Willmar City Council

Rice Memorial Hospital

NewCo Working Session #1
September 13, 2017
 Work Session
Willmar City Council
Rice Memorial Hospital
September 13, 2017

Agenda
I. Opening Comments Douglas Allen, Rice Memorial Hospital Board President

II. Vision Overview Michael Schramm, CEO, Rice Memorial Hospital

Dr. Cindy Firkens Smith, CEO/President, ACMC Health

III. CentraCare Health Dr. Kenneth Holmen, President/CEO, CentraCare Health

IV. Legal Overview David Melloh, Attorney, Linquist & Vennom

Jill Radloff, Attorney, Stinson Leonard Street
A New Partnership
Willmar City Council September 13, 2017

3
ACMC Health
Formed 46 years ago
Physician-owned multi-specialty health network
9 clinics and one ambulatory surgery center
100,000+ patients, 600,000 annual visits
Over 170 physicians and advanced practice
providers
955 employees

4
 ACMC Specialties & Services
Allergy/Asthma Imaging Services Pediatrics
Anesthesiology Infectious Disease Perinatology
Audiology Internal Medicine Physiatry
Balance Center Nephrology Physical Therapy
Bariatrics/Weight Control Neurology Plastic Surgery
Cardiac Electrophysiology Neurosurgery Podiatry

Cardiology Obstetrics/Gynecology Psychiatry

Occupational Medicine Psychology
Dermatology
Oncology Pulmonology
Endocrinology
Ophthalmology Rheumatology
Family Medicine
Optical Retail Sleep Medicine
Gastroenterology
Optometry Surgery General
Geriatrics
Orthopedic Surgery Urgent Care
Hand Surgery Otolaryngology (ENT) Urology
Hematology Pacemaker Clinic Wound Clinic 5
ACMC
Network

6
Rice Memorial Hospital (RMH)
Began 80 years ago
Rice Home Medical (5 locations)
Rice Hospice (7 locations)
Rice Care Center & Therapy Suites
(skilled nursing facility)
Rice Regional Dental Clinic
Rice Health Foundation
1,076 employees

7
RMH 2016 Stats

Births 747
Total Admissions 3,473
Average Daily Census 33.9
Total ER Visits 13,540
Total Surgical Procedures 3,670
Total Revenue $107 million

8
RMH Service Area

9
 Willmar Medical Services (WMS)
WMS was formed in
January 2008 as a WMS includes:
joint venture Willmar Surgery Center
between ACMC Willmar Regional Cancer Center
and RMH. Willmar Diabetes Center
Willmar Imaging Services
Willmar Orthopedic Services
Willmar Sleep Center
Anesthesiology

Currently employs
170 staff.
10
11
Big News

12
 Our Vision

Become west and southwest regional hub of CentraCare, across

care continuum
Collaborate with interested and strong regional healthcare entities
- goal is to include others and conversations have begun
Provide practice management and IT services to collaborating
organizations continue to build on existing relationships 13
 The Case for Affiliation
Why Rice, ACMC, and CCH?
Preserves long-standing legacy of community-based care in west-
central and southwest MN
Better supports services to an aging population with growing
needs (enhanced delivery, care coordination across large group)
Increase access to comprehensive care with coordinated care
transition when needed
Supports recruitment, retention, data analytics, EHR coordination
Enhances financial stability through investment in technology and
talent, and ability to spread costs across larger system
Positions systems to succeed in era of decreased reimbursement,
increasing transfer of financial risk & demands for enhanced
efficiency and transparency
14
More Alike than Different

All three All three All three

organizations organizations share organizations share
share similar values goals of keeping
geography putting patients first patients close to
and patients by working home for most of
collaboratively to their care, increasing
improve care and access to specialists,
the health of our and striving to reduce
population costs

We are better together

15
Unique Opportunity
Creation of a New Model
A chance to envision and optimize rural health and health
care delivery
Governance and decision-making at the local level
Deliver the right care at the right place at the right time for the
right cost

Benefits to Our Patients

Best possible care locally
Medical information shared seamlessly, affording physicians
the most current information available
Improved access to specialty care locally
16
 Timeline Next Steps

Summer & Fall

May 24 LOI Approval & Periodic shareholder &
Public Announcement organizational updates

May 2017 2018

June 13th & 14th Our Fall Organizational January 2018 Startup
Best Begins With Me Approvals of New Organization
Culture Sessions with
CCH, RMH & ACMC

17
 Hospital-to-System Affiliation Transactions:
CentraCare Health and Rice Memorial Hospital
Proposed Transaction Overview

September 13, 2017

Willmar City Council Working Session
David R. Melloh
Lindquist & Vennum LLP
dmelloh@lindquist.com
612-371-3943
 Health System Affiliation with and Consolidation
of Independent Hospitals
Overall market reflects consolidation trend:
2010: 66 hospital M&A transactions
2015: 112 hospital M&A transactions
2016: Over 100 hospital M&A transactions
Minnesota Market Consistent With National Activity
 Majority of Minnesota Hospitals Affiliated
with Health Systems
Currently, fewer than 25% of Minnesota hospitals are independent of
larger health systems
Consolidation continues:
Ridgeview Medical Center/Minnesota Valley (2016)
Fairview/HealthEast affiliation (2017)
 Factors Driving Hospital Affiliation Activity
Financial or clinical distress (particularly smaller facilities)
Transition from fee-for-service to value-based reimbursement
Anticipated intellectual and financial requirements for success
under value-based environment
Desire for reduction in cost structure
Value of scale for purposes of addressing capital needs, technology
implementation and infrastructure upgrades
Enhanced opportunities for integration with physicians
 Models of Affiliation
ACO Participation
Health IT Participation
Management/Shared Services
Lease
Complete Affiliation/Merger
 Typcial Consideration in Affiliation Transactions

Non-Upper Midwest Environment: In context of investor-owned hospitals

(none in Minnesota), purchase price normally based on multiple of EBITDA
(2017 data reflects 8x multiple for acute care hospitals)
Minnesota Market: Among non-profit hospitals, including government-
owned hospitals, affiliations typically involve the assumption by the
system of the balance sheet assets and liabilities of the affiliating facility
(effectively, no purchase price paid)
Other forms of consideration (capital and service commitments,
maintenance of core services, physician development plan,
contribution to local healthcare foundation)
 Typical Hospital Lease Structure

Lessor normally is the governmental entity (such as city or hospital district)

Minnesota law authorizes city lease of hospital to a non-profit entity
Governmental unit retains ownership of real property
Health system obtains access to facility through lease
Rent payments equal to principal and interest on existing bonds (plus amounts
necessary to maintain agreed-upon bond reserve)
Governmental unit transfers balance sheet assets and liabilities to system, which
assumes financial responsibility for operations of affiliating hospital
 Foundational Principles of Newco

CentraCare and Rice boards share common vision of coordination and delivery of
high-quality, cost-efficient and locally-focused inpatient, outpatient and
professional healthcare services in west central Minnesota
Newco has unique opportunity to integrate Rice and ACMC, the preeminent
physician practice in the region
Rice and ACMC mutually agree that collaboration and integration through Newco
facilitates achievement of shared Tripe Aim goals of improving patient experience,
enhancing population health in the region and reducing the cost of healthcare
Unique affiliation model, in which Newco (Rice and ACMC) will serve as regional
health system hub
 Proposed Rice Memorial Lease Provisions

Subsidiary of CentraCare Health (Newco) will lease Rice real property from City
Newco will be tax-exempt under Section 501(c)(3) of Internal Revenue Code

Lease will have 30-year term, with option for renewal of second 30-year term
Newco to inform City of intent to renew prior to expiration of initial term

Lease may not be terminated without cause

Either City or Newco may terminate the lease upon a failure of the other party to
perform its obligations
Newco may exercise purchase option upon repayment of Rice bonds
 Financial Duties of Newco

Newco will pay rent to City equal to principal and interest on Rice bonds, plus
required reserves
CentraCare will guarantee rent payments of Newco
Newco also to make specified intergovernmental transfer payments to City
Newco required to maintain leased property, repair or replace equipment, pay all
operating expenses, carry insurance (with the City named as an additional insured)
Newco will indemnify the City against claims related to the liabilities assumed by
Newco
 CentraCare Health
System
Tax-exempt, MN non-profit corporation
City of Willmar
100% ownership

Newco Rice Memorial Hospital

Tax-exempt, MN non-profit LLC

Newco will operate Rice post-closing Newco to bill for healthcare

Pay agent for ACMC employees services under RMH provider ID
Employs Rice personnel as of Closing Willmar Medical Services
100% joint venture to be eliminated
Holds all benefit plans, either transfer
ownership
ACMC 401(k) Plan, or establish new Plan
Newco to renegotiate payor contracts

ACMC
(d/b/a Newco Clinic)
MN for-profit corporation

All staff (including physicians)

employed by ACMC at Closing
Potential to transition employment to
NewCo over 2-5 years
Physician owners convey interests in
Surgery Center Properties to NewCo
 Additional Obligations of Newco

Newco required to use the leased property in a way that will not
negatively affect the tax-exempt status of the Rice bonds
Newco must ensure other bond covenants are satisfied
Newco must maintain all Rice licenses and permits, as well as Medicare
certification
Newco will make an annual report on Rice performance to the City
 Post-Termination

If Newco breaches its obligations and the City terminates the lease:
Newco will retransfer all Rice assets and liabilities to the City
The City will assume all contracts related to the Rice assets
The City will repay Newco an amount equal to Newcos investments in Rice,
including improvements of Rice assets
 Additional Affiliation Terms

Rice employees will transition to employment by Newco

Comparable positions, rate of pay and benefits (subject to pre-employment screening)
Assumption of existing Rice collective bargaining agreements

Newco will assume responsibility for virtually all liabilities of Rice, ongoing
Rice operations
City will transfer to Newco all Rice personal property, including equipment
Newco will extend privileges to all members of Rice medical staff
Newco will have Co-CEOs, including current Rice CEO
 Protection of Citys Interests

Newco may not sell any leased assets during term of lease
Newco may dispose of obsolete or non-functional equipment
Newco may not assign lease without the Citys consent
 Benefits to City of Willmar

Maintenance of local control (Rice Board retains oversight role, Rice CEO
to remain a Co-CEO of Newco)
Newco/Willmar will be hub for delivery of healthcare services in western
Minnesota
Relief from financial risks of operating hospital, bond payments and
uncertain healthcare market/reimbursement
Ability to retain and enhance key healthcare services in Willmar, including
recruitment of providers to Willmar
Continued payment by Newco of intergovernmental transfer
 Governance

The composition of and methodology for appointment to the Rice Board will not
change
Rice Board will oversee Newcos performance under the lease, monitor adherence
to Rices mission and commitment to services
Newco Board will be composed of 10 directors:
4 individuals nominated by the Rice Board (including 1 Willmar resident)
4 individuals nominated by ACMC (including 1 Willmar resident)
2 individuals appointed by CentraCare
Newco Co-Chief Executive Officers will serve as non-voting directors
Two Newco directors also will be appointed to the CentraCare Board
 Key Conditions to Closing

All necessary consents or waivers obtained, including consent of

bondholders and parties to contracts
Execution of definitive agreements between Newco/CentraCare and
ACMC providing for integration of ACMC and Newco
 Next Steps

Continue to prepare, negotiate and finalize transaction documents

Ongoing working sessions/community informational meetings/City Council
approval
CentraCare Board approval
Bond counsel review and consent process
Third party consents
Closing of transactions
Operational transition (including employees)
 Who is CentraCare?
501(c)3 not-for-profit created in 1995
merger of clinic and hospital
Integrated regional health system
Hospitals
Physicians
Long Term Care
Dyad leadership
10,000 employees
We are committed to rural access

39
CentraCares Vision
Community based
Regional
Integrated
Collaborative
Triple Aim Focus
Engaged leadership
Engaged workforce
Engaged communities
 Quality and
Experience
We will
build a comprehensive
ambulatory network to redesign
the consumer experience.
make access to care convenient
for our patients.
thoughtfully expand local and
regional specialty services alone
and through strategic alliances.
Value Community
Health
We will We will
invest in regional & strategic engage partners to improve the
partnerships with those who share overall health of our
People
patients in our defined geographic
region.
communities.
develop capabilities to be a
We will
deploy resources to ensure Population Health Organization.
sustainable financial success &
attract and retain the best people
achieve top quality outcomes.
that reflect the community we
serve.
continue to work with payers to
improve value and impact the total
foster a culture that allows us to be
cost of care.
at our best every day.
MARKET FORCES DRIVING UNCERTAINTY

Payment
& Policy
Growth &
Scale

Technology

Consumers
Workforce

Adapted from: Sg2

This Photo by Unknown Author is licensed under CC BY-SA