Last weeks announcement about two Milwaukee health systems creating an organization together spotlights joint operating agreements, which experts have described as complicated deals that typically do not top the list of preferred healthcare affiliations.
Even so, Columbia St. Marys and Froedtert & Community Health announced on Jan. 16 they had chosen such an agreement when they formed Progressive Health, the result of a joint operating agreement that includes separate borrowing and balance sheets but joint investment of profits.
While there are advantages to entering into such an agreementa Catholic and a non-Catholic health system might not want to consolidate assets, for examplethese deals are trickier when it comes to antitrust issues, according to Rob McCann, a partner with the law firm Drinker Biddle in Washington. When systems agree to this model, McCann said, they are structuring a yours, mine and ours situation in which the assets of the organizations might be separate, but the use of those assets is pooled.
The motives could be wide-ranging, but I suspect the most compelling case for a JOA is you wouldnt merge for some structural problem, McCann said. If we do a merger, we will resolve our bond issuesmaybe the organization has debt issues and cant resolve different obligations to bond holders. But really the best thing is if we could merge. A JOA could be seen as the next best thing or a steppingstone to a merger. (To learn about healthcare-related mergers and acquisitions in 2007, see story on p. 22.) A resurgence in the use of joint operating agreements has been going on for some time (July 16, 2007, p. 6)
Keith Anderson, a partner in Drinker Biddles Chicago office, said joint operating agreements are complex arrangements that undergo a factually intense antitrust process.
Its difficult conceptually, Anderson said. By and large, there is complexity with administrating it. Basically you have to create financials for the JOA when you dont have an entity. Theyve basically got to come up with an entity-like balance sheet and all of the things in a financial statement and make it clear how they will calculate the net revenue and overhead, he said, adding that one reason to enter a joint operating agreement is so systems do not have to scramble the egg in the way a full merger would.
As part of the Froedtert-Columbia St. Marys deal, each system will appoint half of Progressive Healths 16-member board. William Petasnick, president and chief executive officer of Froedtert, and Leo Brideau, president and CEO of Columbia St. Marys, will serve as co-presidents.
Obviously, its a unique model, Brideau said. Progressive will operate with a single integrated strategic and financial plan and a single governing board, he said. Assets will remain separate.
Consolidating governance and operations will allow the two systems to efficiently coordinate services, according to Petasnick. The partners hope to leverage their respective strengths: Froedtert Hospitals status as an academic medical center and Columbia St. Marys community care, Petasnick said, adding that the deal will also expand each partners respective geographic reach.
Froedtert includes 434-bed Froedtert Hospital, Milwaukee, and 196-bed Community Memorial Hospital, Menomonee Falls, Wis. The system reported operating income of $24.7 million on revenue of $813 million in 2006, the most recent year for which audited financial information is available.
Columbia St. Marys includes 226-bed Columbia St. Marys-Milwaukee, 248-bed Columbia St. Marys-Columbia and 106-bed Columbia St. Marys-Ozaukee, Mequon, Wis., and a rehabilitation facility. Columbia St. Marys reported net income of $45 million on revenue of $607.6 million in 2006, according to the system.
Columbia St. Marys is a subsidiary of Ascension Health, St. Louis, the nations largest not-for-profit health system.
JOAs, because of the complexity, the ability to pull them apart, (and) the inability to make some of those tougher, combined decisions, they are typically not at the top of the affiliation list, Drinker Biddles Anderson said. Theyre useful and have been successful, but there are reasons you dont see more of them.