1108006 Informal Interpretation

Michael Verne

– Agree – not reportable.





Friday, August 26, 2011 9:20 AM


Verne, B. Michael


HSR question


I represent a hospitalthat is proposing to engage in an affiliation with a physician practice group.To effect the affiliation, the parties will engage in several relatedtransactions. My initial reaction is that none of those transactions wouldtrigger an HSR filing, but my review of relevant HSR informal interpretationshas made the issue less clear. Here are the relevant facts as I know them.

As part of theaffiliation, the hospital first plans to create a new tax exempt 801(c)(3) nonprofitcorporation which will become the parent entity of the hospital. Assets andliabilities of the hospital would primarily remain in the current hospitalcorporate entity, but net proceeds for the hospital (revenues after hospitaloperational costs, allocate overhead, and long term debt's are paid) would flowup to the parent, which I will refer to herein as the Health System. HealthSystem will act as an agent for the hospital and will bill and collect frompayers on behalf of hospital, but using the hospital's existing providernumber. It is my understanding that the newly created Health System will becomethe sole member of hospital, but I am not certain on this point.

Contemporaneous with theformation of Health System, Health System will enter into a managementagreement with a third party physician practice group, which I will refer to asClinic. The Clinic's shareholders would continue to hold most of the Clinic'sassets (and existing debts), and the Clinic would maintain an independent boardof directors to be elected by shareholders of the Clinic. However, all ofClinic's administrative functions would be performed by Health System under themanagement agreement. Health System would be paid a management fee by Clinicfor performing day-to-day management of Clinic (including billing andcollecting payment from payers on behalf of Clinic). In addition, Health Systemwill enter into a lease agreement with the Clinic encompassing most of thebuilding and equipment assets of the Clinic, under which the Health Systemwould take on full responsibility for the asset's maintenance and enhancements.It is also contemplated that there will be an asset purchase agreement wherebyHealth System will acquire some other minor assets to provide working capital necessaryfor the operation of the Health System. It is my understanding that the assetsbeing acquired by Health System from Clinic would be significantly less than$66 million; indeed, likely less than $10 million. The parties would also enterinto a professional services agreement to secure the professional services ofall physicians and other providers who practice at the Clinic on behalf ofHealth System.

The Health System willhave its own board of directors. Initially, the board will consist of 15members, 6 of which would be current physicians of Clinic, and 9 communitymembers selected by the hospital's board of directors.

As part of theaffiliation, a flow of funds would be worked out that would reward both Clinicand Hospital for cost-cutting, overall efficiency, and delivery of superiorhealth care services.

For various regulatoryand other reasons, the parties are not capable of merging or having one partyacquire the other. While the Health System will not be acquiring assets orother interests of Clinic in excess of $66 million, the management and otheragreements between Health System and Clinic do provide Health System with somelevel of control over Clinic. At the same time, the Clinic will continue tohave its own BOD (which will handle, for example, decisions relating toprovider compensation and hiring/firing), as well as continue to have the sameshareholders as are in place today, none of whom include the Hospital or HealthSystem ).

As I indicated, I am notsure there is a filing here relating to any of the various transactions, but Iwould appreciate the FTC's thoughts on this. If there are additional facts youneed to provide some guidance on whether a filing is required, please let meknow. As always, thanks for your help.

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