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SCENARIOS FOR SUCCESS
How do LHP partnerships work? The following scenarios provide an inside look at the kinds of challenges faced by not-for-profits. Read about the steps LHP proposes to overcome challenges and meet goals. And learn how LHP partnerships can provide the capital, collaboration and joint venture support necessary to help hospitals like yours win in today’s healthcare environment.
CASE SCENARIOS
Scenario One
Large not-for-profit multi-hospital system wants to acquire another hospital in its service area
Opportunity:
A successful multi-hospital system identifies an acquisition opportunity and has the ability to proceed with the acquisition by revising its internal capital allocation. However, this approach could delay long-awaited projects at existing system facilities and could strain community and physician relationships. To avoid these potential negatives, the system looks for alternatives.
Proposed LHP Solution:
LHP and the hospital system sign a letter of intent to create a limited liability company (the Joint Venture) to acquire, own and operate the target hospital as part of the system’s network of hospitals. A joint proposal is prepared by LHP for approval by the system and submission to the target hospital. At the time the proposal is accepted, LHP contributes 80 percent of the necessary cash, and the system partner contributes 20 percent. The Joint Venture acquires the target hospital, rebrands it under the system partner’s network identity and clinically integrates it into the network to ensure continuity of care. LHP manages the day-to-day operations of the newly acquired facility under the direction of the Joint Venture Board of Directors, with 50 percent of its members appointed by the system and 50 percent appointed by LHP.
Projected Outcome:
While the hospital system expands its network by making a minority investment in the Joint Venture, it retains the ability to control the acquired hospital. The acquisition has a synergistic effect on the entire network by making the not-for-profit partner stronger in its market and better able to serve needs regionally. The acquired hospital is stronger because its debt is eliminated, it is a member of a broader network and is more successful in meeting the needs of its community.
Scenario Two
Public sole community provider wants to build a replacement facility
Opportunity:
A stand-alone public hospital, which is owned by a government entity, needs to replace its facility. As access to capital becomes difficult, the hospital begins to look for a capital partner.
Proposed LHP Solution:
The government entity and LHP sign a letter of intent to create a limited liability company (the Joint Venture). Together, they own and operate the existing facility, continue the provision of charity care in the same manner the hospital has done historically and develop a replacement facility within the service area. LHP contributes cash to the Joint Venture while the governmental entity contributes the assets of the hospital. Simultaneously, the Joint Venture make special cash distribution to the government entity, which it utilizes to defease the existing debt and to establish a healthcare trust for the benefit of the community. Then it immediately transfers its ownership interest in the Joint Venture to a 501(c)3 tax-exempt organization, known as the “Foundation.” LHP and the Foundation will own 77 percent and 23 percent of the Joint Venture respectively. LHP provides day-to-day management under the direction of the Joint Venture Board. The Joint Venture owns the existing hospital assets and will have sufficient cash available to complete the replacement project.
Project Outcome:
The governmental entity is no longer subject to the risks and responsibilities of maintaining an acute care hospital, the community gets a new state-of-the-art facility with a continuing guarantee of charity care and a local community foundation is created to focus on community health issues. The hospital is stronger due to the elimination of its debt and the infusion of needed capital, along with accountability to and guidance from a Board of Directors, 50 percent of whose members are appointed by the local foundation.
Scenario Three
Large not-for-profit hospital system wants to replace one of its hospitals
Opportunity:
A successful multi-hospital system sees a need to replace one of its existing hospitals. Constraints in accessing additional capital cause the system to look for alternatives, which will allow it to move forward more quickly with the replacement project.
Proposed LHP Solution:
LHP and the system sign a letter of intent to create a Joint Venture, a limited liability company. The Joint Venture owns and operates the existing hospital as part of the system’s network while it develops and commissions the replacement facility. LHP contributes cash to the Joint Venture, and the system contributes the existing hospital’s assets as it simultaneously takes a special cash distribution to defease existing debt. At closing, the Joint Venture owns the hospital’s assets and has cash available to complete the replacement project.
Projected Outcome:
The not-for-profit system partner eliminates any debt associated with its existing hospital and accesses the capital necessary to build a replacement facility––all without losing control of the existing hospital. The new facility benefits the entire system, making the not-for-profit partner stronger in its market and better able to meet needs regionally. The Joint Venture hospital is stronger through the elimination of its debt, the building of its new facility and its increased ability to meet community healthcare needs.
Scenario Four
Large university system wants to expand its network and tertiary capacity by building a new community hospital
Opportunity:
A large university hospital system reaches its capacity and has to increasingly turn away tertiary referrals. In order to meet the growing referral demand, the system decides to build a new community hospital in another part of its service area. The new hospital will offload some of the less acute medical and surgical volume from the system’s main campus, freeing up capacity for increased tertiary volumes and creating private practice opportunities for its faculty. When limits on availability of capital become an issue, the system decides to look for alternatives.
LHP Solution:
LHP and the system sign a letter of intent and create a limited liability company (the Joint Venture) to design, build, own and operate a new hospital as part of the university system’s network of facilities. LHP contributes 80 percent of the necessary cash and the system contributes 20 percent. The Joint Venture builds and opens the new hospital under the university system’s network identity. The new hospital clinically integrates into the network to ensure continuity of care. LHP manages the day-to-day operations of the newly acquired facility under the direction of the Joint Venture Board of Directors.
Projected Outcome:
The university system expands its network by making a minority investment in the Joint Venture, yet it retains its ability to control the new hospital. The new hospital has a synergistic effect on the entire system, making the university system stronger in its market and better able to meet healthcare needs regionally. Tertiary space is freed up on the main campus because less acute services are handled in the new community hospital. In addition, university faculty is provided with new private practice opportunities.
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