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00;00;05;01 - 00;00;35;06
Meg Pekarske
Hello and welcome to Hospice Insights: The Law and Beyond where we connect you to what matters in the ever changing world of hospice and palliative care. An Alternative to Consolidations: Key Considerations for Management Services Organizations. Adam, glad you're here. Talking about more corporate stuff. My favorite. So I'm talking to the corporate guru here. So we thought we do this.
00;00;35;06 - 00;01;11;24
Meg Pekarske
I mean, we've been doing a series of various podcasts, you and I have, on different ways people are coming together and various transactional kinds of things. And so this is sort of in that genre, so to speak, of talking about management services organizations, what they are, what they aren’t. And we won't rehash Adam here all the climate of what's going on in hospice, because that would be like a hardcore history podcast that goes on for like 8 hours or something.
00;01;11;26 - 00;01;31;16
Meg Pekarske
So we won't go there. But let's start with sort of why do people need alternatives to transactions, right? Like what's going on here that makes some people willing to consider a management services organization or as we'll say throughout MSO.
00;01;32;10 - 00;02;04;17
Adam Royal
A couple of things are sort of going on right now. One, we've seen changes and just generally greater attention to how hospices report management and ownership on there. 855 So your your CMS enrollment information, we also just saw the final rule for the expansion of the 36 month rule to include hospices which will go into effect January 1, 2024.
00;02;04;24 - 00;03;00;24
Adam Royal
So that'll prohibit changes of majority ownership in hospices within 36 months of initial enrollment or your last change of majority ownership, with some exceptions. And then some announcements about prepayment review. Right now, these are targeted at certain states Arizona, California, Nevada and Texas. But CMS intends to expand this regime of prepayment review to include other states, and they essentially scrutinize hospices that are new enrollees in Medicare or those that have just undergone a change of ownership or an asset deal or 100% change in equity.
00;03;00;25 - 00;03;21;07
Adam Royal
So generally, just a lot of scrutiny around traditional transactions and M&A. So stock deals, asset deals, mergers, those are all the sort of traditional transactions that are receiving a lot of scrutiny.
00;03;21;22 - 00;03;59;15
Meg Pekarske
Yeah, and it's not that we're not working on some, but I think you're right that and I think everything that's out there says that deal activity has dropped off not everywhere. And it doesn't mean you can't do deals, but I think it's what eyes wide open if you're going to do this because you have plenty of cash in the bank to deal with all the prepayment review and, you know, some cash flow bumps are, you know, if you get to do the transaction because the 36 month rule is going to have some impact on that.
00;03;59;23 - 00;04;00;04
Adam Royal
Yeah.
00;04;00;14 - 00;04;32;13
Meg Pekarske
I also think some of the clients are coming to us to consider an MSO are, you know, including, you know, some nonprofits who are saying, you know, Meg, I listen to your podcast and about different ways to integrate. I'm not there yet, but I understand the need to create administrative efficiencies to reduce my cost of care so I can position myself better with payers because payers care about my cost of care.
00;04;32;13 - 00;04;56;12
Meg Pekarske
And so I think some of the conversations we're having with folks right now are saying, I'm not ready to integrate with other people right now, but I do want to be able to reduce some of the duplication. And so why don't you share a little bit about how MSOs help people, you know, creates administrative efficiencies.
00;04;57;00 - 00;05;48;02
Adam Royal
So the Mayo Management Services Organization is, you know, as the name implies, a place to consolidate management and administrative operations in a different entity that that could serve multiple provider entities or the operating entities. So you could consolidate administrative personnel, billing financial personnel, all of the non-clinical aspects of a hospice in the management services organization. And when you have multiple hospices that are sort of doing the same thing, I think that's where we see MSOs being an option.
00;05;48;02 - 00;06;25;11
Adam Royal
They kind of they kind of see another hospice that that they're aligned with either operationally or culturally to some respect, or they just like their operations and they think, well, we're kind of doing a lot of the same things. What if we can consolidate this in an MSO, streamline operations, and still allow the hospices to focus on focus on the clinical aspects of care, but the administrative and management aspects could be consolidated and reduce a lot of duplication.
00;06;25;23 - 00;06;58;10
Meg Pekarske
And I think that there are some folks that, you know, this is a precursor to maybe doing something larger in the future. But I'm not quite there yet. My board's not quite there yet. And so it doesn't mean that you won't do something on that other chart I was talking about as I'm going to become clinically integrated or maybe have a parent subsidiary model through member substitution, but this is sort of tapping the toe, as we say in the water about how do we work together.
00;06;58;10 - 00;07;34;11
Meg Pekarske
And so obviously this is I don't want to say new ish to hospices because I think there are folks that are doing this now. But I think it is a newer thing that some hospices are thinking of doing, even though it's very common in other parts of health care. And so as a small things like it feels like we're inventing the wheel, but we're really not that right now doing what other people have been doing for some time, but that sort of get into some of the nuts and bolts.
00;07;34;11 - 00;07;51;08
Meg Pekarske
So I'm listening to this. I have some people that I feel like are somewhat aligned with me I want to create in A.L. What are the kinds of things that I'm thinking about? So you talked about I need to create a separate legal entity.
00;07;51;22 - 00;08;47;00
Adam Royal
Yeah. Step one is it's it's got to be something you got to create a new entity. And so deciding what that entity is going to be is a key first step. And the two obvious choices are a corporation or an LLC. And we see a lot of times clients choose the LLC. Just because it provides greater flexibility in governance requires less than a corporation in governance and so when you're thinking of the MSO as kind of a first step in partnering or consolidating, but with the idea that you're preserving institutional independence, the LLC, which may not require a separate board and a lot of buy in from a governance perspective that could be appealing because
00;08;47;00 - 00;09;15;11
Adam Royal
you can still say, you know, each hospice has its own board and there's not kind of this heavy handed MSO out there with its own board and and all that. So the LLC can can simplify matters and is more straightforward. To set up the corporation where we see this being a popular option is would the nonprofits from primarily a cultural perspective?
00;09;15;13 - 00;09;44;26
Adam Royal
Some nonprofits may prefer if they're going to associate with an MSO to have that MSO be set up under state law as a nonprofit entity. So if that's the case, that that sort of leaves the corporate nation as the only option. If the nonprofit consideration really isn't important, then the LLC kind of emerges as the frontrunner in terms of preference.
00;09;45;21 - 00;10;11;10
Meg Pekarske
And you touched on governance, which I think in all these transactions we've worked on, not necessarily MSOs, but much, much of the the finagling goes around governance. Right. Governance is really important, especially when you're working with community boards and you're coming to gather lots of attention and time is spent on configuration of the board and all of that stuff.
00;10;11;10 - 00;10;50;29
Meg Pekarske
And so I do think, as you said, that LLC can be a way to have, I think, more streamlined management of this MSO than I have a whole nother board. And I mean, it just ends up lots of meetings, lots of right. All the staff. So I think a lot of people choose the LLC route and then if you do have an LLC from a governance standpoint, now I'm going back 25 years to my corporate board member manage or manager manage, right?
00;10;51;24 - 00;11;25;16
Adam Royal
Yep, yep. You got options? Yeah. Remember, manage or manager manage. And within that there the respective powers and rights that the members and managers have vis a vis each other. If there there is going to be a member managed versus manager managed entity. So yeah, you can, you can build out the LLC governance as much as you want, but there is flexibility in terms of who manages it.
00;11;25;16 - 00;11;48;22
Adam Royal
So a very simple approach would be to have it manager managed and appoint a few key executives or individuals from the the hospices forming it as those managers and give them plenary authority to operate MSO. And then you've got a pretty streamlined governance structure.
00;11;49;00 - 00;12;09;08
Meg Pekarske
Yeah, I don't want to pooh pooh, you know, being thoughtful here, but sometimes I think people because we're humans, right, we stumble over like it's got to be perfect and I have to have everything figured out. And then it's like, tick tock, you know, a year and a half later and I can't left off anything because I stumble on the first question.
00;12;09;08 - 00;12;39;09
Meg Pekarske
And that was like when I was doing my well and I start with the question who gets my dog? And then I was like, I don't know. Five years later, you know, I do have I will now. But like it just, I think make decisions and move on. Nothing like can't be redone or reshuffled later or so. But I think that's different when you're dealing with, you know, a member substitution and, you know, this governance as sort of feels a bit more written in stone.
00;12;39;09 - 00;12;57;25
Meg Pekarske
I mean, I think that it's important to try to lift these things off because, you know, time is ticking in terms of if you want to start up something and I want to say don't wait for perfect, but like begin, right, and then test it out. And then, you know, if you need to to make some modifications, you can do that.
00;12;57;25 - 00;13;48;11
Meg Pekarske
So I think in terms of the kinds of things that we're seeing, people consolidate operations on, you know, billing, for example, I think that, you know, there might be one hospice that is really good at that. And, you know, consolidating that in to a few people instead of having six people doubling among three hospices, you could maybe have two people doing that because you know, they can be totally focused on that or perhaps how you do your telephone triage at night or how you, you know, are doing compliance or I mean, there's lots of different sort of back office noncore services that you can consider doing.
00;13;48;11 - 00;14;08;08
Meg Pekarske
Obviously, you have to have an administrator at the hospice level and stuff like that. But you know, when you think about it, there are a lot of different things that folks can, you know, h.r could be something that you consolidate, you know, in terms of like some of the administrative things and it gets a little bit more complicated.
00;14;08;08 - 00;14;26;23
Meg Pekarske
We're not going to cover that here about could you do something from a benefit standpoint and consolidate benefits for staff? And so those are things that we can talk offline on. But I guess any other thoughts about consolidation of operations.
00;14;27;11 - 00;14;55;20
Adam Royal
The physical location and intangible assets, I think are are two other big issues that I mean, to your point that you don't have to get it perfect from the outset, that that's true. It's hard to kind of come up with this entity and immediately know everything the entity is ever going to need to have. Yeah, but from the outset, you know, where are these these employees of the MSO going to work whose offices that are going to be?
00;14;56;21 - 00;15;20;12
Adam Royal
And then what do you need to make that run? So there are there are initial sort of assets that you need to have at the MSO just to operate. But no, I think it's a it's a good point operationally, that part of the part of the job is just organizing the MSO and starting not trying to do right.
00;15;20;12 - 00;15;21;20
Adam Royal
The whole will at once.
00;15;21;21 - 00;15;44;22
Meg Pekarske
Yeah, exactly. Speak, just get it in place like can you know by the time I do that I won't have a dog because they are my third dog. Anyway I agree and, and maybe that's one tidbit for everyone because you and I have been working on a variety of different projects and I think these things are hard, but also don't overthink it.
00;15;45;03 - 00;16;16;01
Meg Pekarske
You know, this isn't a permanent thing unlike some other things. Most things can always be unraveled. But this is sort of a low risk proposition as test the waters. Obviously, if you consolidated some things and want to unravel it, then you're going to have to then hire back people or fill positions again. But it's I think that would be an observation I have.
00;16;16;01 - 00;16;37;25
Meg Pekarske
I don't know if you share it, Adam, in working with folks all across the country, I think that there's a lot of trepidation, and I think that people feel like it's hard to make decisions on this kind of stuff. And I think people or I don't know if it's fear or just like, I don't want to do the wrong thing.
00;16;37;25 - 00;16;43;29
Meg Pekarske
And and so I think there's a lot of trepidation about some of these these things.
00;16;43;29 - 00;17;12;24
Adam Royal
Yeah. Yeah, absolutely. And and I've seen that, too. And I think it's a number of reasons. One is just an interest and optimizing everything is understandable and admirable, but difficult. But I think also, you know, especially with the nonprofits, they've invested a lot of time and energy into developing their way of doing things and it's often in a good way.
00;17;12;24 - 00;17;38;14
Adam Royal
And so any concession or change can seem like backing off of this, this program that you've built and a way of doing things. So yeah, I certainly understand the difficulty in doing that, but that is sort of part of the the game for consolidating or partnering with other hospices is figuring out what works best and what doesn't work well.
00;17;38;14 - 00;18;06;19
Meg Pekarske
And I think everyone's having these conversations because it's not working right now and we have to change, right? Like, you know, obviously if everything was paradise, you know, and people felt like they had enough resources to do the work that they want to do, that's one thing. But I think people are getting really stretched and there's just a lot of challenges.
00;18;06;19 - 00;18;27;19
Meg Pekarske
And so I think no matter what, there's going to just be, you have to be open minded to new ways of doing things. And so this can be one way, obviously not the only way and might not be for everyone. But I guess as we close up here, you've got to fund this organization, create this new organization, you got to fund it, right.
00;18;27;19 - 00;18;52;22
Meg Pekarske
And yeah, so and I know in California, for example, there's a new law about certain transactions that you have to report to the state right at ADD. Right. And MSOs might be included in that. And so there can be state reporting requirements to about with that MSOs and stuff. I don't know if you have any other thoughts you wanted to share in the funding piece of it.
00;18;52;29 - 00;19;22;11
Adam Royal
Yeah. So the funding piece is can kind of raise a few different issues. The the first would be initial capital contributions. When the MSO is formed, what is it going to need to operate day one so pay employees pay obligations of the so and so. That would need to be a contribution made from from its members when it's formed.
00;19;22;11 - 00;19;52;08
Adam Royal
And then there are subsequent ongoing capital contributions or the possibility of those that you'd want to think through for the operating agreement for the MSO. And so when can those additional capital contributions be called and under what circumstances? And so that's something that the the member hospices we need to think through and get get comfortable on, you know, how much are we going to have to contribute to this and and how much are we binding ourselves to contributing capital to the MSB?
00;19;53;14 - 00;20;24;01
Adam Royal
And then another way that the MSO can can be funded is through a management fee. And so some people operate the MSO on a zero margin. So basically all the funds are distributed out to the hospices. Others will leave some margin as a management fee in the MISO. And so again, that's kind of a a consideration that the hospices would need to have.
00;20;24;01 - 00;20;50;25
Adam Royal
Is is there going to be a fee that the Mayo takes and if so, how much? And that can depend on on state laws. So some states have restrictions on how management fees can be paid, whether it's a percentage of total revenue or a flat fee. So wherever you're forming the MSO, you want to check state regulations to see if that's a permissible way to structure the management fee.
00;20;50;29 - 00;21;16;09
Meg Pekarske
Got it. And then I feel like we can't do a podcast without talking about 855. So maybe that's our closing thing is just because ownership isn't changing. On the 855 ad there, there is a place where you would need to list a manager on the 855. Is that right?
00;21;16;27 - 00;21;58;04
Adam Royal
Yes. So the 855 requires you to disclose any managing organization that exercises operational or managerial control or has a direct or indirect influence over the day to day operations to provide the structures that we're describing with an MSI or being, you know, fairly involved in operations, especially for consolidating administrative personnel at the Mayo level, that would be sort of a degree of control that you would most likely need to report on an 855.
00;21;58;04 - 00;22;26;07
Adam Royal
And it's it's ultimately sort of a factual analysis as to whether you fall under this definition. So to give an example of of what clearly would not fall under this definition, if you're if a hospice just contracts out like a payroll party to handle their payroll, well, that's not something we would expect to report one over five. They're not they're not accepting control over the operations, but it's a matter of degree.
00;22;26;07 - 00;22;36;11
Adam Royal
So other MSOs, if they're exercising control over the day to day operations, that's the kind of thing that you would need to disclose on the F-35.
00;22;36;20 - 00;23;05;06
Meg Pekarske
And to close it out. We can't talk about coming together if we don't talk about antitrust, which our friend and colleague Wendy Ahrens has been on the podcast where we talked about antitrust. So she's our go to person on that. But I think any time we're working on these kinds of things, we need to consider antitrust and specifically what kinds of information the hospices are sharing.
00;23;05;06 - 00;23;20;24
Meg Pekarske
Right, because you're not under one umbrella, really. I mean, this is more discrete than that. And so I think you need to be mindful of antitrust considerations, especially as the climate for antitrust enforcement has sort of ramped up.
00;23;21;13 - 00;23;33;13
Adam Royal
Exactly how you're sharing information, what information you're sharing. Is it competitively sensitive? Those are all the things to watch out for and that we ask one day about.
00;23;33;23 - 00;23;54;01
Meg Pekarske
Yes, because I don't want to I don't want to go there. Thank God for Wendy and I think that lawyers can like I feel like we kill the dreams that our guys were because, you know, lawyers will ask lots of questions. And what about this? What about that? And I think that we can be good with for that.
00;23;54;01 - 00;24;13;07
Meg Pekarske
But also, I guess I want to leave people and I know I'm harping on this a bit, but like begin, right? Like these things and I think you said it, while this can be an iterative process, you don't have to figure out everything. And like the ten year plan for this MSO just it can you can begin it.
00;24;13;07 - 00;24;34;25
Meg Pekarske
And if it's not valuable, you can unwind it. I mean, it's not the end of the world to do these things or perhaps this is a great partnership and you want to be integrated more fully. And then you end up on the other chart where we talk about different ways of integration or member substitution or something like that.
00;24;34;25 - 00;25;16;20
Meg Pekarske
So I think it's worth exploring these things, but also don't spend two years trying to find perfection. Yeah. With some of the staff because I think it can be we can overthink things sometimes as leaders trying to find the best path forward and sometimes, you know, try it and if it doesn't work, try something else. Right. So but anyway, well, these, these have been fun projects to, to work on and doing this, this work to help our, our clients sort of transform and do things differently and to be a guide for them.
00;25;16;26 - 00;25;18;06
Meg Pekarske
Yeah, it's a fun time.
00;25;18;15 - 00;25;29;15
Adam Royal
Yeah, a fun time and a fun area to be in because lots of challenges but also like you said, opportunities for growth. So it's exciting to be a part of that.
00;25;29;20 - 00;25;40;28
Meg Pekarske
Yeah, well until next time because I heard that there is just constantly things to talk about. But thanks. Thanks for your time and and sharing your insights Adam.
00;25;40;28 - 00;25;44;16
Adam Royal
Yeah, thanks for having me.
00;25;45;14 - 00;26;03;05
Meg Pekarske
Well, that's it for today's episode of Hospice Insights: The Law and Beyond. Thank you for joining the conversation. To subscribe to our podcast, visit our website at huschblackwell.com or sign up wherever you get your podcasts. Until next time, may the wind be at your back.