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AHLA's Speaking of Health Law
Hot Collaboration Considerations: Health Care Joint Ventures in 2025 and Beyond
Jennifer Hutchens, Partner, Dechert LLP, and Tom Spellman, Associate General Counsel and Vice President, Fresenius Medical Care, discuss how health care joint ventures can provide considerable financial, legal, and operational flexibility and opportunity for their participants, along with unique regulatory and relationship considerations. They cover when a joint venture can be useful for a health care business venture, what key financial and operational provisions to consider, and how to plan for both good and ranging business outcomes. Jennifer and Tom spoke about this topic at AHLA’s 2025 Annual Meeting in San Diego, CA.
Watch this episode: https://www.youtube.com/watch?v=MH9KgAduuW4
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SPEAKER_01:Hello, everybody, and welcome to the AHLA Speaking of Health Law Podcast. Today's session is Healthcare Joint Ventures in 2025 and Beyond, a fireside chat with myself, Jennifer Hutchins, and my dear colleague Tom Spellman. Today we will cover how healthcare joint ventures can provide considerable financial, legal, and operational flexibility and opportunity for their participants. And along the way, can also bring some unique regulatory and relationship considerations in the healthcare sector specifically. We're also going to discuss when a joint venture can be useful for a business venture, what types of key financial and operational provisions we might want to consider, and of course, how to plan for both good and ranging business outcomes as a result. We plan to touch upon what we've seen personally in our own experiences about what makes a joint venture successful for our mutual clients. And we plan to highlight some innovative joint ventures recently making the difference in the industry. Tom and I actually spoke about this topic at the AHLA 2025 annual meeting in San Diego in June. We may have seen some of you there. I'm your co-host today, Jennifer Hutchins. I'm a proud volunteer of the AHLA, including serving most recently on its board of directors. I've considered the AHLA home for my professional life of almost two decades of healthcare law. In my law firm practice at Deckart LLP, I lead our firm's healthcare regulatory practice, working with private equity, other types of investors, providers, and so many other types of stakeholders, often taking joint ventures from concept to formation all the way through growth and on occasion window. I'm joined by my co-host, Tom Spellman, as I mentioned, seasoned in-house counsel at Firsenius Medical Care. And today we do promise you at least two acronyms and at least one bad pun along the way.
SPEAKER_03:Hi, excuse me. I'm Tom Spellman, I'm associate general counsel and vice president at Firsenius Medical Care North America. I've been at Fersenius for about a decade now. And uh while I've been there, I focused on our U.S. and international mergers and acquisitions, divestitures, venture capital investments, and joint ventures. I mostly support Firsenius' kidney dialysis business, but also provide some uh guidance on our non-core business as well as general corporate and commercial guidance to the various teams. Um, Jennifer and I have been working together for a while. I'm thrilled to be here with her today. Um, and I love a good pun, so I'm looking forward to that.
SPEAKER_01:Absolutely. So before we dive in, Tom, let's do a quick origin story for the listeners. How did we still first start working together and how has that translated to our time together volunteering with the AHLA?
SPEAKER_03:Yeah, of course. So when I started working at Fressenius, Jennifer was at one of her prior firms as an associate who was deep, uh deeply involved in the Fersenius joint venture uh program. Um so once I came aboard board and started to work, uh Jennifer and I started to work together very closely. Since we've been colleagues and working together, we've probably closed over 50 MA and joint venture transactions. Uh, it's been a fun run. Um, we've had a lot of fun in the process, and um as a result, we've we've started to do a lot of work with AHLA. We've spoken at the Fundamentals Conference, the Transactions Conference, and recently the annual meeting.
SPEAKER_01:Yes, and I would add, and I hope you can feel that through this podcast, we really do enjoy sending the elevator down and imparting these shared war stories and lessons learned and what we kind of consider deal hacks with the AHLA community. We've been privileged to teach CLEs together and courses over the years for AHLA on a wide range of healthcare transactional and regulatory topics. And in the process, we've learned so much from all of you in the AHLA community and at the healthcare law community at large. So, with that backdrop, let's go ahead and set the stage for today's conversation. A quick roadmap first. Uh, we plan to hit upon three areas and then bring it around the corner with a fourth kind of look around the corner, so to speak. So, first, we want to hit upon what are JV's and common models. Second, hit upon the regulatory guardrails that we routinely approach in this sector. The third is more on the operational side, a bit more of a do-and-don'ts. And then finally, that look around the corner, which I think excites all of us for sure, is how we are seeing JV's fuel innovation. So, an important reminder to thread throughout this conversation is that the theme of consolidation in the American healthcare system is largely growing and has been here omnipresent for some time. While much of this consolidation has occurred, as Tom mentioned earlier, through mergers and acquisitions, there's also been considerable growth in what we consider to be more so soft consolidation in the case of the topic at hand today, joint ventures. For example, those may be among providers, hospitals and health systems, and healthcare professionals. You can also bring in payors or other types of stakeholders, obviously, as well. A joint venture can provide financial, legal, and operational flexibility and opportunity for all those kinds of participants. But as we've often seen in healthcare, they can really bring up a lot of complexity, uh, both regulatory complexity and relationship complexity. And so today we're really gonna sit down to do that deeper dive about why so many players in the industry are choosing joint ventures, a bit about how they work and what to watch out for. And no, JV does not mean junior varsity. Uh, we promise that this is gonna be a varsity level strategy, at least that's what we hope.
SPEAKER_03:Nice. Um, so Jennifer, why don't we start at the top? What is a joint venture and why do we see so many of them in healthcare?
SPEAKER_01:Absolutely, Tom. Joint ventures, JVs, are what we consider to be collaborative arrangements where at their heart, two or potentially more than two organizations are pooling resources, they're pulling capital, they're pulling expertise to pursue a specific business opportunity. And generally, each of them keeps their own distinct organizational structure this same. Um, they JVs themselves have been popular for decades, and that's because of that flexibility that they offer. They let the individual participants create something new without the added complexity of costs and even permanence, let's say, of a fuller merger or an acquisition. And that flexibility really has been the permeating appeal. But in a heavily, heavily regulated industry like healthcare, that can also pose a challenge.
SPEAKER_03:Absolutely. Um, so I'm sure a lot of folks in the audience have seen joint ventures across a variety of sectors. Um, physician and provider partnerships are very common, hospital and payer collaborations. Um, more recently, we've been seeing a lot of provider and technology company joint ventures, uh, similarly, retail company and health provider joint ventures, um, really just the opportunities and the growth of joint ventures is everywhere. Um, one of the things we're going to try to touch on a little bit is to impart that what the right joint venture for you and your client might be is going to depend very heavily on what are the party strategies, what does the regulatory environment look like, and what sort of levels of control and risk and capital uh is your client able to bring to the table.
SPEAKER_01:Yeah, I think that's a really good way to set the stage there, Tom. Let's break down the types of main JV models that we've been seeing.
SPEAKER_03:Yep. Um, and so we typically think of JVs as falling into three main categories. Um there's not like a specific rule or regulation as to what the three are, but this is how we we typically think about it and how we've seen it. Um the first, and I think is the most common, is what we call the equity joint venture. Um, it's called equity because at the end of the day, the party the parties are gonna hold equity. Um, typically they're gonna form a new holding company, typically called NUCO, and they're gonna capitalize it, putting either cash or assets, contributing services or other resources to take NUCO from you know an empty legal shell into an operating provider in a space. Um is going to operate as a separate business with its own governance, its own financials. Um, this is typically the go-to joint venture that parties are going to want to choose when they're building out a new service line or entering a new market together.
SPEAKER_01:Yes. And then I guess shifting from the equity JV, the second would be more of what we consider to be a contractual JV. So there, by contrast, there's no new entity usually. It's just one or more agreements that define the roles, the economics, the performance standards, the governance of the venture itself. You may hear terms that are flying through the press when you're seeing different types of collaborations that may be termed affiliations, they may be termed co-management, uh, a variety of different synonyms, but we generally see these as a bit of a lighter way, I would say, and a faster way to implement those types of combinations. Uh, very important though, because you know, nothing's easy, right, in any of these areas, that we have clear guardrails and performance metrics. And the one way we kind of think about it and really joke about it is that it really is a great way for teams that want to commit to one another, but don't quite yet want those matching tattoos.
SPEAKER_03:Right. Um, and then the third basic category of joint ventures is a management joint venture. Uh, one party provides management services, and that can be some or all of a variety of buckets. You could have revenue cycle compliance, HR, IT, procurement, um, through some sort of management services organization. A typical acronym you'll hear around is an MSO. Um, it can be challenging to figure out when is a company just a management company or when is it becoming a joint venture. Um again, there's not really hard and fast rules. The way we think about it is when you have a management services arrangement, it's getting close to the joint venture territory when parties are sharing risk or upside, and you're getting beyond simple fee for service. Um, in states where we have corporate practice of medicine, which we'll touch on a little bit later in the podcast, this is a very common model for uh physicians and uh other entities that are covered by corporate practice uh to get around those rules to join venture.
SPEAKER_01:Absolutely. And look, what what I would say is whatever the model is, structure matters, ownership percentages, capital calls, board composition, what types of reserve powers remain, deadlock mechanisms. That's one where a lot of our clients don't really want to think about that because you go into a JV at times happy go lucky, but we have seen deadlock be a really key area when when things unfortunately might go awry in a JV. Um, and and along that line, exit rights would be another. Um, you know, options to buy have buy-sell triggers, transfer restrictions, all of that need to be really clear up front from a structural perspective. So now taking a step back, here's the practical why now from our perspective behind JVs. JVs really allow healthcare companies to control costs, to provide competitive services, and they're a fantastic partner option when build is slow and buying it might be pricey or impractical. We are seeing JVs used for all sorts of things, but ones that we've certainly worked on together include entering a new market quickly with a local partner, scaling a service line like dialysis in Tom's world, imaging, behavioral health, any other type of service line in that regard, uh, ability to align with providers like physicians without necessarily employing them. That of course uh does uh relate back to one of the themes discussed, which is corporate practice of medicine or corporate practice of dentistry or whatever the analog is there. Um it is also a means to co-develop uh particularly value-based care products, which is a particularly hot area now with payors. And even we're seeing a lot of creativity around, and we'll touch upon this a little later in the podcast, adding in tech and retail capabilities without giving up your core business if that's not the type of business that you have. I would also put a shout out for the nonprofits out there. We have seen firsthand that JVs can drive growth with a lighter balance sheet footprint in many instances. So if mission alignment, governance, and private benefit guardrails are built in, this can be a really effective and impactful way for nonprofits to have some skin in the game and really make a difference and really change that footprint.
SPEAKER_03:Absolutely. And then one other thing that overlays, you know, all the reasons that Jennifer just laid out. Sometimes joint ventures are preferable just because they bring a reduction of risk for the parties. Um, the parties can share capital, so it's a less expensive investment. Um, you're sharing operational know-how, so there's less potential investment in uh your team, uh, whatever that might be. Um and there can be potentially less regulatory exposure if you have a partner that complements your abilities, right? If you have somebody with know-how in the space, uh, or if you were the party with know-how in the space. Um so there's a lot of a lot of good potentials with joint ventures. Um, but generally that only works if you're upfront about things like control, culture, and economics from day one, which we're gonna spend some time to get into. Um but bottom line, generally you want to be choosing the joint venture that matches your strategy, your risk tolerance, and your timeline. And then you're gonna cover a lot of the guardrails as the lawyer on the deal that Jennifer and I are gonna touch on.
SPEAKER_01:Okay, so we've talked a little bit about the why, why joint ventures are so popular in healthcare. Now let's talk about some of the key regulatory and compliance considerations in the healthcare world. We like to think of this as the big three. It's not at all by any stretch inclusive. Uh, but I do think it provides a framework that we tend to start from uh when we are analyzing how to put these types of deals together, whether it's with our compliance teammates and whether it's with our business teammates, um, and certainly among our our council colleagues. So those big three are CPOM, corporate practice of medicine or its analogs, as I alluded to earlier, the Stark Law and the AKS, ENA kickback statute. So I tend to start with CPOM, mainly because it is more so a state administered, state functional doctrine that's quite old. Uh, it's much older than Stark and AKS. So I like to kind of start with that base level. Um, and then we'll zoom out to Stark and AKS. So for CPOM, corporate practice of medicine doctrine, this is a legal doctrine that at its core prohibits corporations, and I would use the word capital C there, although it's unfortunately because it's a 50-state doctrine not defined that way. Um, but capital C corporations from the practice of medicine. As I mentioned, it can vary tremendously from state to state, and many states have significantly older doctrines than you might even imagine. We've seen doctrines, you know, think about like the 1920s, 1940s era. Uh, but at its core, the doctrine is meant to curb what's called corporate influence into a physician or a medical professional's medical judgment for their patients. Uh, as I alluded to, and sometimes surprising to folks, there are analogs for other regulated medical professions or health professions, dentistry, veterinary medicine to name a few. They all have a similar function and intent.
SPEAKER_03:Yeah, and the intent behind corporate practice makes a lot of sense. You can you can easily understand why. Um, but as you can imagine, these restrictions can significantly impact a joint venture that is in or around these areas. Um, so at the start of a deal, you're gonna want to do significant analysis about what jurisdiction we're gonna be you know considered to be in and how the corporate practice uh laws can can impact that jurisdiction, and then be thinking about how structures can be used to shape the deal. Um, what are the key considerations you're usually looking at, Jennifer?
SPEAKER_01:So for starters, just with CPOM specifically, because it typically is in relation to key equity or other types of control arrangements, it's it's generally ownership restrictions, is the first place I start. Um, CPOM laws at their heart often prohibit folks that are not physicians uh from owning medical practices or businesses. And so as a result, this can limit the structure of particularly an equity JV, of course, or an MSO JV, as Tom alluded to earlier. So you've got control and management, and CPOM laws often restrict non-physicians from making controlling medical decisions. If that's the case, the JV has to make sure that those licensed professional medical professionals are making all the clinical decisions. The translation for that, and that really is a red line, is to let the clinicians make all the clinical calls full stop and to be sure that your documentation and your operational structures, policies, procedures all mimic that.
SPEAKER_03:Yeah. And unfortunately, corporate practice, uh, you know, it goes beyond ownership. Uh, it can also affect things like revenue sharing models, right? So uh you can have issues with fee splittings or profit sharing arrangements because it starts to look like a non-physician person or entity is exerting control over the physician practice. Um, so sometimes a JV is going to want to adopt an alternative structure so that they can provide adequate administrative or management support without triggering a CPOM issue.
SPEAKER_01:That's right. And, you know, like we've said, CPOM laws with that variation from state to state, I think of it, you know, as very much a patchwork. It makes compliance tricky, I will say, obviously crucial. Uh there are significant um disciplinary actions that local medical boards can take, can enjoy businesses in certain instances. So it doesn't just impact the providers themselves, it can impact the venture and its operations. But because of that patchwork, I sometimes think of it really as a puzzle. And um a lot of our clients have multi-state operations. So we're not just looking at one state and it's CPOM laws, which may or may not exist. CPOM is in the majority of states at this point, but there are some states without CPOM at all. Um, so we're quite literally working through this just this patchwork of state laws. I think of it as a quilt, quilt with a bunch of holes in it. Um, and plus it's been pretty widely publicized that many states are actively revisiting their existing state law frameworks with new and proposed legislation. I'd say that's been in the last five or so years. Um, and dozens and dozens of states have gotten in on that legislative action. We sometimes get asked if it has a COVID impact or you know, Genesis because of the timing, but really less so COVID, as more so in my mind, the way I see it and the way that we counsel clients is that a lot of times it's just bringing this older, antiquated doctrine kind of into modern times, and you're seeing legislatures reacting to existing public activities that might be going on in their state, with you know, an out of state investor coming in and providing equity to a medical practice or a group of medical practices in a state or a bunch of states. And how does the legislature feel about that when it rubs against these CPOM doctrines, especially when they're much older? These CPOM doctrines in some cases don't even contemplate, you know, for example, private equity as an investor because they are, you know, ancient in many cases, uh, relatively so. So this is definitely an evolving area where advisors, whether you are the compliance team, the business team, or the legal team, definitely need to be up to speed and monitor so that you can keep your stakeholders informed.
SPEAKER_03:Absolutely. Um so the so corporate practice is one of the three big regulatory regimes that that I certainly keep in mind when thinking about joint ventures. Um the other two are the federal STARK and anti-kickback laws. Um, and then we can't mention the federal laws without the the various state analogs, which I refer to and I think a lot of others refer to as mini Stark and mini AKS. Um, Jennifer, do you want to give a quick overview for the listeners about federal STARK law?
SPEAKER_01:Yeah, absolutely. A lot of times those mini laws will have some sort of derivative to the federal, and you know, we'll go ahead and just give that federal overview to start. Uh federal STARK law, for those that are less familiar, is the federal physician self-referral law. And it really does what it says. It prohibits a physician from referring Medicare patients for what are called designated health services, and we'll touch on those in a second, to an entity that the physician or actually the physician's family member. So it's a pretty broad overview, uh, pretty broad preview, has a financial relationship with. So essentially the STARK law wants to ensure that physicians exercise, again, and this is familiar in intent to the CPAM laws, exercise medical discretion independent of any potential financial benefits that that professional might be able to enjoy from the relationship.
SPEAKER_03:And what are those designated health services that you touched upon?
SPEAKER_01:DHS, designated health services, there's specific services and items covered by Medicare that can trigger trigger the self-referral prohibition. And they include things like clinical labs, inpatient-outpatient hospital services, and prescription drugs. There's actually definite defined terms of what DHS is under the legislation. And it is pretty discrete buckets, but they are very wide-reaching into the throes of what you know a particular venture might be doing in the in the medical space. Even if a JV, I should say, doesn't offer designated health services at the outset, you know, because we may be working with a more of a startup JV, for lack of a better word. As the business expands, the Stark law could apply. And we've seen this quite often. So it's very important for those that are counseling in the JV space to stay aware of what the JV does now, but also, you know, what are its short to mid to long-term plans for what it might want to do in the future to be sure that you kind of circle back and true up that analysis.
SPEAKER_03:Right, right. Unfortunately, there are some exceptions to the Stark law as kind of healthcare evolves over time, right?
SPEAKER_01:Right. Right. So modern exceptions that we work with quite a bit are value-based care arrangements, which of course are aiming to promote coordinated care, improve patient outcomes, reduce healthcare costs. You know, that's that notion, the shift away from you know fee for service and into more of the value-based care area.
SPEAKER_03:Right, right. Um and so then the last major bucket we'll call in the regulatory spaces federal anti-kickback statute or AKS has a very similar goal, right? It wants to ensure that physicians are providing medical care independent of financial benefits. Uh, but it is much broader than the Stark law. Um AKS is gonna be looking at any inducements by a provider to a physician. Um, fortunately, there are safe harbors that can shield a joint venture if you fit into the criteria. Um whenever I'm setting up a joint venture that has physician investors, um, I'm gonna be looking at both of these regulatory regimes. But AKS especially, um, it's gonna push joint ventures into proving that uh any transactions are fair market value and that across the board, you know, everything that we're doing is commercially reasonable. Um, because at the end of the day, if we're really only doing this deal because of the expectation of referrals, um, it's it's gonna be a problem and everyone's gonna get in trouble.
SPEAKER_01:Yeah, absolutely. I'd say the big four there to summarize and simply put are you know, number one, design for care, for sure. You know, be sure you have that backup file as if you're the counsel from your business team. The second, talking about documentation is document fair market value FMV in the way that us healthcare uh council and advisors know it to be, capital FMV and commercial reasonableness, right? For sure. Um, and then don't hang any economics on referrals, period. That is um as clear as day if you are really on your business team about watching how they speak to one another in texts, in emails, and in other places. Um, you know, again, that's a more in the hack category, but we are definitely um very aware that that that's a you know something that we need to be 100% mindful of. Again, in this narrative, that truly is the reason that our clients are going into the joint venture space, which is to have something innovative and to be a combination that brings something new to the table and not something questionable. So, all right, we've now discussed uh the regulatory and compliance matters. And let's shift gears to the fun part. Not that the fun part is not the regulation, because Lord knows I love a good regulation. But how can you actually start and run a healthcare JV? Um, and I when I say you, you know, provo proverbial you, you may be the lawyer on the phone, you may be the compliance person, the business person, but but how do we actually get that JV jump started and up and running? So when thinking about finding founding a JV, getting one started, developing a JV, for us, JV lawyers, Tom and myself, we should know exactly who is forming the business because who joins can significantly impact the JV itself.
SPEAKER_03:Yeah, absolutely. And and it's not just the names on the page of the contracts, right? It's what is the legal entity that's joining and what does that imply? Um, for example, if you're representing a tax-exempt organization, you might need protections around UBTI, right? Unrelated business taxable income. Um, complex systems like my client at Firsenius Medical Care, um, the specific subsidiary might matter, right? Whether you're in the medical device space or the provider space, and what kind of license or what kind of regulations apply to you. Um and for individuals, physicians or otherwise that might be joining, getting the exact identities of the individuals that are going to join is critical because you're gonna want to make sure that these are all accredited investors. If you need securities law compliance, um you're gonna want to make sure that those are the right people for purposes of a restrictive covenant.
SPEAKER_01:That yes, absolutely. So that's kind of the day one of the JD, so to speak. So let's plan for day two, right? And three, four, five. That gets a little trickier. And that's the negotiating of admission of future members into that new entity. As we discussed, that ability to have this sort of notion of controlled flexibility, and I put that in quotes because the flexibility is what they're is what we're all after, but there does have to be a fair amount of guardrail in order to protect the parties. We are spending a lot of time baking that into the operating agreement. Tom and I have worked on JVs where the operating agreements may be single member and they may be short, um, because we know by you know we know other parties are coming in later, and so we can deal with some joinder matters at that time. But we've also dealt with ones where you know baked into those operating agreements were dozens of pages in this regard. And that could mean putting provisions in that permit the transfer of equity to a new member. It could relate to covenants that limit the transfer of equity to an affiliate or a successor in interest. And I know we've had a couple exciting, um, exciting ones in that regard, Tom.
SPEAKER_03:So yeah, absolutely. Um, you know, because at the end of the day, a lot of these joint ventures, they're not for short, discrete periods of time, right? If assuming things go well, this could be a multi-decade business or or even longer. So the core question that the lawyers on both sides are going to have to think about is how much freedom do we want to give a transferring member who wants to exit or who wants to bring in a new partner, versus how much control do we give the non-transferring or remaining members? Uh, you know, on one hand, you want flexibility to you know move your equity around as necessary. On the other hand, if you're not moving your equity, you want to have control over who's sitting at the table with you and who you're in business with. Um, and so a lot of times there's there's no right answer. But uh one thing that often comes into play is can somebody use money, right, to block an outcome that they dislike? Can there be a right of first refusal on transfers or something like that?
SPEAKER_01:Yeah, that's right. And you know, I would add that because you're bringing together, for lack of a better word, disparate parties into a shared arrangement, right? The twists we see that over the JV's life, because you know, these JVs, as Tom mentioned, I mean, they're hopefully successfully in place for decades, um, in perpetuity in some cases. And so we've seen twists where, you know, there might be a member who at some point expresses an interest to be the one that might want to transfer, but at the same time, they also might be the one that wants to veto that down the line if their circumstances change or their ownership amounts change. So there's really a lot of fluidity and We like that because we want the members to be able to grow into the venture or flex out of the venture as makes sense for them at that time.
SPEAKER_03:Yep. And you know, because we're in healthcare, unfortunately, or fortunately for the lawyers, there's there's even more complexity that we have to keep in mind. Um, a lot of healthcare joint ventures being in a regulated space, there's gonna be some added complexity that the lawyers are gonna want to keep in mind. Um, for instance, you know, if your joint venture gets reimbursement from federal payers, you don't want any transfers to an entity or an individual that's been excluded from those payer programs. That's gonna basically blow up the reimbursement uh ability of the joint venture. Um, similarly, you know, if you have a joint venture with a nonprofit partner or working in a nonprofit space, um, that prop that party is probably gonna want some protection about any new members that could jeopardize their nonprofit exempt status. Um, you know, and and you can imagine that issue across a host of licensing and permitting uh issues that can come with a particular joint venture depending on the industry.
SPEAKER_01:Yeah, for sure. Those are really good points. We should also discuss planning for future growth, which which could come in the form of expanding locations, offering new services, or any other variety of pathway.
SPEAKER_03:Yeah, absolutely. Um growth, growth is a great topic because one, the business folks like to talk about it, right? They always want everyone to know that their deals are gonna be great and are gonna be super successful. Uh, but it can be very challenging for the lawyers, right? Because growth almost by definition is unknown and you're trying to look into your legal crystal ball to plan for eventualities that that really you can't predict, right? Um if a joint venture grows into a new business line, is the current management structure appropriate? Um there's really no way to know, but you know, we're we're tasked with figuring out how to draft provisions that allow growth to go forward. Um it's uh it's a bit of a cliche, but you kind of want to draft for an argument that you hope to never have. And you know, over time, as you get more experienced with joint ventures, you get a little bit better at it, but but it's always a bit of a bit of a black box.
SPEAKER_01:I like that one. Draft for the argument that you hope you never have. I like that. Um that that goes along with my, you know, some of my cynical clients will say that lawyers are paid pessimists, but there's reasons for that. So um, so for that reason, you know, it's important for the JV lawyers, I think, to get a sense of where the business could grow when they draft that initial operating agreement. That's going to be that governance document that, you know, grows with the JV and could be amended in the future. But that really is that sort of um charter, so to speak, of the business itself. And we are successful, right, if that business grows. Every business wants to grow, right? I mean, that's what our clients are hoping for, especially in the JV space where they're not divesting, they're actually choosing to go into something together and build. Um, but you also want to and need to protect that core of that business that's being formed. So there's this tension that we observe in this space where you've got growth-focused members that want enough freedom to potentially pursue new opportunities. And we might see that inside the JV, actually. And Tom mentioned sometimes we have rights of first refusal or other mechanisms built into, you know, allow for that in a permissive way. And sometimes they may want to pursue those opportunities outside of the JV. Uh, but then you've got growth-resistant members sometimes that really are concerned about cannibalizing the JV or risking the status quo that's profitable on expansion and and that they don't support.
SPEAKER_03:Right. Yeah. And it gets even harder if one or more of the joint venture parties, you know, say a hospital or health system, if the joint venture is in its core business, how can you tell a hospital it can't grow into something it wants to do because its joint venture partners don't want it to? Um, so there's always going to be this push and pull. Again, there's there's not always a perfect right answer, but it is just one of those tensions that the lawyers need to be aware of and understand when they're negotiating things.
SPEAKER_01:Yeah, we definitely see that as a tight rope walk for sure. A delicate balancing act, but one necessary and one that I think a nuance that I didn't really understand until I was probably a little bit deeper into my practice and have seen JVs evolve, particularly the partners evolve or the purpose of the business evolve. So it's definitely one to flag as a another good hack.
SPEAKER_03:Yeah, yeah. And so you're typically going to see this kind of push and pull play out in three different covenants that you'll see in a joint venture operating agreement. The employee non-solicitation, uh, confidentiality covenants, and then non-competition covenants.
unknown:Yeah.
SPEAKER_01:So the for the confidential confidentiality covenants, we'll start with, those generally require the members to keep the JV information confidential. And that may limit actually ultimately each member's use of that information. These are pretty standard in drafting, but in practice, it's often tough, to be honest, to be able to distinguish what a member learned through the JV versus what they developed independently.
SPEAKER_03:Right. Uh, non-solicitation covenants are also pretty challenging in that respect, right? Um, usually, usually we're talking about employees, it could also cover vendors, customers, patients is really sticky. Um, but this is a topic where, again, it's hard to kind of ensure protection because people have, you know, general advertisement for healthcare support staff and things like that. And it's also challenging because, you know, especially now, but even before that, um, employee non-solicit to get a lot of antitrust consideration. So the lawyers are going to want to be very mindful of what the exact language says. And to our earlier point, you're gonna want to be very thoughtful in how you instruct your business colleagues on how to talk about this kind of stuff.
SPEAKER_01:Yeah, absolutely. And I will just say, you know, the elephant in the room, sometimes they're just impractical. If a member already operates in the same market, you can't actually limit them from engaging with every vendor. And obviously, as you've alluded, Tom, you know, patience is a whole nother tricky area. But, you know, customer, for example, a targeted non-compete is really, in our experience, often a better tool than a broad non-solicit.
SPEAKER_03:Yeah, and the non-compete is typically the most heavily negotiated. Um, we won't go into too much detail, but the three big things you're going to want to think about are the what's covered under the non-compete, the geographic reason region that's covered in the non-compete, and the time period, right? Is it during the joint venture relationship? Is there a tail period if someone exits? Things like that.
SPEAKER_01:That's right. And these covenants also apply to affiliates most often. Especially, yeah, especially drafted, drafted the way we would typically like on behalf of the best interest of the JV. Um, so let's talk about those types of transactions. Affiliates are in some way related or share common ownership with a member or a manager of the JV. That's typically how we sort of see affiliate lowercase A defined. Uh, many of the healthcare JVs that we've done together at least have at least, if not more than one, at least one contractual or financial transaction with an affiliate of one of our JV members. And we actually have found that to be, you know, as we've gone on to do other work, uh, that that's quite common in the healthcare space. These transactions can create, of course, conflicts of interest technically in approving, overseeing, and terminating these types of deals.
SPEAKER_03:Yeah, absolutely. And, you know, when we're thinking about it from a practical standpoint, I think the two main areas you're gonna see affiliate transaction in is kind of like general management services or something similar to a medical directorship where a physician partner uh is is providing specific services that that really only a medical professional can can provide. Um so you're gonna want well-drafted agreements that address different incentives, um, give non-affiliated members the right to step in if services falter or if the business fundamentally changes. Uh, your operating agreement should also have a very clear process for how are we approving these transactions. Um, selecting who the provider is, material changes to these transactions, what do what do we do if we need to terminate? You all want that, you'll want all that stuff laid out very clearly.
SPEAKER_01:Yeah, for sure. And I think we've also found it's quite important to make sure that any window or exit provisions in the JV contemplate for that potential termination of an affiliate transaction. If even one of the members of the JV doesn't want to terminate an affiliate transaction, the reality is that the JV may not survive in certain instances. And I know we don't go into this work, Tom, you know, with a gym's day scenario, but that is a reality that we've had to address.
SPEAKER_03:Yeah, absolutely. Um, you know, I've been in situations where, say, you have a joint venture with a cardiologist and a hospital, and the right now it's on the hospital campus, and the hospital's rebuilding and they're going from the first floor to the fourth floor or something like that. And the cardiology group says, no, that's you know, that's not the deal we wanted. Um, we want to now leave the hospital campus. Well, maybe the hospital all of a sudden it doesn't make sense. Um, and so what do you do when those parties feel like the original benefit of the joint venture just doesn't pan out anymore the way they thought it was going to?
SPEAKER_01:Yeah, I mean, it would be really hard, you know, in that instance for the JV to move forward. So, you know, speaking of exits, uh, everyone's favorite topic, the operating agreement should match out, should map out how to wind down the business if needed. So some of the last JV decades, some of the JVs in the last decades, you know, we found you'll face some curveballs. Um you'll have to anticipate what you can do today, but build in that flexibility. And um, like we talked about earlier, for what you can't. So, Tom, what what should automatically dissolve a JV in your experience?
SPEAKER_03:Yeah, not certainly not every problem. Um, you know, a lot of problems can be fixed, even if it seems like it's a fundamental disagreement. But, you know, the the first step should always be discussions between the parties. But I find generally, first off, if there's sustained negative cash flow and some or all of the joint ventures don't want to put in more cash or take on debt, that that's kind of, you know, at that point, unfortunately, the business didn't pan out and it's probably time for the joint venture to wind down. Um, and then the second big one is, you know, if there's a regulatory change, right? We talked earlier about these safe harbors that allow certain joint ventures to function. If those change for any reason and now you don't have the safe harbor, unfortunately you probably don't have your joint venture anymore.
SPEAKER_01:Yeah, so those are good. I mean, what you know, you also though are going to want to preserve relationship integrity, right? So the operating agreement shouldn't allow one party to redesign the deal, right, by stripping out roles or revenue streams without giving the affected member a path to exit or rebalance. So how do you calibrate that?
SPEAKER_03:Yeah, I mean, so first of all, there's no perfect way. I think one way to get around it is to make sure that your operating agreement is clear about what happens if you get to dissolution. So everybody understands that if we can't come to some kind of agreement, here's how things are gonna play out. Um, but no, I mean, I think it's a lot of like conversation between the parties, back to that cardiology hospital campus uh topic. Um, is there a situation where the parties can sit down and and mutually agree? Um, and if they can't come to some sort of agreement, um thinking about how the relationships are gonna play out, because these folks still probably want to stay in business, uh maybe not directly in a joint venture, but but they're still gonna see each other if the healthcare space isn't isn't that large. Um, but you know, in general, we want to be mindful that conflict enough, uh conflict is you know something we're trying to avoid. Um so I think that's that should be our over overarching goal in in a lot of these joint venture negotiations, giving giving enough of a a script for for the business folks to help avoid some of this stuff.
SPEAKER_01:Yeah, and I would throw in there that you know, we've seen enough of these uh go wrong, so to speak, that we just have to plan for bad actors. And that's not inherent in anyone's DNA. We don't feel good about that sometimes. But I do think that, you know, that's just something that we have seen as important to set up in terms of guardrails, things as simple as building in, you know, periodic screening against federal exclusions lists, requiring, you know, prompt notice by a member of an inquiry of a government investigator or otherwise, you know, with that goal to really catch issues before they infect. You like what I did there? Infect the JV. Um yes, that is our promised healthcare plan. Um, so next, you know, let's decide about what happens when an issue arises briefly. You know, what about investigations? Like, should an investigation have consequences? How do you see Tom JVs uh putting into place tools that mitigate bad behavior and you know, not poison the well, so to speak?
SPEAKER_03:Right. Yeah, investigation is hard, I think, because you know, a lot of times investigations can take years and there still may not be a clear like knowing of bad behavior. Um so I think one of the one of the key things that I find successful in my practice is the trigger for removing or sanctioning or otherwise dealing with a bad actor is not a final non-appealable judgment or whatever term the litigators like to use. It's once we know that there might be bad act occurring, at that point, the non-bad acting parties parties in the joint venture, they can now take whatever action the operating agreement sees fit. And maybe that means that you kick somebody out too early who actually didn't do anything bad, but at least it puts the onus on the accused to present some level of comfort to the other parties of the joint venture. Um because you're right, we don't want a world where this joint venture, which is probably providing healthcare services, to have major interruptions. That's that's not going to be beneficial for patient helpcomers and things like that.
SPEAKER_01:Yeah, I think that's a good, pretty solid playbook from prevention to interim standards to, you know, unfortunately, removal mechanisms. So let's take the final minutes together to describe what we're really excited about as healthcare law practitioners, which is innovation in JV and in healthcare. Um, so you know, I've got a big question, big picture question from your standpoint, Tom. Like, what do you think are some of the key drivers that are um bringing innovation into healthcare and the JV model?
SPEAKER_03:Yeah, I think it's, you know, it's really cost, right? At the end of the day, you you have a lot of large providers, a lot of large health systems, you know, companies like the ones I work for, and and everyone's feeling the crunch on reimbursement and caught, you know, employee costs, vendor costs, things like that. So at the end of the day, folks are going to be looking at joint ventures as an opportunity to say, how can we achieve the you know, the financial goals that we're looking for? How can we get the patient outcomes that we're looking for while doing it at reduced cost? And joint ventures are a great opportunity for that. Um, they maybe allow a large organization to operate outside, not outside their usual policies, but have more of a startup venture feel if they're partnering with a venture company in a joint venture. Um, it may allow for medium or smaller providers to offload, like we discussed earlier, some of that capital risk, some of that financial risk with a deep pocketed private equity firm or something like that. Um, or it just, you know, you have a small physician practice in whatever subspecialty, you know, even though those folks are, you know, probably doing pretty well financially, healthcare is expensive. And, you know, building out a five or ten million dollar imaging center costs a lot of money. So even if you have five or ten physicians, that's that's a big investment. That that could be somebody's retirement account. So having an opportunity whereby this sort of structure allows folks to mitigate and drive down costs and reduce risks, uh, I see that's why joint ventures are continually continued to be, you know, active and and even growing in in the American healthcare space.
SPEAKER_01:Yeah, definitely from my perspective too. One of the things I found most exciting about this era is um how JVs can be possibly a solution for talent. A JV can recruit product managers, data scientists, you name it. And you've got the agility of a growth company, right? But the scale of possibly a health system or a plan behind it, um, it's really hard to create that single synergy in front of, you know, in a single parent organization. And, you know, on the care delivery side, JVs are really pushing, as you mentioned, that lower cost, higher convenience setting. You know, I know in your world, Tom, and Firstinius, you're seeing a lot of innovation in the home health area. We're seeing hospital at home adjacencies and virtual specialties and all sorts of different combination efforts when you bring particularly the tech side along with the institutional side. And I just for me, it's just such an exciting time to practice in terms of new solutions for patients, access to care and the like. And I would also say for the nonprofits out there, um, I wanted to take a moment to return to that notion that innovation through JVs can really help to advance mission, um, charitable mission, access, equity, community health, without overextending that balance sheet. And we touched upon this earlier, but I think really baking those mission metrics into your scorecard, um, you know, whether it's wait times in your underserved areas, whether it's language access, whether it's digital equity measures, we are seeing really, really exciting developments in this space. And it just feels like JVs have always been there as that solution, but the potential is endless as you're seeing on one hand, partners developing the tech, developing the data, of course, being sure that your IP and other data rights are protected. But greater than that, how does that fit in with more of the institutional model that is more client and patient-facing and developing these combinations that really are a mind blow and uh just such an exciting time?
SPEAKER_03:Absolutely.
SPEAKER_01:So I am sure that you know we could keep talking about this, Tom, um, forever and ever. And I know we do when we are at the conferences. So be sure to find us at any conference that we are attending for AHLA. But I wanted to thank you, Tom, for sitting down and sharing this time with me to deep dive about one of our favorite topics, healthcare joint ventures.
SPEAKER_03:Yeah, absolutely. Thank you, Jennifer, and thank you, listeners. And a quick plug um next year's annual meeting, 2026, is going to be in New York City for the first time, I think, in over a decade. Uh, Jennifer and I are both hoping to be there. So uh, if we're there, definitely come and find us and say hi. Thank you.
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