Healthcare Contracting During Mergers and Acquisitions – Part 2Part 2: Consolidating Purchased Services, Maintenance Contracts, and Lease Agreements
After hitting a record high in 20171, hospital merger and acquisition (M&A) activity has remained strong,2 with financial, market, competitive, and regulatory forces driving consolidation. In addition to acquiring hospitals or facilities, health systems also divest facilities that are problematic or are failing financially. Health systems hope consolidation will result in economies of scale—the ability to decrease unit costs or improve productivity and efficiency through increased volumes. Purchasing and negotiating power with vendors (including GPOs) and suppliers can be increased. One report of hospital mergers found that acquisitions are associated with a 2.3 percent decrease in annual operating expenses, while care quality is enhanced (significant reductions in rates of readmission and mortality).3
Another study of 750 hospital transactions found that although quality measures didn’t change at acquired hospitals, cost efficiencies were realized. Within that study, a survey of 90 executives at hospitals undergoing a transaction revealed that 29 percent of acquirers sought the acquisition to improve efficiencies. Seventy percent of survey respondents said they achieved at least some of their projected cost structure efficiencies.4
To achieve efficiencies and improve productivity and outcomes through M&A, you must start with due diligence that includes a careful review of all contracts to proactively identify risk and redundancies. When you merge with or acquire a hospital or health system, you aren’t just taking on new (to you) buildings and staff. You are also buying the risk associated with all pre-existing contractual relationships—including purchased services, maintenance contracts, lease agreements, managed care contracts, and physician agreements, among others. We addressed the special compliance concerns related to physician agreements in a previous blog. In this blog we’ll focus on a few considerations related to the other contract types.
During due diligence, review all contracts to identify:
Assignability. If you choose to retain certain key contracts (e.g., purchased services, professional services, real estate leases, and clinical arrangements with other healthcare providers) in an acquisition, you may be required to obtain consent to assign the contract to the new entity. In many contracts, a change of control of any kind will require consent. Other contracts will require only that you provide written notice once the transaction has been completed. Are payer agreements assignable to the new entity and, if so, are there any changes to retroactive reimbursement? You’ll need to review all contracts to determine what’s required to transfer the contract to the new entity.
Duplicative contracts. If you’re merging hospitals in the same geographic area, you probably won’t need multiple waste management or linen services contracts. Your supply chain team will need to search for contracts for purchased services and maintenance contracts and examine the contract terms and conditions (T&Cs). You’ll want to amend the contract that has the better T&Cs for the future and cancel the other agreement(s).
Auto-renewals. You’ll need to search all contracts to determine when the contracts are due to auto-renew so you can prevent duplicative contracts or those with unfavorable terms from automatically renewing. You’ll need to continually monitor renewal dates and cancellation policies.
Locating and reading thousands of paper contracts during due diligence is incredibly time-consuming. Furthermore, it’s easy to lose or temporarily misplace paper contracts during the move to a new home office. Storing digital, searchable contracts in a central database solves both of these problems. The legal team can simplify and expedite the contract review process by using contract management software that stores digital contracts in a central database and includes a contract analytics tool that automatically scans contracts for key business and legal terms, identifying risks and redundancies and providing insights that allow your M&A team to make strategic decisions earlier in the due diligence period.
TractManager’s Contract Lifecycle Management solution makes it simple to review contracts during M&A due diligence by identifying potential risks contained in all existing contract relationships.
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