In It Together: Emerging Joint Venture Structures for Health Systems and Insurers. Insurers

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Elinor Austin
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com Denise Hanna Moderator P t Partner Locke Lord LLP 202.220.6992 dhanna@lockelord.

1 In In It Together: Emerging Joint Venture Structures for Health Systems and Insurers Insurers October 20, 2015 Alan Maesaka Counsel Aetna Inc Denise Hanna Moderator P t Partner Locke Lord LLP dhanna@lockelord.com Baird Allis Partner L k L Locke Lord d LLP ballis@lockelord.com 2015 Aetna and Locke Lord LLP

2 What is Changing? What is the Future of Health Care? As a result of the Affordable Care Act Act, along with the health care exchanges, the market must offer more inexpensive health plans. Uncoordinated care through broad provider networks is increasingly an unsustainable model. Payers and health care providers must work in tandem to reduce the inefficiencies in the health care system. Health care providers need to understand the cost i li ti off th implication their i d decisions i i and dh have skin ki iin th the game. 2

3 Economic Environment Fee for Service vs. Efficiency How Real is This Trend? There is an inherent tension between the fee-for-service model and efficiency. efficiency As efficiency increases increases, services are reduced or eliminated. This can put pressure on providers. Accounts of the demise of fee-for-service may be exaggerated. Similar challenge is other industries (law; technology, etc.) How to Solve the Dilemma? In any case, hospital systems and providers are considering entering the insurance business directly by organizing their own health ea t p plans. a s Others are considering or entering joint ventures with insurers for the purpose of sharing in the profits of the joint venture s health plans that insure their p p patient p population. p 3

4 The Relationship p Between Payers y and Providers is Changing Providers and payers have historically had challenging relationships regarding rates. IN IT TOGETHER Because of ACA s mandate to lower health care delivery costs, improve the quality of care through better clinical integration and coordinated care, providers and payers must more closely collaborate and align their respective interests interests. 4

5 Value-based Payments The Continuum Patient Centered Medical Homes Patient-Centered Bundled Payments Incentive Arrangements Risk Arrangements Joint Ventures Our focus today 5

6 How Are These Innovative Joint Ventures Structured? Two Primaryy Structures: Contractual business arrangement (the Contractual JV ) Joint J i t ownership hi off newly l organized i d and d lilicensed d insurance company or HMO (or existing insurer, yp y a shell insurer)) ((the Legal g Entity y JV )) typically A two-step joint venture can also be pursued pursuant to which the parties first enter into the Contractual JV and d if certain t i agreed d upon ttargets t are met, t the th parties ti will then automatically move to the Legal Entity JV (the y JV ). ) Hybrid 6

7 What Drives These Joint Ventures? These joint ventures--regardless of structure--can d li deliver: Alignment of interests Insurers, providers and patients align to achieve optimum results through wellcoordinated and more efficient care Partnership Insurer and the health system sharing a business plan and underwriting risk 7

8 End Goal Competitive Advantage - Significant competitive advantage over other insurers through partnership with a strong health system Increase in Business - Increased utilization of health system s services driven by competitively priced joint venture t products d t and db better tt coordinated di t d care Skin in the game - To improve quality of care and delivery of more affordable health care services Inorganic Growth - Accelerated growth in membership and utilization in a highly competitive market that could not be otherwise replicated by the insurer or health system 8

9 Business Case for the Parties Entering I t Such S h Joint J i t Ventures? V t? Into Insurer receives: Significantly discounted rates exclusively for joint venture products and services Access to health system s clinically integrated network (which either already exists or will need to be organized) Cooperation of health system providers to emphasize quality of care and optimum results Accelerated growth in insurer s membership in a competitive marketplace k t l Health system receives: Potential share of profits from joint venture business Off th h lf IT and Off-the-shelf d administrative d i i t ti capabilities biliti Exclusive relationship drives additional patient population to the health system and its network 9

10 What Type of Health System is a Desirable Candidate for a Joint Venture? Scope and Penetration Progressive Significant health system, preferably with a clinically integrated network, offering comprehensive services in a discrete geographic market Forward thinking health system that understands the changing health care landscape and is willing to take the leap Market Leader Strong brand recognition within ithin the market 10

11 What are Health Systems Looking y g for in a Payer in a Joint Venture? Brand Capabilities Positive reputation and brand recognition in the health system y market Excellent administration and technology gy capabilities Progressive Track record of working with providers as partners rather than as service providers 11

12 What are Health Systems Looking for in a Payer in a Joint Venture? (con t) National Network Cost-effective out-of-area coverage Hospital System Expansion Looking for growth in the hospital system system s s home market Strong g sales capabilities p of Insurer 12

13 Contractual JV How Are They Structured? Provider 100% Insurance p y Company/HMO policyholders members b Provider Captive Insurer (can also be a traditional licensed insurance company)* ii.e., e 50% quota share reinsurance is ceded to the Provider Captive Insurer i.e. 50% profit share in ASO service fees Insurer TPA self-insured employers and similar groups * Only a handful of states allow an HMO to assume quota share reinsurance 13

14 Contractual JV: Relationship Agreement - Contractual JV is defined by y an alliance or relationship p agreement g (( Relationship p Agreement ) No joint ownership or control of an operating entity Shared Profits/Losses - reinsurance for insured products and a p p profit sharing g contract for ASO services Flexible and Speedy - Quick access to market b because ffewer regulatory l t approvals l (t (typically i ll only l of reinsurance agreement(s) by state insurance regulators) g ) 14

15 How does the reinsurance work? Profits and losses on insured products shared through reinsurance arrangement: Insurer writes jjoint venture p products through g its existing g insurance companies and HMOs and cedes a quota share participation of the joint venture business to an authorized risk bearing entity of the health system M t large Most l h lth systems health t h have captive ti insurance i companies i which can assume reinsurance or the health system can quickly form a new, or acquire a shell, insurance company Significant flexibility: profit sharing (i (i.e., e a party s party s quota share participation in joint venture products and services) is not fixed and can vary by product or service, geographical location, calendar year or other metrics ASO services revenues can be shared through profit sharing or other arrangements between the parties 15

16 What s in the Relationship p Agreement? g The Relationship Agreement governs the overall joint venture relationship between the insurer and the health system including: The deal Th d l Nature/scope/objectives N t / / bj ti off the th joint j i t venture Contributions to JV The p parties contribution to the joint venture (for example, renewal of existing insurer policyholders onto joint venture products and services renewal of health system s services, system s employees onto joint venture products) Discounts Provider rate discounts for joint venture business Governance Many structures available 16

17 What s in the Relationship Agreement? (con t) Restrictions Exclusivity and non Restrictions non-competition competition in the territory covered by joint venture and Carve-Outs Limitation on the exclusivity restrictions (for example, for out-of-state employer group national plans of the insurer with modest presence in the joint venture territory) Dispute Resolution Many structures possible Term and Termination May include run-off obligations and/or buy-out of reinsured joint venture products (Note: can be challenging!) Network Access 17

18 Ancillary Agreements (in addition to Relationship Agreement) May Include: Reinsurance agreement(s) Profit sharing agreement(s) Provider and network access agreement Administrative services agreement(s) Delegation agreements 18

19 Legal Entity JV How are They Structured? Insurer Health System 50% equity 50% equity Joint Venture Holding Company 100% equity Joint Venture Insurance Company ASO Services 100% equity Joint Venture HMO Members Policyholders 19

20 Joint Ownership of an Insurance C /HMO Company/HMO: Key y feature The jjoint ownership, p, operation p and control of risk bearing entity (by the parties ( NewCo ) Risk/Reward Profits and losses shared through joint ownership of NewCo Regulatory approvals Insurance department approval of formation; obtaining approval of policy and contract forms Powerful Platform Provides a very powerful co-branded operating platform 20

21 What else is in the Relationship Agreement? (In addition to what s covered above ) Organization and Formation Covenants relating to the organization and licensure of NewCo ((or acquire q a NewCo shell insurance company) Capital Capital and capital maintenance covenants t Business Plan Agree on a business plan for NewCo Administrative Services Insurer will agree to provide the NewCo back office 21

22 What else is in the Relationship Agreement? (con t) Branding Brand or co-brand co brand all joint venture products and services Sales Sales force and compensation p for relationship products sales (careful insurance agency requirements) Temporary Reinsurance Temporary arrangement for insurer to write and reinsure with the health system system s s captive joint venture products and services until regulatory approval 22

23 Key Features Ownership Percentages Percentage ownership of NewCo of each party can vary depending on each parties contribution value Discounts Discounted medical reimbursement cost rates of health system and network access provided to NewCo directly Initial Capital Membership Insurer s contribution of initial capital can include renewals of in-force in force policies and contracts previously (as well as cash) 23

24 Key Features (con t) Holding company A holding company (for example example, a Delaware LLC) typically employed. Provides flexibility for funding the joint venture prior to organization and licensure of NewCo Shareholder/Operating Agreement Requires shareholder/operating agreement that will govern voting and sale/dissolution of NewCo (among other covenants) 24

25 Deadlock and Exit Provisions: As with any joint venture, deadlock and exit provisions are critical: Deadlock: D dl k Deadlock procedures create a mechanism to force resolution of a limited number of critical joint venture issues (a Deadlock ) Cannot deadlock on every y issue only y those where a failure to reach resolution critically impedes the venture For F issues i which hi h cannott create t ad Deadlock, dl k the default should be to follow the agreed upon business plan 25

26 Deadlock and Exit Provisions: (con t) Exit Exit rights can exist for material breach or failure to resolve a deadlock Exit rights at particular times (e.g., 5th anniversary) Numerous exit mechanisms: Auction sale Put/Call rights Dissolution as the final option 26

27 Lessons Learned Be Patient These transactions take time Perspective Need to understand the needs and desires of the other side Flexibility Circumstances change over time. Need to build flexibility into the JV Other market participants Be cognizant of impact on the joint venture of each party s other relationships l ti hi iin th the market k t 27

28 Pros/Cons of Two Principal Joint Venture Structures: Contractual JV PROS: Easier/faster to set-up (significantly fewer regulatory approvals) Can use existing insurance company and HMO and policy and contact forms of insurer No new capital needed to organize or acquire a NewCo Easier to terminate/unwind (e.g., reinsurance can be terminated, either on a run run-off off or cut-off cut off basis, basis and a party can buy buy-out out the other party s participation interest in the relationship business) CONS: Health system may not be satisfied with a contractual relationship but may see value in having part ownership of NewCo that it can monetize by eventually selling its ownership stake to the insurer or a third party or buying the insurer s ownership stake H l h system may not be Health b ffamiliar ili with i h reinsurance i and d thus h may not feel that it is a true joint venture partner No separate, independently branded entity Perceived as shorter shorter-term term relationship 28

29 Pros/Cons of Two Principal Joint Venture Structures: Legal Entity JV PROS: Powerful co-branded platform NewCo will grow in value as its business expands. Value can be eventually monetized by sale of entity Health system may perceive ownership of NewCo as essential for full health system participation in, and commitment to, the joint venture Longer term commitment Longer-term CONS: Ongoing capital needs as NewCo business expands Cost/time of organizing NewCo and obtaining licenses (or of acquiring a NewCo shell insurance company) and of obtaining policy and contract forms approval Consolidation of NewCo by the insurer for purposes of GAAP financial statements can be challenging More difficult to terminate and unwind (see discussion on exit rights) Longer-term commitment 29

30 Other Legal g Issues In addition to applicable insurance laws, the parties also should consider the following legal issues in selecting the optimal joint venture structure: t t Tax consequences of the joint venture. In particular, where the health system is a nonprofit charitable organization, organization each party will want to carefully analyze the joint venture to make sure that no element of the arrangement will imperil the nonprofit and federal tax-exempt status of the health system. Contractual protections can be built into the joint venture agreements to mitigate this risk and to provide paths to resolution where possible possible, particularly in the event of changed circumstances in connection with the venture. Applicable antitrust laws. As with any venture involving parties that may be in a competitive position with one another (and where one party may have significant geographic market share), joint ventures between providers and insurers may raise antitrust and competition issues that need to be reviewed by legal counsel. 30

31 Prohibited physician referral laws. In the event that the health s systems controlled or managed physician network is part of the joint venture, the parties ill need d tto carefully f ll review i th d l and d any applicable li bl state t t physician h i i selflf will the ffederal referral laws including the federal Stark law to confirm that the structure and contractual arrangements do not implicate these laws or if these laws are implicated, to structure the venture in compliance with an applicable exception. Anti-kickback laws. If the joint venture will include a Medicare Advantage health plan or other federal health care program, the parties should carefully review the arrangements g and any y referrals between the p parties and other providers including physicians to determine whether the federal anti-kickback law will be implicated by the venture. In addition, many states have payer antikickback laws that will need to be reviewed, if applicable. Privacy laws. In any such joint venture, the parties generally will desire and have a need to share protected health information for a number of reasons, including treatment, payment and health-care operations purposes, such as for population health. health The sharing of protected health information requires compliance with the federal Health Insurance Portability and Accountability Act (HIPAA) Privacy and Security regulations and with applicable state laws, given that the joint venture and both parties are likely to be covered entities under HIPAA HIPAA. 31

32 Other contractual obligations of the Health System. The health system and its controlled or managed physician network will have existing contractual relationships with other insurers covering medical reimbursement cost rates and, in certain cases, capitation arrangements (e.g., global capitation arrangements). The health system should carefully review these contracts to determine if any of those existing arrangements will compete with the joint venture or restrict the health system from delivering the agreed upon reduced medical reimbursement cost rates for health care services to be provided to the joint venture membership. Narrow networks. Another area of growing concern that should be considered relates to proposals by the federal government, the National Association of Insurance Commissioners and certain states (such as California and Oregon) to strengthen regulations regarding the adequacy d off iinsurers networks, t k iincluding l di narrow networks. t k S Such h proposals could impact the health-controlled or affiliated physician networks utilized by these joint ventures. 32

33 Conclusion/Q&A Alan Maesaka Counsel Aetna Inc Direct Denise Hanna Partner Locke Lord LLP Direct Baird Allis Partner Locke Lord LLP Direct Di t ballis@lockelord.com Aetna is the brand name used for products and services provided by one or more of the Aetna group of subsidiary companies, including Aetna Life Insurance Company (Aetna) and its affiliates. Attorney Advertising. Locke Lord LLP disclaims all liability whatsoever in relation to any materials or information provided. This presentation is provided solely for educational and informational purposes. It is not intended to constitute legal advice or to create an attorney-client relationship. If you wish to secure legal advice specific to your enterprise and circumstances in connection with any of the topics addressed we encourage you to engage counsel of your choice. 33

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