Question of the Week

Question: Our hospital is considering whether it should affiliate with another, larger hospital or a health system.  What are the major steps to take for a significant transaction such as this?  How long does a transaction like this take?


Many hospitals have done, or are doing, the same kind of review that you are now starting.  Whether it is some kind of loose affiliation or partnership, becoming a subsidiary of another hospital or health system, or a full-fledged merger, this is one of the most important choices the hospital’s Board is ever going to make.

Step one is just that – the Board going through a thoughtful and careful process to make its decision.  That will take time, and often involves an outside consultant to help the Board.  If the Board’s decision is to move forward, the end result of this first step is usually to create a Request for Proposal (“RFP”) that the hospital sends out to anywhere from one to a number of different entities.  From the responses, the Board decides with whom to move forward.

Step two is the negotiation process, where the key terms of the affiliation are spelled out in a Letter of Intent (“LOI”).  A while ago, LOIs used to be fairly short documents, the “spine” of the transaction upon which to build the Definitive Agreement.  Now, given the importance of this kind of transaction and the details of any affiliation, LOIs have become rather substantial documents.  They usually address, among other things, important conditions to move forward, the delineation of powers involved, details of financial commitments and the assumption of liabilities, if any.

Step three is the due diligence process.  “DD,” as it’s called, is the process by which each entity reviews information and materials about the other.  This work is led by the legal counsel for each entity and often involves some review work by the entities themselves and any consultant(s) involved.

The whole point to the DD process is to provide each entity with sufficient information to make good judgments and good risk management decisions.

The DD process has always been very time and labor-intensive and voluminous when it comes to the documents and information involved.  Like the universe, DD lists look to be constantly expanding.

Step four, which usually begins at some point in the DD process, is for the Definitive Agreement to be drafted and eventually signed.  The details of the LOI create the base of the Agreement.  The remainder is completed by addressing any other issues that need to be resolved and adding the kind of provisions needed for such an Agreement:  representations and warranties, covenants, requirements for closing, schedules and exhibits, etc.

Step five concerns major regulatory reviews on both a federal and state level.  Due to the nature of these transactions, antitrust regulatory review has become an enormous piece of the regulatory review.  If the federal government is to be involved, that’s likely to be the Federal Trade Commission (“FTC”) or it could be the Department of Justice (“DOJ”).  If no federal review is required, that’s a best outcome.  State reviews, usually by the state’s Attorney General’s Office, are usually quite rigorous and time and document-consuming.

On the state level, the appropriate agency that reviews charitable organizations will become involved.  The extent of this is often dependent upon the particulars of the hospital’s situation.  Some transactions are so clearly needed that the agency may not be too demanding in its review.  With others, the state agency uses the full extent of a detailed review protocol.

Other state agencies will be involved, certainly the Department of Health and perhaps the Insurance Department, depending upon the transaction.  All of this takes time, planning and document management.

The sixth step begins once the Definitive Agreement has been signed.  It’s all the work that must be completed to take the parties through to the transaction’s Closing.  During this time, DD issues must be cured or settled, contractual notices given, all the requirements in the Agreement met, and appropriate Board action taken.  If the transaction also requires approval by a court, that step is taken here.

Step seven is the Closing and Post-Closing duties.  The Closing occurs on the chosen date when all regulatory reviews have concluded, all requirements and conditions have been met, all approvals received and legal documents filed.  Difficult regulatory reviews can extend this process and make the run-up to and through the Closing kind of choppy at times.

Post-Closing, from a legal perspective, is the final work to make sure that all post-closing notices are given and any remaining loose ends tied up.

Generally speaking, you should count on at least one year’s time to go through steps one through seven.  If you’re lucky, it takes less, and it’s not uncommon to take longer.

Then, of course, comes step eight:  making the affiliation work.  No lawyers here.  It’s leadership, staff, personnel, physicians, health care providers, etc. – all the people and populations that make up the hospital, and their counterparts in the other hospital or health system, coming together to achieve the purposes and goals identified by the Board in step one.