Moving the HME Industry Forward

General Healthcare

Joint Venture Agreement with Hospital

February 1, 2016

AMARILLO, TX – It is the “irresistible force meeting the immovable object.” We are witnessing a “sea change” in how health care is delivered and paid for. Medicare has been barely able to pay for health care for the 23 million of the Greatest Generation (the World War II folks) and the additional 20 million of the Korean War Generation. We now have 78 million Baby Boomers – those born between 1946 and 1964 – who are retiring at the rate of 10,000 per day.

The Medicare fee-for-service payment model that has been in place for decades is unsustainable. It is inefficient and results in too much unaccountability. Medicare is pushing all health care providers (hospitals, physicians, pharmacies, SNFs, DME suppliers, etc.) to be more efficient in delivering health care products and services.

Medicare is accomplishing this by reducing reimbursement and requiring positive outcomes. All providers, not just DME suppliers, are feeling the pain. DME suppliers are experiencing the financial squeeze through competitive bidding, aggressive audits, stringent documentation requirements, and reimbursement cuts. Commercial payors are following Medicare’s lead.

Because of pressure from Medicare and commercial payors to (i) provide services and products at the lowest possible price while (ii) achieving the best possible outcomes, health care providers are entering into collaborative arrangements with other providers to achieve the best possible outcomes for the lowest price. An example of this is how DME suppliers and hospitals are working together.

When two or more entities own something together, then a “joint venture” is created. Increasingly, we are witnessing hospitals and DME suppliers forming joint ventures. This normally entails the hospital and DME supplier forming a new legal entity (ABC Medical Equipment, Inc.) that is, itself, a DME supplier.

ABC can be owned 50-50, 60-40, 70-30…….whatever the parties decide. The benefit of ABC for the hospital is that it has “a constant touch” with patients after they are discharged……the goal being to keep the discharged patients healthy so that they are not readmitted any time soon for the same illness that resulted in the initial admission. The benefit of ABC for the DME supplier is that it is able to expand its business.

A number of steps must be taken to establish ABC. An important first step is for the hospital and the DME supplier to execute a Joint Venture Agreement (“JVA”). This is an approximate six page agreement with multiple exhibits. The important terms of the JVA include the following:

• The Preamble (introductory section) of the JVA may say something like the following: (i) “Hospital is a tertiary care hospital that services [Name of City] and the surrounding area and desires to partner with a provider of high-quality integrated home medical equipment in order to provide home medical equipment services in the area served by Hospital.” (ii) “DME Supplier has extensive experience and expertise in providing high-quality home medical equipment and supplies and desires to partner with a prominent provider of health care services in the market area served by Hospital.” (iii) “Hospital and DME Supplier wish to enter into a joint venture arrangement on the terms and conditions described in this Agreement in order to better meet the need for high-quality home medical equipment in the market area served by Hospital.”

• The “Formation of Joint Venture” section of the JVA may say something like the following: (i) “The joint venture between Hospital and DME Supplier will be in the form of a member-managed limited liability company to be formed under the [Name of the State] Limited Liability Company Act and will be known as ABC Home Medical Equipment, LLC (the “Company”)”. (ii) “The Operating Agreement for the Company will be in the form attached as Exhibit A and will provide, among other things: (a) that Hospital and DME Supplier (the “Members”) will be the sole members of the Company and that each of them will have a 50% interest in the profits, losses, and cash distributions of the Company with distributions of available cash to be made on a quarterly basis; (b) for the amount of capital contributions to be made by the Members and the terms and conditions upon which additional capital may be required from the members; and (c) for management of the Company by the Members, with each Member having an equal vote with respect to all matters to be determined by the Members, and for regularly scheduled meetings of the designated representatives of the Members.”

• The “Business of the Company” section of the JVA may say something like the following: (i) “The Company will operate a retail durable medical equipment business serving patients in the following [Name of State] counties: _____________ (the “Service Area”), which will include sales and service.” (ii) “The Company will be the exclusive vehicle through which either Hospital or DME Supplier will engage in the business of providing durable medical equipment on a retail basis to customers within the Service Area during the entire term of the Company and neither Hospital nor DME supplier will directly or indirectly compete with the Company during such time.” (iii) “The Company will be operated independently of either of the Members. Among other things, the Company will be operated in a manner that respects the right of patients to acquire durable medical equipment and related services from providers of their choice. The Company will not require or request any referral source to enter into an exclusive referral arrangement or other arrangement that does not honor each patient’s right to choose his or her provider.”

• The “Space Rental” section of the JVA may say something like the following: “Hospital will make up to _____ square feet of commercial space available to the Company at a site within the Service Area determined by the Hospital and the Company to be reasonably suitable for use as the Company’s offices and its customer service and equipment storage facility. The Company and Hospital will enter into a standard commercial lease agreement for this space in substantially the form attached as Exhibit B (the “Lease”) having an initial term of not less than one year and providing for monthly rent and other terms that are at market for similar commercial space in the Service Area. Rental rates will be subject to adjustment not more often than annually.”

• The “Inventory and Equipment” section of the JVA may say something like the following: (i) “The Company will acquire and maintain a reasonable level of inventory of equipment, spare parts, and other items needed for the conduct of its business operations in the Service Area. DME Supplier will be responsible for acquiring all necessary inventory on behalf of the Company and will provide all such inventory items to the Company at fair market value.” (ii) “The Company will be authorized to acquire such business equipment, vehicles, and other tangible assets as the Members determine are reasonably necessary to carry out the Company’s business operations. In the event the Company acquires any such tangible business assets from either DME Supplier or Hospital, the price paid by the Company will be the fair market value of such asset.”

• The “Operational and Administrative Support” section of the JVA will say something like the following: (i) “The Company’s employees will include, but not be limited to one or more intake personnel, one or more sales representatives, one or more customer service representatives, one or more delivery technicians, one or more office or clerical employees and such other personnel as the Members determine from time to time.” (ii) “The Company will engage DME Supplier to provide administrative support services for the Company pursuant to an Administrative Services Agreement in the form attached as Exhibit C.” (iii) “The Company will engage DME Supplier to provide billing, accounts receivable management, and collection services for the Company pursuant to a Billing Administration and Accounts Receivable Management Agreement in the form attached as Exhibit D.”

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or jbaird@bf-law.com.