This transcript has been auto generated
00;00;00;00 - 00;00;22;26
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. But Am I Set Up for Growth: Corporate and Governance Considerations for Growing Hospices. Hey, Adam.
00;00;22;28 - 00;00;24;07
Adam Royal
Hey, Meg.
00;00;24;10 - 00;00;31;28
Meg Pekarske
I've been trying. I've been bugging you to do this podcast for a while, so thank you for for taking me up on it.
00;00;32;00 - 00;00;34;09
Adam Royal
Yeah. Happy to be back on it.
00;00;34;12 - 00;01;03;04
Meg Pekarske
Yeah. Well, it has been and you've been busy with all of the things that we're talking about in today's session. And I guess just maybe I start out by, by recapping what we’re seen. What we see a lot across the country. And this applies to nonprofits and for profits. But I think probably especially nonprofits and how they are organized from a corporate perspective.
00;01;03;04 - 00;01;38;03
Meg Pekarske
So 40 some years ago, people started a hospice organization, typically in Inc, and then that's it. And then 40 years have gone by other than, you know, personnel changes and board changes. Nothing else has really changed. And I think that we're at this point in time right now where people are thinking about service expansion and geographic expansion and affiliating with other providers and doing a lot of cool stuff.
00;01;38;05 - 00;02;15;19
Meg Pekarske
I think for and partial with that exploration you need to think about is my corporate structure is the single legal entity now doing ten things? Is that really the right way that sort of best meets the goals? And so, so that's what we're going to talk about today because okay. Spoiler alert. No it doesn't. And you know, lawyers can be wishy washy, but I really don't think there's few people that I think that makes a lot of sense for some.
00;02;15;21 - 00;02;44;19
Meg Pekarske
Wanted to jump to. So why are we seeing people do that does make sense. And, so why not want to explore that with you today? And maybe let's get out of the way and hopefully people won't, you know, it will encourage them to continue listening. We are not encouraging you to make complexity for complexity sake.
00;02;44;21 - 00;03;08;19
Meg Pekarske
And I actually think what we're talking about in the session doesn't need to lead to lots of administrative burden. And like, oh my God, I'm going to need, you know, someone to just manage all of my boards. And all I'm going to be doing is going to board meetings and, you know, all the stuff. I don't think it needs to be that way.
00;03;08;19 - 00;03;22;26
Meg Pekarske
So that just get that sort of misnomer out of place right now. Because I don't think that it needs to be that way. And I, I actually think it can streamline a lot of things for folks. So.
00;03;22;28 - 00;04;01;18
Adam Royal
Yeah, exactly. And, and so to your point, what what we're generally seeing is for hospices that are either, you know, diversifying their service lines and, and creating new service lines, whether that be expanding into home health or non hospice palliative care or creating physician practice groups. Doing that or growing through acquisitions, or by affiliating with with other hospices or providers.
00;04;01;21 - 00;04;40;26
Adam Royal
Generally what we're seeing is the creation of, of different entities for different service lines and then creating a non-operational parent to be the parent entity or, or holding company for all of those operational entities that are either providing services in different service lines or are acquired entities, the ones actually providing the care and and to the point you just made about complexity.
00;04;40;28 - 00;05;17;00
Adam Royal
Certainly if you have multiple entities, that's going to be, a bit more complex than one single entity. It it adds something and you can't get around that. But but like you were saying, with a smart governance structure, and thinking through kind of how you can, how you can link these separate entities together, you can wind up with a pretty sensible, pretty straightforward structure that's, that's easy to operate a maintain.
00;05;17;02 - 00;05;50;18
Adam Royal
And it has added benefits. So it continues to help growth. And it helps isolate liabilities among and between different service lines and different entities. And, and that's a key consideration as hospices start to grow. Different service lines will have different risk profiles. And so isolating those from, from the other providers is is crucial.
00;05;50;21 - 00;06;25;02
Meg Pekarske
Well, and I think that in the for profit world, we're used to creating LLCs and so nonprofits not as much. And everything needs to be an inc. So even if you have multiple entities, we run into organizations that have lots and lots of things. And it's like, well, but for it to be, you know, not, you know, be exempt, it needs to be its own 501(c)(3).
00;06;25;02 - 00;06;56;19
Meg Pekarske
And so I think really important for listeners to hear about the whole disregarded LLC. So what oftentimes and again this is generalities we're talking about here. But oftentimes this is going to be available to folks where you don't necessarily need if you want to do home health or whatever in some separate legal entity, you're not going to have to do it as a name.
00;06;56;20 - 00;07;06;20
Meg Pekarske
Tell us what, disregarded LLC is and how that plays into the big picture for for nonprofits in particular.
00;07;06;22 - 00;07;38;12
Adam Royal
Yeah. So so this is something that's available both for profit and not for profit entities. And a disregarded entity is an IRS concept that applies to what's called a single member, LLC. And so LLC, you don't have shareholders, they have members, but it it's generally speaking the same concept, the entity or individual that owns that LLC.
00;07;38;14 - 00;08;19;00
Adam Royal
So if you take, a nonprofit, corporation, for example, that exists today as one entity, that corporation creates an LLC that the corporation owns, and the corporation is the sole member of that LLC. Then from a federal tax perspective, that LLC is what's called a disregarded entity. Meaning that it would, in this instance, share the tax exempt status of the parent, the nonprofit corporation.
00;08;19;00 - 00;08;45;25
Adam Royal
It would be treated as that corporation. The LLC wouldn't have to file a separate tax return. So, all of the LLCs profits and losses would be rolled up to the parent and reported on the parent. 990. The same thing applies with a for profit corporation, but it would be that corporation's tax return. It was not a 990, but that's the that's the yes.
00;08;45;25 - 00;08;49;09
Adam Royal
And it's
00;08;49;11 - 00;09;24;01
Meg Pekarske
A benefit maybe just to, to talk about that for for listeners who aren't super familiar with LLCs and you say it's a member manage or manager manage, there's a choice there. But essentially in, non corporate ways of speaking here, it's not like you have to have a full board for that LLC. So when we talk about streamlining governance it means translate that for me.
00;09;24;01 - 00;09;43;05
Meg Pekarske
What does what does it mean. What's the minimum you need to have. Because you're going to your big is probably still going to be on top right. All those members that have, you know, board members that have always been there, what who needs to be on this this organization's leadership?
00;09;43;08 - 00;10;19;07
Adam Royal
Yeah. We like LLCs because there's a lot more flexibility and in how they're managed. With a corporation you, you essentially have to have a board. With an LLC, you don't have to have a board. They are LLCs can either be member manage or manager or manage. And that simply means they're member managed. Whoever the member is is in charge of, making decisions and binding the LLC.
00;10;19;09 - 00;10;51;02
Adam Royal
If they're manager managed, that means you appoint an individual or an entity to act as the manager, and then the the members delegate that manager. Some authority to, to operate the LLC, oversee the LLC and bind the LLC and then kind of between those two, there's there are different iterations of how you set that up, but those are the two basic options that states tend to recognize.
00;10;51;04 - 00;11;23;22
Adam Royal
And so in practice, if you have this sort of simplified structure where it's a nonprofit corporation owning the LLC, you can make the LLC member managed, which means it's managed by the Inc, which in turn is governed by the board. And so the board of that corporation is, is ultimately the one making decisions both for the corporation and the LLC.
00;11;23;25 - 00;12;09;14
Meg Pekarske
Yeah. And I think that's super helpful because I do think a lot of our corporate clients, they're very familiar with the governance of banks and less familiar with LLC and, and sort of the flexibility there, which is, I think, super important. And the time to think about this stuff is now or like before you do stuff because, you know, we're working or we worked on projects where, you know, they do have multiple entities under their corporate umbrella, but, a lot of them are things that parent is an operational entity.
00;12;09;14 - 00;12;46;08
Meg Pekarske
And it's not like you had to legally convert anything to an LLC. But it's a lot of work, right? So it's better to if you're thinking of these expansion opportunities, growth opportunity, it's best to sort of get that in place before you start pursuing these things, because then you're really in a plug and play mode as opposed to like, you know, trying to recreate the past because it's harder to to do it and obviously more expensive and is probably, you know, is it really worth the squeeze at that point?
00;12;46;11 - 00;13;09;12
Adam Royal
Yeah, absolutely. Yeah. Yeah, exactly. But generally what we found is, is the LLC is, you know, if it's if you're in a position where you're, you're creating a new entity as opposed to dealing with currently existing entities and how those can fit in your, organizational structure, the LLC does tend to make a lot of sense for for all of those reasons.
00;13;09;14 - 00;13;19;03
Adam Royal
And you get the same, asset protection, as you do in a corporation and just without the headache of a separate board.
00;13;19;06 - 00;13;56;17
Meg Pekarske
So let's talk about unpack a bit the non-operational parent or holding company, and we use the non-operational parent as sort of shorthand, because this entity isn't going to hold any licenses as a health care provider or anything like that. And, and I would say one common question we get when we're working through this with clients is to say, well, I'll just put my parent company, you know, why doesn't my big entity just become the parent?
00;13;56;19 - 00;14;12;03
Meg Pekarske
And that holds a bunch of hospice licenses and real estate and all this stuff, and it's like, no. Yeah. No. Probably the best. And so, in brief, why is that not not the best idea.
00;14;12;04 - 00;14;51;17
Adam Royal
Like, yeah. And it really it really boils down to, risks and, isolating liabilities among entities. If you have a, like, an existing entity that's operating your hospice, that that hospice operation creates a fairly large risk profile. I mean, even if you look just at audit liabilities alone, we're seeing pretty extensive liabilities potentially just just from CMS audit alone.
00;14;51;19 - 00;15;23;07
Adam Royal
And so those are those are all liabilities that the hospitals could face through the ordinary course of its hospice operations. And, and so generally, when you're looking at how CMS would treat those liabilities, CMS will initially look to the, the Peyton that is audited. But then and, and will extend that liability to other patrons owned by the same.
00;15;23;08 - 00;16;07;10
Adam Royal
It does the same tax ID. So if you have an entity with multiple patrons, that liability could be shared among multiple ends. On the other hand, if you have separate entities that have different EINs, generally speaking the liability stays with the EIN. It won't transfer to another EIN so being able to separate out your hospice, home health and any other kind of providers into their own EIN and then put a non operational parent on top helps isolate that at risk.
00;16;07;12 - 00;16;36;17
Adam Royal
And then from a general corporate perspective, if you have an operational parent, so being one that operates a provider and as a Peyton could potentially be faced with these liabilities, if that provider or that entity owns other entities, those liabilities could be shared, by the entities that it owns as assets of that entity.
00;16;36;17 - 00;16;54;07
Adam Royal
So creditors, whether that be CMS or, or any other creditors that potentially satisfy a liability, from the assets of a subsidiary, the liability of a parent being satisfied with the assets of a subsidiary. Not conversely.
00;16;54;07 - 00;17;19;21
Meg Pekarske
Though. Yeah. So things can flow down, but not up. And so, so I think that that sort of misnomer, number two. So one is like, oh this is going to require lots of boards and governance and all the stuff. And then second is like, well, I just pop these entities under my big entity that holds all the stuff.
00;17;19;21 - 00;17;57;28
Meg Pekarske
And it's like, well, you probably ideally want to do something more wholesale. And so and there's so much we could talk about here, but, I think maybe the last place we go is that to do this kind of stuff that we're talking about, it is going to require reporting to CMS through the 855 and, you know, to Tuesday licensing and whatnot.
00;17;57;28 - 00;18;22;11
Meg Pekarske
But that's just to pause on that and be like, that's not the end of the world. Like, these are I feel like there are folks I've talked to and like, I don't want to do anything that requires updating. It's like given how frequently do you need to be updating your 855? Like anytime there's a board change or, you know, high level manager change, you need to be updating.
00;18;22;11 - 00;18;49;22
Meg Pekarske
These are like routine things. So it's not a big deal, especially if it's a change of information. So if it's in short the tax ID is and changing of the entity. And you know, so you just put a new operational parent on top. You know that might not you know, it might just be a change of information and not what we call a change of ownership.
00;18;49;25 - 00;19;20;22
Meg Pekarske
Again, it it sort of depends on if you're having to move around where the private provider number is held and, and whatnot. But it just it's not these things aren't insurmountable. And I just think that some key hospices are getting to be larger and larger and more complex and more sophisticated organizations. And we really need to have corporate hygiene and sophistication that matches that.
00;19;20;22 - 00;19;52;19
Meg Pekarske
Because it just it's worth it, as you said, like hospices just from a government liability standpoint, with audits and stuff, there is a lot of liability. We might not have the same malpractice liability that like an OBGYN is going to have, but, you know, I mean, pick your poison, right? I mean, there's there's, you know, we deal with $100 million overpayments that would bankrupt any company.
00;19;52;21 - 00;20;19;07
Meg Pekarske
I mean, it doesn't matter how big you are. So, this stuff is real. And so I think thinking through this, the end. I think can make a lot of sense. And sometimes I think we're dealing with this in two different situations. Some people are planning for growth and change and they're doing it or proactively. Other times we're working on these projects like we're working on an affiliation.
00;20;19;07 - 00;21;02;12
Meg Pekarske
And, you know, it makes sense to do things through this sort of structuring at the same time about what makes, you know, exploring these questions and stuff and thinking through that governance piece. But I think they've been really worthwhile projects because we've been doing a lot of these. And in terms of is it worth the squeeze? I think absolutely, given that I don't think we're going back to the future, like we're not going back to hospices that are, you know, really small, you know, volunteer-based organizations.
00;21;02;12 - 00;21;42;11
Meg Pekarske
I mean, we're, you know, many million dollar organizations typically tend hundred million, several hundred million dollar organizations. And the things we're talking about is consistent with like, what the larger corporate world and corporate health care world really does. And one thing we didn't talk about a ton, but maybe just worth a mention is also how you hold your real estate, which is a huge asset, like putting that all in an LLC instead of holding that at, you know, operational, you know, entity level and, and stuff like that.
00;21;42;11 - 00;21;53;02
Meg Pekarske
So I think we may be getting more rich in real estate as an industry. And so, you know, that's another thing to think about here.
00;21;53;05 - 00;22;26;11
Adam Royal
Yeah. The real estate could be the horse's biggest or one of their biggest assets. So putting that in its own LLC, again to isolate it from a liability that could be shared from any of the operational entities is a smart thing to do. And a good way to protect that asset. And again, is something routinely done, and other types of health care organizations and non-healthcare organizations.
00;22;26;13 - 00;22;28;04
Adam Royal
So it makes a lot of sense.
00;22;28;06 - 00;22;52;00
Meg Pekarske
Yeah. And I, I guess the final point, I'll give myself the final word here. I, I feel like it's though I always have so many thoughts floating my head about who's going to. I'm worried I'm going to forget that. But, I guess the last thing I wanted to share was there are some hospice regulatory nuance here, like core services requirements.
00;22;52;00 - 00;23;24;17
Meg Pekarske
And how do you meet those when you do this. And then, you know, the governing body requirement under the hospice regulatory framework, who's the governing body? Those are all things we work through. I don't want to get into that granular detail here, but a lot of the stuff's corporate stuff. But there is this hospice nuance to staff is really unique to what we're doing that are not really matched by, you know, your average corporate lawyer isn't going to know about that stuff.
00;23;24;17 - 00;23;57;16
Meg Pekarske
And so we also need to be making sure, you know, when surveyors come around, like we can show we're meeting these requirements. And so, you know, when we work with clients talking through how how to comply with that aspect because they're very important things to think about as we do this. And they shouldn't be an afterthought. But but anyway, well, this has been we've been doing a lot of this and it's been fun work.
00;23;57;16 - 00;24;13;27
Meg Pekarske
And I think it's fun to feel like we're putting our clients in the best possible shape to, to grow and thrive into the future. And so I think it's it's been rewarding work.
00;24;13;28 - 00;24;26;26
Adam Royal
It has. Yeah. Getting to see how it fits with their, strategies, and growth plans is, is always interesting and rewarding to, to be a part of.
00;24;26;29 - 00;24;54;01
Meg Pekarske
And if you're doing proactive work instead of reactive all the time, that's also not a panic attack. Yeah, exactly. So anyway, well, thanks so much for for your time and wisdom on this, Adam. You've been so critical to our team and and leading our team on, you know, things. Thing is, you know, tons of stuff. I don't know if you came to this work in a different way than I did.
00;24;54;01 - 00;24;58;00
Meg Pekarske
And so it takes all of us, right? It takes a village here.
00;24;58;02 - 00;25;03;03
Adam Royal
It does. Yeah. And thanks for having me back on the podcast. It's good to be back on.
00;25;03;06 - 00;25;27;22
Meg Pekarske
Great. Thank you. 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.