Skilled Nursing Supplemental Payment Programs Architecture for Expansion & Utilization – Nuts and Bolts October 17 2016 Kevin Pahud Partner kpahud@bkd.com

Topics The Contracts Benefits: Financial and … Flow of funds Change of ownership Financial reporting Administrative & deal considerations

The contracts Increasingly, participation is being achieved via a Lease Agreement Change of Ownership (CHOW) is triggered & hospital becomes the licensee No capital required by buyer SNF retains long-term control of its assets Ease of entry/ease of exit Benefits of leasing

The contracts Parties also typically execute a management agreement Compensation structures unchanged No HR implications No disruption of day-to-day activities at Facility Employees remain employed by manager Manager subject to oversight of owner -

Benefits: financial and … Benefits of participation include: Max financial benefit based on estimate of UPL and 10% Rule = approximately $25 million per hospital Strengthened relationship & enhanced communication between hospital & SNF Preparation for future ACO development Preparation for future Medicare payment bundling, i.e., DRG 469/470 demo joint replacement project – this will be the norm

UPL/IGT – Flow of Funds Supplemental Payment Operating Expenses, Lease Non-Fed Share Supp. Payment (43.26%) (100%) Operating Expenses, Lease & Management Fee Supp. Payment Federal Government State Government Third-Party Vendors, Lessor & Manager Gov’t Hospital General Account Hospital Bank Account(s) – dba SNF

Change of ownership (CHOW) Buyer’s / Lessee’s (Hospital) responsibility Dept of Inspections and Appeals- Application for License – 30 days in advance Additional documents and CMS required docs including 855 and 588, as well as, legal doc(s) governing CHOW (lease) Notify IME CON considerations If a “new institutional health service” or “changed institutional health service” – CON required

Change of ownership Lease structure would not seem to meet this definition, but submitting a request for a “determination of reviewability” would remove any doubt Submitted to Iowa dept of Public Health If determined CON is NOT required, goes to state health facilities council for consideration

FINANCIAL REPORTING Governed by Management Agreement SNF operations recorded on Hospital GL Software typically NOT integrated Monthly journal entry to record activity - suggest establishing a Dept or Segment (“Post-Acute Operations”) Cost reporting (responsibility of Manager) Separate cost report Limited impact to Hospital – allocation of G&A

Administrative & Deal Considerations Longevity of SNF UPL Program Tax benefits – Income, sales, property, etc. Cash flow needs – Funding of working capital Reputation of SNF Current LTC financing structure – HUD? Bonds? Challenges with financing (AR/working capital lines) Fiscal year-end Financial Increased accounting & financial reporting requirements

Kevin Pahud, Partner BKD, LLP kpahud@bkd.com 317.383.4069