Margin pressures, patient experience expectations, transforming technology systems and overhead, along with evolving healthcare policy, are driving change throughout the industry. The need to reduce costs and deliver value continues to intensify among industry stakeholders, resulting in new models of care, partnerships and demands for each to clearly delineate the value they contribute. Along with these pressures, competition from sources such as retail health, concierge medicine, telehealth, and mobile technology are revolutionizing the healthcare market. One way many hospitals and health systems are keeping pace is to explore new partnerships or joint ventures.
When considering various partnerships, organizations must think carefully about their goals and preferred outcome. For example, if an organization is seeking to maintain some element of independence, an affiliation for management services may be best. On the other hand, if an organization prefers the ability to refer and leverage resources, a contractual partnership formation may be best. Or, if the deal involves the purchase of asset/ equity or change of governance, the structure would be ownership or employment via merger or acquisition.
The options for partnership can be daunting.
How Joint Ventures Benefits Healthcare Systems
Joint ventures (JVs) are common and there are several reasons why organizations decide to form relationships with other organizations to create this business structure. JVs allow for each Creating Entity (CE) to spread costs associated with patient care delivery, marketing, product development and other expenses, reducing the respective financial burden on each CE. JVs also provide access to new markets and help with economies of scale in developing products or services that reduce total overall production expenses.
Healthcare systems seeking to focus on core competencies while continuing to penetrate new markets are exploring JV vehicles as a ‘best of both worlds’ business option for expansion opportunities.
Historically, healthcare providers have used JVs as a physician alignment strategy or to share the costs of introducing new equipment or technology to their communities. More recently, a combination of political and economic forces sparked interest in the use of JVs and contractual collaboration models for more diverse and expansive purposes. In fact, such contractual affiliations are displacing traditional mergers and acquisitions, particularly in circumstances where providers desire to expand their geographic reach, continuum of care or network presence quickly and without committing the financial and human resources necessary to accomplish an outright merger or acquisition.
JVs allow two or more entities to share resources, responsibilities and business risk for a particular enterprise with each CE maintaining their own separate identities. For example, health systems and physician-owned urgent care businesses have collaborated because forming JVs between urgent care and hospital health systems is good for the public and improves the quality and accessibility of urgent health care.
The governing agreements for JVs are unique to each project as they are customized to the specific needs being met; however, the benefit of such a customized rapidly implemented JV solution to a business need also creates risk management headaches. These so called headaches may lead to events and/or claims triggering coverage from many lines of insurance including Directors and Officers, Cyber, Professional Liability, and others.
The unique nature of a JV creates risk management concerns as a ‘one size fits all’ organizational risk strategy is impractical. Each JV agreement needs to be carefully analyzed with respect to the control and exposure elements that implicate the CEs. In a litigious climate where plaintiffs look for ways to access ‘deep pocket’ defendants, it is important to isolate the JV exposure from the CEs. CEs should look to Insurance as a risk transfer vehicle to assist in mitigating this exposure; however, its efficacy requires careful analysis for each individual JV.
The creation of a JV may present exposures to CEs that are not immediately apparent. When viewed through the lens of insurance as a risk mitigation strategy, it is beneficial to focus on some potential pain points, including:
- Unexpected dilution of limits. A CE may unknowingly share insurance limits where its policy either contains built-in JV coverage or where its definition of subsidiary is implicated by a CE’s 50%+ ownership and/or management control in such JV. Additionally, a CE may underestimate the propensity for vicarious liability actions resulting from a JV’s actions.
- Joint and several liability. Such exposure has real world insurance implications that could lead to finger pointing among CE and JV insurers. The possibility of multiple carriers picking up coverage for a claim tends to increase costs and create inefficiencies, as well as potential subrogation issues.
- Transparency and coverage. Where multiple CE and JV policies may respond to a single event, it is unlikely that the various policies will provide the exact same terms and conditions. In the face of differing terms and loyalties owed, transparency amongst the parties is unlikely and uncertainty as to policy responses (e.g., contribution, primacy, etc.) may prevail.
The Insurance Solutions
Careful consideration should be given to insurance obligations when creating a JV agreement. Generally, there are three options:
- Each CE insures the JV based on its pro rata ownership.
- One CE provides coverage for the JV under its own insurance policies.
- The JV obtains its own insurance coverages.
Each option has benefits and pitfalls that should be explored fully to allow CEs to make an informed decision. Each option is detailed below.
This coverage option would have each CE extend cover to the JV up to the amount of their ownership. While this is likely the most cost-effective solution, it may be problematic with respect to the extent of coverage offered to both the JV and the CE itself. Typically, ownership percentage and/or ‘management control’ of the JV are the standards by which coverage for the JV entity may automatically exist in a CE’s existing policies.
With respect to both the CE and JV, there will be insured vs. insured implications and severability issues in the policy to be assessed and negotiated. Dilution of limits can become an issue and create not only tensions between the parties but also more importantly gaps in coverage. Further, the involvement of two or more insurance policies with disparate terms and different insurer claim departments may lead to claim handling challenges.
With respect to the JV itself, its status as an insured under the CE policy may not provide it with equal rights to the CE with respect to decision-making. However, the JV may also benefit from a CE with broader coverage than it could reasonably secure on its own.
Winner Take All
With respect to one CE taking full coverage for the JV under its own policies, this will entail many of the same problems as noted above. Further difficulty may arise in negotiations with underwriters, as it is not a certainty that an underwriter would extend coverage to a risk in which its client is only a partial owner. Additionally, tensions between the CEs may arise due to a lack of transparency between the CE placing the insurance and the non-party CE.
Having the JV procure its own policies appears the cleanest option with respect to isolating JV risks for the CEs and providing the JV with authority. However, it is almost certainly the most expensive option. There are also potential downsides in a JV not being granted the breadth of coverage otherwise available to the CE.
Risk Management Considerations
The CE should consider, carefully, how much of the JV exposure they are willing to include in their existing insurance programs and identify other insurance options, including if the JV has its own specific insurance coverages. Additional tips include the following:
- Develop a risk based due diligence tool to track insurance requirements and restrictions for the JV
- Utilize the services of respective insurance brokers/ agents and consultants in review options for the insurance needs of the JV
- Check the language of existing policies to see whether the JV vehicle being created may automatically be entitled to coverage and whether this is intended.
- Mitigate ‘other insurance’ and primacy concerns with respect to dilution of existing insurance limits.
- Participate in drafting language to mitigate concerns that are tied to the insurance solution selected. And finally,
- Report regularly to CE leadership and JV board/ leadership as to final coverage decisions and resulting protection for the new JV relationship.
As this brief examination of the topic shows, there is much to consider when evaluating whether a JV is an appropriate option for a healthcare system. While there are significant benefits to forming joint ventures, they are not without downsides or risks. Insurance ramifications should be examined and weighed before making an ultimate decision.
This material is for informational purposes only and not for the purpose of providing legal or insurance advice. Insurance coverage, and the terms and conditions relating to such coverage, will vary. No representations or promises are made that any particular insurance coverage will be available to any individual or entity seeking such coverage. EPIC Insurance Brokers and Consultants is not a law firm and does not provide legal advice. If such advice is needed, consult with a qualified adviser.
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