners that want a bit more autonomy, while still achieving access to payor opportunities?
Brett Friedman: Yes, I'm happy to jump in on that one, Stephanie, because one of my favorite models would do just that, which is the professional services agreement ("PSA") model, sometimes called the "leased physician model" or the "PSA model."
Under this one, you have a professional practice that leases its physician or other billing practitioners, who are employees of that entity, to an existing professional services entity through one or more professional services agreements, sometimes called "lease agreements," such that the services of those leased providers are now billed under the TIN (Tax ID Number) of the entity that's the other party to the PSA. And the benefit of that is that when those practitioners are performing services, it's under the payor contracts and rates for the entity that is receiving the leased providers.
Under this model, the entity that's leasing the physicians or other clinicians remain W-2 employers of those individuals, and they continue to act as employees of that entity, but that they're essentially now billing under the other entity with that entity collecting for the services performed by those clinicians. You can supplement the PSA by having the leasing entity manage the practice site, in whole or in part, through a separate administrative services agreement, but those clinicians get credentialed under the name and the TIN of the entity that's receiving the lease, and they're really doing the billing and collection for those entities. And so, the entity billing for the services has a degree of oversight to ensure that the services going out under their name meet the quality and expectation of the payors, and then they remit the fees that they collect to the entity that's leasing those providers at a fair market value fee that should be structured consistent with fraud and abuse laws, and we typically see that being done utilizing a flat-fee structure—X-amount of dollars per month or other defined period of time. You can do it on a per-provider, per-month basis, so for every doctor, you're paying X-thousands of dollars per-provider, per-month.
And in rare cases, we see what we call a "membership attribution model," so if you can somehow segregate through one or more attribution metrics that these members or these patients of a certain payor are originating from the leasing practice site, you can charge a per-member, per-month fee, which all have different fraud and abuse considerations but can generate financial alignment between the entity that's leasing the clinicians, and the entity that's receiving and billing for those services.
Ben, if you've had experience with these models, what pros and cons should people keep in mind under the PSA approach?
Ben Wilson: Sure. This can be a great model for those times where you want some joint venture features—like sharing of profits and losses—but you do not want to move assets, employees, payor contracting relationships around, etc. There are plenty of examples of this. Many hospital service line joint ventures are structured using a professional services agreement or management services agreement approach—think pediatrics, cancer and imaging joint ventures. It can also be an effective approach where it's important to bill for the joint venture services under a partner's existing payor agreements. As you mentioned, Brett, it allows physician groups to participate in joint ventures without disrupting their existing structure and while maintaining a significant degree of physician autonomy. Bottom line: the PSA approach is great when you want the flexibility to pick and choose the joint venture alignment features you like, but not disrupt your assets or structure.
The key disadvantage of this flexibility is that professional services agreement model joint ventures tend to have a much lower degree of alignment. Because of that, and because they are entirely based on one or a few contracts, the relationships tend to be a lot less sticky—that's the price you pay for autonomy and flexibility.
Also, remember that one of the advantages of the traditional joint venture model is that you get a lot of features automatically, right off the shelf. For the professional services agreement model, you have to cook it all up from scratch. It's like the difference between buying a MacBook computer—that comes with all the software you need preinstalled, and everything just "works"—to building your own Linux PC where you need to make a bunch more decisions and exercise a lot of care just to get the same baseline functionality.
Stephanie Webster: I like that analogy, Ben. It seems like the professional services agreement model could work well for partners looking to integrate, while maintaining local control.
Turning back to you, Brett, where do clinically integrated networks fit into the picture?
Brett Friedman: I mean, there is a role for a clinically integrated network -- or what people typically call a "CIN model." Under this model, providers will create an incorporated association with either a single provider serving as the lead contracting entity, or through the creation or imposition of a new contracting entity to hold the payor contracts. Those can be in the form of an accountable care organization, a physician hospital organization or an independent practice association—that alphabet soup of ACO, PHO or IPA—with that lead contracting entity having a separate governing body and administrative infrastructure.
The critical consideration here—Ben, which I'm sure will go into in a bit—is whether those entities are sufficiently clinically integrated and/or financially integrated to pass antitrust muster. And the FTC and DOJ have continued to refine the indicia of what they consider to be sufficiently clinically or financially integrated, so that these associations of providers can engage in single signature contracting that would allow for joint negotiation and payment under a common rate structure. The FTC and DOJ guidance is constantly evolving, and without that certainty, you do expose yourself to—or implicate—a significant degree of antitrust risk when otherwise independent providers are looking to engage in what could be horizontal price fixing.
But once a clinically integrated or financially integrated network is formed, that CIN may negotiate and contract on a joint basis for all of the providers in their network, such that the joint contracting is, in the antitrust parlance, subordinate to the clinically integrated networks' integrative activities, and it's reasonably necessary to achieve that clinical integration program. In the interim, if you form the network and you haven't yet achieved that indicia of clinical integration or financial integration, the network can still add value to its participating providers through a "messenger" model, where their IPA in an antitrust-compliant way is literally messaging rates from the payor to individual practitioners, but the critical feature there is no one provider can know what another provider is getting paid in the same network. But there is administrative benefits to utilizing the CIN to be that negotiation and messenger body, which works well for smaller and independent providers, who don't have the capability, experience or market power to do so on their own.
Ben, do you want to talk a bit more about when the clinically integrated network model works best?
Ben Wilson: Yes—thanks, Brett. Clinically integrated networks help solve a very specific, but also very important, problem. A decade ago, the vast majority of physicians—over 60%—were in private practice. Today, that number is much lower, around 45%. If you ask the doctors why they sold their practices, almost all—four out of five of them—will tell you the same story. For them, it just made no financial sense to stay independent given the administrative garbage required by our current health care system. Most of that story is about dealing with health plans—from being the little guy getting jerked around on rates, wasting hours on prior authorizations and facing routine denials, to just not getting paid. Part of that story is the expenses associated with modern practice, particularly implementing electronic health record systems.
Clinically integrated networks, including independent practice associations, are a way that physician groups can team up to address each of those factors without giving up on an independent practice model and without violating a rat's nest of laws. This strategy has worked really well for some, and not for others. A key point is that it's not just a strength in numbers play to get more leverage against health plans—that strategy is a recipe for lawsuits and antitrust enforcement. Those that have been successful here recognize that member physician groups actually change how their physicians practice. That's really hard, particularly when those groups retain a significant degree of autonomy.
Stephanie Webster: Now that we've gone through some of the pros and cons of these options, let's take some time on specific questions for potential partners to ask in choosing the model best suited to them.
The first question is: Are partners able to achieve common rate structure? Brett, that one's for you.
Brett Friedman: Yes, it's a great question, because that's really the big question everyone wants to ask when pursuing a joint venture, right? What does this do for me in participating with potential payors?
In a traditional joint venture—that's your new legal entity—it is possible to achieve a common rate structure, but that requires the new JV entity to be added and participate with payors. That's possible in some cases, depending on the terms of the payor contracts, if one of the joint venture parties can treat the joint venture as an affiliate and to bring in the joint venture as an affiliate under those payor contracts—otherwise, the joint venture's going to have to negotiate arrangements with payors from scratch.
Next, when we look to the PSA model, here, this is where this model really shines, because under the PSA model, there's no change in what it looks like to payors, right? On day one, the entity with the TIN that's receiving the leased providers is billing the same way that it bills on day two—it's just billing for more providers that are being leased. And so, this structure is often the path of least resistance if you have an existing practice participating in a favorable payor arrangement, because the TIN and billing entity is not changing.
And then, for clinically or financially integrated networks, the parties in a clinically integrated network can enter into contracts on a single-signature basis when you've achieved that level of integration—but if you're not sure that you have, doing so can prematurely expose providers to a degree of antitrust risk, as we mentioned earlier.
Stephanie Webster: Again, going through the three different options, the question is: Is use of branding allowed?
Brett Friedman: Yes—really under all three models. It really depends on how the branding or co-branding is negotiated by the parties. In a traditional joint venture, we often see IP, branding or trademark provisions negotiated as one of the terms, especially if one of the joint venture partners has a strong brand.
In the PSA model, you also can negotiate branding in connection with the lease of providers from one entity to the other. Sometimes we see "Such-and-such practice group powered by or affiliated with," to convey that there is a PSA underneath and driving that arrangement, especially when you have a separate administrative services contract that's also managing the practice locations.
And then, in a clinically integrated network, co-branding is permissible, but really it should be in furtherance of the clinical integration program, and that all of the providers in the network are agreeing to the use of the branding, usually as part of the participating provider agreement or the clinically integrated network's operating agreement.
Stephanie Webster: What degree of control exists over physicians and practice sites under the different models?
Ben Wilson: In a traditional joint venture, there can be quite a bit of control. Particularly if the joint venture entity employs the professionals, holds the payor contracts and owns the assets. The professional services agreement model generally has less control, as the professionals, licensed assets and contracts tend to stay where they are within the respective partners. There's really no "control" within the clinically integrated network approach outside of the protocols that member physician groups sign on to implement within their respective independent practices.
Stephanie Webster: Thanks again, Ben. This last question is also for you: How easy or complex is the implementation of the model?
Ben Wilson: Great question. Generally speaking, traditional joint ventures are the most complicated to implement. While you do get an off-the-shelf framework with the potential for high alignment, you are still creating a new legal entity, identifying and valuing contributions, delivering supports and services, lining up new payor agreements and running a separate business. This is why you do not see many joint ventures that continue for decades—eventually, the joint venture partners just find a more efficient way to run the business.
The PSA model is kind of the opposite—it requires a bit more homework up front to spell out in a contract the particular joint venture features you want. However, you tend to wind up with a pretty good road map for implementation—at least over the early years—and the arrangement tends to require a lot less administrative complexity on the back end.
The complexity of implementing a clinically integrated network can be all over the map, frankly. A lot of that turns on the particular value proposition developed by the network for members and payors, and how challenging it is for the network to execute and deliver on that collectively. How easy it is to execute depends in large part on the strength of the network itself.
Stephanie Webster: Thank you so much, Brett and Ben, for discussing these different health care joint venture models today. For those of you listening who would like more information on the topics discussed today during this podcast or our health care practice group more broadly, please don't hesitate to contact us. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple, Google and Spotify. Thanks again for listening.
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