"Building Hospital Capacity: Legal Strategies for Hospital Growth in a Constrained Market," Health Law Pulse, Davis Wright Tremaine Webinar
Hospitals are facing crowded emergency departments, aging patient populations, workforce shortages, and continued reimbursement pressure, making capacity expansion an urgent strategic priority.
In this webinar, Davis Wright Tremaine counsel Christine Johnson explores the legal and regulatory considerations associated with capacity building strategies. Attendees will leave with a practical framework for evaluating these strategies, sequencing approvals, managing regulatory risk, and anticipating legal developments affecting hospital growth initiatives.
This webinar is part of DWT's Health Law Pulse, our monthly series on the developments shaping the health law landscape in 2026.
Click to download presentation slides.
Webinar Transcript
The following transcript was created using AI-assisted speech recognition and formatted for publication. Readers should be aware that automated transcription may not capture every statement with complete accuracy.
Christine Johnson: Good morning, This is "Building Hospital Capacity: Legal Strategies for Hospital Growth in a Constrained Market." I'm Christine Johnson, I'm part of Davis Wright Tremaine's healthcare practice group, and I sit in the Los Angeles office. You'll notice a little bit of California bias in this presentation, but it is meant for a national audience.
I'm talking today about something that I have been thinking about for more than a decade.
Today's session is about how to build hospital capacity. Although I've sought to be comprehensive, this presentation is really about the legal framework for building hospital capacity, and it doesn't delve into every possible approach. So, if you're sitting here thinking, why didn't she talk about this really cool, innovative project that we're thinking about undertaking, I would love to hear from folks after the presentation or during the Q&A session about other innovative approaches they are taking, or experiences that they have had.
Here's our agenda for today. I'm going to give some background to make sure we are all on the same page about the problem we are addressing, and then I'm going to talk about what I see as the four main pathways to addressing hospital capacity issues. Buy it, build it, partner for it, or repurpose and optimize it. And you'll see me coming back to the legal concepts over and over again. This is a CLE, so I want to make sure that we're coming back to the legal framework you should be having in your heads. So, in thinking about hospital capacity building, we also want to keep in mind some of the typical legal framing.
Transaction structuring, what are the healthcare regulatory approvals, fraud and abuse compliance, antitrust scrutiny, reimbursement risk, and provider enrollment requirements. But before we jump into our potential capacity building, let's talk about the core problem. New beds are slow and expensive. Workforce shortages limit growth. Reimbursement does not reliably pay for growth. And in addition, we have regulators looking closely at consolidation, we have seismic mandates competing for capital, and payers are moving care to outpatient settings through prior authorization and medical necessity reviews.
All of these can make it difficult to expand the hospital's capacity. And with every approach, there's also trade-offs. You're trading off speed versus capital investment, workforce building, regulatory burden, and reimbursement stability, and all of these factors weigh into the path that you end up taking. So, what do I see as counsel's role? And that's really, I think, from the get-go, pressure testing and owning the critical pathway. So, our role is to help our business and operations folks get where they need to go, but make sure their plan is legal.
Workable, and will be reimbursed in the way that they expect, or that their consultants have told them to expect. It is either a no, but we can do this instead, or a yes, but let's think about this. I know that we're all acutely aware that what's a great idea in every other context is often illegal in healthcare, and that's really partially what should be driving our work: Is what is proposed doable? So, when I'm pressure testing an initiative, I'm running through a screen. Are there fraud and abuse considerations? Are there government payers at issue? How's compensation flowing? What is the payment for? And are there referral sources?
Do I need to get my favorite fraud and abuse colleague involved to kick the tires on this. Has the OIG issued any opinion on this sort of arrangement? This is particularly a good thing to look at if we are doing something a little bit innovative. Are there scope of practice issues or supervision issues? Are my clinicians going to be able to do what they are supposed to do? And what about antitrust? Are the parties competitors? What will payers in the community say? Should I reach out to my favorite antitrust colleague to talk about an initiative? I also like to think about the regulatory pathway from the beginning.
So, what types of filings are we going to need to get across the finish line? What's the timeline for those filings, and how does that impact the project's timeline? I am always sad when somebody comes to me with a California project and wants to close it in 30 to 60 days.
That is unlikely if you're acquiring a hospital, certainly if you're building a hospital, if you're entering a JV partnership, maybe, but regulatory pathways can be long, and it can be disappointing to the business and operations folks that don't necessarily understand that lawyers cannot work magic with regulators, and you really do have to go through the process, although, of course, with good relationships, you can certainly move the process along, but we can no longer wave our magic wand and make a 90-day process take 30 days. What does reimbursement look like?
How soon will we be reimbursed for this project, and are there going to be any gaps in reimbursement, likely pauses in reimbursement, or hiccups, for instance, where Medicare has processed, but our Medicaid has not, so our Medicaid managed care payers are no longer paying? And you want to always, of course, keep an eye on changing laws. So, some other rules for counsel. Bring in your specialists early from the get-go. Your antitrust friends, tax-exempt experts, real estate, labor, reimbursement, and coding and billing folks to make sure that they have thought through the plan.
For enrollment and reimbursement, you want to really make sure you're reviewing your payer contracts for anti-assignment and change of control clauses. One of my colleagues, John Barnes, who is my managed care contracting specialist, tells me that the assumption is often that a new location can be added to an existing payer contract, and that is not always, or even very often, true. So, you really want to be pressing down on your assumptions like that. You also want to confirm the arrangement meets Medicare and Medicaid billing requirements before launch, and you want to be building your compliance record. Bring in the compliance team early.
Keep a file with fair market value support, commercial reasonableness analysis, and the signed agreements. So that's our legal background. Let's talk about our what's going wrong background. And I have a quote here that gets at the heart of why we are here. In one study, what the authors were doing was they were beginning to quantify the story already felt at the bedside in hospitals across the nation. Namely, a trajectory toward an inadequate supply of hospital care for the anticipated demand of the coming decade. We have been talking about the aging boomer population and what that would look like since before I went to public health school.
We are here. We are starting to feel the pinch. Experts treat 85% hospital occupancy nationwide as a shortage. That's because that means there's not enough of a buffer against daily turnover, seasonal fluctuations in hospitalizations, or unexpected surges. So, you can see from this chart that prior to 2019, Occupancy was at 63.9% nationwide. Immediately post-pandemic, occupancy rose to 75.3%, and that study projects it to hit 85%, which is our shortage by 2032. So, we are feeling the pinch now, a greater shortage is expected. Put another way, in the U.S., staffed beds fell from 802,000 to 674,000 post-pandemic, which was a 16% drop.
And what are the main drivers of our capacity issues. We have an accelerating nursing shortage. We have long had a nursing shortage in this country. It was accelerated by the pandemic. We also have post-pandemic provider burnout among all types of clinicians. We have high ED patient load. We're seeing non-urgent visits to cover gaps in primary care. As I touched on, we have an aging population, so we have higher acuity and longer stays. At the same time, we're seeing post-pandemic hospital closures. They are coming from increased supply costs, increased staffing costs.
Payer mix challenges, reimbursement challenges, and aging infrastructure which, taken together, mean we're seeing hospitals close their doors. And some private equity transactions can result in scaled-back or restructured inpatient capacity. So, what do I view as the four ways to add capacity? And again, if you are sitting there thinking, I can think of ways five, six, and seven, I'm very interested to hear about that. I would love your thoughts. So… in my opinion, we can buy it, which is acquiring new capacity from someone else. We can build it, building new hospitals, new hospital towers, or other new facilities.
We can partner for it, which is teaming up with someone else to help add capacity, or we can repurpose and optimize your existing facilities and workflows. And these can mean making hard choices about service line conversion and investing in tech solutions. With each of the four strategies, you're implicating a large number of laws that I've listed here. We have state-level reviews, pre-transaction filing reviews, land use reviews, there are state licensure issues, Medicare and Medicaid enrollment changes.
As I've said, private payer contracting, antitrust review, fraud and abuse issues, provider-based billing, and labor and union obligations, among others. And oftentimes, almost always, the regulatory timeline determines your operational timeline. And so, what are the questions that legal counsel should be asking before helping business and operations think through and choose a strategy? So, you want to think about, is the constraint on beds a staffing constraint, reimbursement, throughput, or something else? If the problem is staffing, opening a new hospital probably isn't going to be a solution. Is the need temporary, or is it structural?
Is this something going on For the short term, so maybe a partnership is what is required, or is there a system problem that needs to be addressed? Do you have patients that need post-acute care or psych or rehab care who are boarding in your EDs, and that's causing throughput issues? In that case, building a new hospital, unless it has large psychiatric or rehabilitation or substance abuse capacity, that's probably not going to help. But maybe addressing post-acute care issues, possibly through partnerships, might. Is speed more important than control?
If speed is important, you probably don't want to build it; that's our longest path, and you likely don't want to buy it. Transactions are long, they fall apart, and all of a sudden you're back at square one. You may want to partner for it, or repurpose and optimize for it. Can the organization absorb a regulatory delay? If you're opening a new hospital, for instance, can you absorb the gap between opening, Medicare approval and actual reimbursement when funds start hitting your accounts? Is capital available? How are you going to fund this project? What's the payer mix? Does this even financially make sense?
It might sound great, but what happens when we put pen to paper? What capacity already exists in the market? Are we sure we can't partner for it? Will our physicians support the strategy? Will the community and patient population support the strategy? Are they going to go to our new hospital, or are they going to keep going to the beloved hospital that they already know? So, is the initiative acceptable? And is seismic investment already required? Are you already building a new tower such that it makes sense to think about building in the capacity needed as part of the existing project?
And then the big one, will the solution actually address the problem? Have our reimbursement and finance folks put pen to paper? So, let's jump into buy it. Buying is the most common route, it's moderately fast, but it does carry a heavy regulatory burden. And here's some of my gating questions that should be considered. Is the transaction reportable under antitrust laws or a state equivalent? What does successor liability look like, and how does that affect how our transaction needs to be structured? Is there overpayment risk here?
Does that mean that we need to do a different sort of transaction, or how are we going to draft the documents to account for that? What's going to occur with the payer contracts? Can we assume them? What needs to happen in order to close? Who needs to approve in California? Are we in front of the Office of Healthcare Affordability or the Attorney General's Office? Is the Board of Pharmacy going to take a long time? Those regulatory approvals are the tail that wags the dog, meaning that they really do determine transaction timing, and we cannot close until they're taken care of. And then are the Reimbursement assumptions workable?
For instance, you may be looking at the existing hospital reimbursement levels and numbers, but will that change under your ownership? Are you for-profit and you're looking at reimbursement under a nonprofit hospital? And then, what types of diligence findings are deal stoppers or might trigger disclosures? This is really a homework slide, it's for you to take away, run through, and think about, but these are our transaction targets, and some of what I view as the associated legal issues. So, for instance, in a hospital transaction, generally, you are going to need to assume the Medicare provider agreement.
Or you are going to have a substantial gap in payment. So, when you are doing the diligence, can you assume that Medicare provider agreement? Does it make sense? If you're looking at acquiring a physician practice, you have to pay attention to whether the state has a prohibition on the corporate practice of medicine, what structures are allowed. How closely is the state looking at the structures? You also want to take a look at compensation structures.
In ambulatory surgery center transactions, you have antitrust risk, which can creep up if there are numerous ASC transactions over the years, or if a hospital is removing a lower-cost competitor through acquisition. There's also a risk that if a hospital is acquiring ASCs from surgeons that it already contracts with, that could be seen as keeping competitors from having access to those surgeons. So again, you want to bring in your favorite, wonderful antitrust lawyer to think through those considerations with you. Home health and hospice are tricky.
We have the 36-month rule with Medicare, which means that you cannot have a change of ownership within 36 months of the last change of ownership or the initial enrollment. With outpatient and ancillary care sites, you really need to pay attention to payment and reimbursement considerations, and with behavioral health, you need to, from a Medicaid standpoint, be thinking about the bed number. This is my second homework slide, really meant for you to take away and think through it, but these are the different types of transaction structures and what you need to pay attention to.
Our deal folks, this is basic to them, but to those of you who don't do a lot of deals. We have an asset purchase, which is a true change of ownership, meaning that you will likely have the most regulatory filings with this type of structure. In a stock deal, or the nonprofit equivalent, a member substitution, liabilities come with the company. For Medicare purposes, it's not a change of ownership, but for all other regulatory agencies, you really do need to look at, is it a change of ownership, what type of filing is required, including it may be a change of ownership for Medicaid.
Mergers have successor liability and integration issues that you'll want to drill down on. Joint ventures, you want to pay attention to fraud and abuse and governance issues, and with management services organizations and friendly physician corporation arrangements. You really want to be careful about where you're doing this, how you're setting it up, because that really is being scrutinized in a number of states right now. And what about if we're doing something that is short of an acquisition, but not really a full acquisition? This is another good option.
There are a couple of structures that can help you build capacity, but are not full acquisitions. For instance. In a clinical affiliation, you might have a contract between two independent providers, typically, for instance, a large system and a community hospital to work together on patient care without either one buying the other. You could have transfer agreements, co-branding, etc. This can help smaller hospitals get specialty care access and expertise. And it can help larger hospitals have a place to move patients as appropriate and legal.
You need to watch out for state federal Anti-Kickback Statute issues, antitrust to the extent data is shared, as well as state licensure issues. Physician alignment can add capacity. You could use a management agreement to help a hospital better use the capacity it has. You bring in a manager that can turn things around, or you could have a whole hospital lease that allows the lessee to operate the facility. This can be a way to add a hospital to a health system without acquisition. I want to take a minute to talk about distressed hospital acquisitions. This is another particular area of interest for me.
I'm sorry to say that we are increasingly seeing more of these. I expect to see more of these in the coming years. Acquiring a distressed hospital can come with a reduced purchase price and allow for faster market entry, but you have to consider why the hospital is distressed, and evaluate whether you can handle the problems it is coming with. And you want to help your business and operations folks think through that. Are there deferred maintenance issues? Seismic liabilities and issues, pension obligations? Cultural instability because of years of poor management? A weak payer mix? Staffing shortages that may be hard to solve?
Community opposition to any sort of acquisition. There can be pressure for the buyer to help finance the deal in order to get to closing. There can be a risk of bankruptcy while you're trying to close the deal. Sometimes it is important to think about whether it makes sense to have the hospital go into bankruptcy and acquire the hospital out of bankruptcy. Is that a better way to address financial issues. Bankruptcy can add a layer of complexity, but it can also address existing liabilities.
And it's just important to remember the new operator… having a new operator in place doesn't necessarily resolve the operational challenges that are causing the hospital to be distressed. A few other considerations… we've touched on these a little bit, but pre-closing filings and approvals can make it harder to get to closing. It can extend the timeline, regulatory agencies need to do surveys. There can be state scrutiny of various arrangements. You want to keep in mind that a Medicare change of ownership, for instance, can take 6 to 9 months or more, and Medicaid can take longer.
I also wanted to flag the site-neutral payment issue that is, I think, something that hospitals increasingly need to think about. Site-neutral payment is the concept that reimbursement is the same regardless of where the patient receives care, whether they're in a hospital-based clinic or a physician clinic. Typically, hospitals have been provided higher reimbursement for these types of visits because of overhead. They're seen as having more complex care. We know that Congress favors site-neutral payments and wants to expand them. This is a bipartisan issue. So, Congress is working to expand site-neutral payments.
So, when thinking about your acquisition, you want to think about whether it hinges on reimbursement levels that don't take into account site-neutral payments. You want to model reimbursement under multiple future payment scenarios before acquisition, so you don't acquire something, and you're not getting reimbursed at the level you expected. And then the big question from legal is, will the acquisition address capacity? This goes back to pressure testing. Helping business and operations assess whether it will address capacity constraints. Are there realistic expectations about reimbursement? Have you run the numbers?
Is the change of ownership going to impact reimbursement? Are you looking at a… Public hospital, and you're a private hospital. Are we going to assume the contracts? Are there site-neutral payments? Are you hoping to add the site as a 340B child site, and do you understand whether that's possible, and the length of time before you'll actually see the 340B program attached to that site? What's your patient population and payer mix? Why is the seller selling? Will the same issues survive the transaction? Are there staffing issues? What are you going to do if there's unions? Cultural considerations, and will patients use the new facility?
I am sure all of us have seen deals go sideways. We see them fall apart all the time. It can be because of operational, late-stage diligence findings. Overestimating the workforce, underestimating integration costs. Issues with payers, missed notice obligations, delayed approvals. It can be for financial reasons, such as unrealistic Reimbursement assumptions. Ignoring seismic or deferred maintenance costs, or underestimating the impact of the transaction on the timing of post-closing reimbursement, or it can be a governance issue. We can see a JV deadlock, misaligned incentives, or unclear exit rights. I'm running through my time a bit.
I want to make sure we don't spend our entire time on buy it without moving to our other topics, but I'd be remiss if I didn't flag the purchase agreement. I've included on these slides some important elements to be thinking through with the purchase agreement. All right, let's set aside 'buy it', and now we're going to build it. I couldn't resist. If you build it, they will come. A little bit of a tailored quote from Field of Dreams, but… but let's talk about building it as a solution to hospital capacity issues. So in a building project, there's some core legal questions that legal needs to take the lead on.
And it's not that different from buy it. What are the state approvals that are required? Are you in a certificate of need state? What's required for that? Are you going to be able to make the site provider-based if that is important for reimbursement? Are there tax-exempt financing restrictions? How are you going to allocate the construction risk? In California, is there a CEQA risk, or land use litigation risks? There are just a couple of different structures for capacity expansion. You can build an entirely new hospital. Typically the most exciting.
You can build a new hospital tower, build a hospital outpatient department, maybe a new ambulatory surgery center. Build a freestanding ED, don't do that in California. Build a micro-hospital. Again, be careful about doing that in California. Build other post-acute facilities, such as substance treatment facilities, among others. Again, you want to analyze the expected reimbursement for the new build while planning.
Model it under the site-neutral payment scenarios before committing capital, consider the provider-based rules, think through state approvals, certificate of need, what's the facility plan review and construction oversight, what's our timeline. Can we deal with construction delays? What does our licensure timeline look like in our state? And then, how are you financing the build? If you're using tax-exempt bonds, what are the legal issues surrounding that? Do you have your bond lawyer at the table?
You can think about sale-leasebacks and real estate investment trusts, but you also, if you're using a real estate investment trust, what… you're weighing your liquidity versus your long-term rent risk. Are you getting into a situation where the rent is going to escalate, to a level that you're not able to pay it? You can also think about public-private partnerships, if that applies to you. It's a long-term contract under which a public entity and a private party share the work and the risk of building, and often running the facility. So…
Instead of the public entity paying for construction up front, the private partner can bring capital and expertise and be repaid over time. This might work, for instance, with a healthcare district or a county hospital. Document checklist. You want to be thinking through the construction contracts. I'm a little bit over my skis here, but… but you want to be bringing in your experts on this. How are you drafting the contract? How are you allocating risk?
For instance, are you going to do integrated project delivery, where the architect, the construction manager, and the contractor sign a multi-party agreement so they're really pooling risk among them? How are you dealing with plan review and inspection delays? Do you have liquidated damages, damage waivers, insurance, and bonding? Also, your financing documents. You want to make sure you're addressing those issues. If you have physician investment, you want to keep track of your offering documents, your safe harbor analysis, and your fair market value support. And that's really something that counsel, again, should be controlling.
Hospitals can also think about building beyond brick and mortar, so… I think Hospital at Home is an excellent example of a way that you can build without actually doing construction. We're seeing hospital systems experiment with hospital at home programs. Under which acute-level hospital care is provided at a patient's residence, rather than at a hospital, using a combination of remote monitoring and home visits by clinicians. It's important to note that hospital at home is not allowed in every state. In California, for instance, it's not allowed. Hospital at home can build capacity without building beds.
A few important notes about Hospital at Home. The CMS waiver runs through September 2030, with no guarantee of extension, so you may be building something that, come 2030, might not be reimbursed. This is a new model, so we're starting to see some bumps in implementation. Modern Healthcare reported earlier this week that Mass General Brigham in Boston is substantially scaling back its program because it's lost $90 million in recent years.
Mass General Brigham officials told the Boston Globe that rising labor, pharmaceutical, and other costs drove the decision, while reimbursement from Medicare, Medicaid, and commercial payers is not keeping pace with rising expenses. However, they are going to continue to use the program at Massachusetts General Hospital and Brigham and Women's Hospital, where capacity constraints are the greatest. They are simply pulling it from their community hospitals, and this raises a good point: Talk to your friends at other hospital systems to find out how the projects that we're all hearing about and thinking about are actually going on the ground.
What are the lessons learned? A couple other beyond construction builds is virtual nursing, tele-ICU, and telehealth programs. I am confident that those of you out there listening have other ideas about other non-construction builds. Again, I'd love to hear about it. Moving on to our next area, which is partnering for it. Partnering is the fastest. It shares capital, but you are giving up complete control. So again, our core legal questions, we want to be thinking about, does the arrangement implicate Stark or anti-kickback? Is there antitrust risk from competitor collaboration? How are we going to structure governance rights?
What exit mechanisms protect against regulatory change, or if the arrangement just simply isn't working? If there's physician ownership, does it fit within safe harbor exceptions, and are there tax-exemption or private-benefit concerns? Some of our targets for partnering can include rehab facilities, behavioral health facilities, ambulatory surgery centers, imaging, and other post-acute care. However, again, legal hurdles to consider. I just ran through some of them, but you also want to think about negotiation of board composition and reserve powers. Everybody is friendly and on the same page at the beginning.
Think about in 5 years when things might be going slightly off-kilter. What do you want to have at your fingertips? What are your deadlock resolution mechanisms? You really want to, rather than drafting with an optimistic mindset, you really… you really want to be drafting, thinking about what happens when things go wrong. What are the exit rights? You want to draft the exit before the entrance. What are your buy-sell rights? Who can buy whose interest? When and on what terms? Think about puts and calls. A put lets a member force the other side to buy its interest. A call lets a member force the other side to sell.
You want to make sure that It's not dependent on referrals. A call triggered because a physician stops sending cases, or a put price isn't legal. Putting a price that rewards referral volume creates problems. Leasing and management of units is another great partnership opportunity. This gets us into hospital-within-a-hospital. You want to be mindful, if you're operating a hospital-within-a-hospital, of the Medicare requirements. Separate governance, independent leadership.
Distinct administration among the two hospitals, distinct physically identifiable space, and independent conditions of participation compliance, you don't want to accidentally be merging your hospitals. You also have to be really careful about co-location and making sure you're paying attention to Medicare's co-location guidance. You also want to be careful about provider-based rules. Something we see clients run afoul of all the time is that patients need to know one, that they're at a hospital receiving services, and what hospital it is. Where are they? Who is providing the services?
So, a couple things to think about when you're drafting your JV or lease documents. Again, in your JV agreement, consider reserve powers and supermajority. Think about deadlock. What are your buy-sell triggers? How are you going to unwind the arrangement, and how do distributions work? You want to bring in your fraud, abuse, and tax experts. You want to test the investment terms, look at fair market value and commercial reasonableness. If you have a physician arrangement, map those against fraud and abuse laws.
And for your tax-exempt partners, really think about whether you are a tax-exempt Facility, really think about how the arrangement might affect your tax-exempt status. With leases and management, make sure you're paying attention to hospital-within-a-hospital, provider-based issues. Transitioning the licensed beds, and make sure you're keeping track of your contracts. All right, moving into 'repurpose and optimize it.' This is the fastest option, because you're optimizing what you already have. This is oftentimes the least appealing option, because it can take work.
To optimize what you already have, but this is certainly something to consider. So, even if you're converting what you already have, there's some legal questions you need to ask. Are notices and hearings required, even though it's something you have? Will service reductions trigger state review? What are your labor obligations? Are you going to be able to fulfill your EMTALA obligations? Will reimbursement change after the conversion? What are your assumptions there? Are existing license categories compatible with the new use, or do you need to relicense the space? And are there any community benefit implications?
So, this is what I mean by conversion options. Can we convert inpatient space to outpatient space? Would additional ambulatory offerings help capture more patients and take the pressure off of your ED? Can we add an urgent care? Can we add other outpatient clinics? Can we move care to lower acuity settings, such as ASCs, or hospital at home? Can we move from outpatient to virtual? Would increased telehealth options help us? Can we move inpatient to behavioral health care? Can we move acute to skilled nursing, rehab, or psych? What about our crisis stabilization and sobering centers? Would that help us relieve pressure?
How can we use our swing beds and observation units? What about reclassifying our beds or temporary flexes? What about alternate care sites? It's also important to take a hard look at service line closures. This is probably one of my least favorite areas. I don't like closing service lines, but I am always happy to help clients that have decided they need to close the service lines to actually make that happen. I dislike closing hospitals even more than I dislike closing service lines, so I can admit that facilities need to take a hard look at their service lines.
Are there service lines that are not profitable or are underutilized that the hospital is holding onto? It can mean making some choices that feel bad, but that ultimately can help with capacity, help free up resources, and ultimately help the hospital stay open and provide better care. But, of course, you want to assess how to repurpose that space. I want to take a minute to talk about value-based care. Value-based contracts can make the reimbursement support the change in care delivery. You can build capacity by rethinking how care is delivered. Consider whether value-based care supports conversion or shifts in care delivery.
Hospitals can consider investing or enhancing their multidisciplinary care teams, their data systems, digital tools, patient navigators, and programs that help manage chronic and complex conditions. These programs can help identify patients who need additional support, improve transitions between care settings and reduce unnecessary variation in care. Value-based care, in turn, might reward hospitals for the quality of care and cost efficiency, so that reimbursement supports these shifts. Value-based care is a lot of work, but it is an option to consider.
It is always hard to rejigger what you have and rejigger the reimbursement, but it is something to think about. As with the other options, really pencil out the reimbursement implications beyond just back-of-the-napkin calculations. Really look at the contracting implications. I just talked about how value-based care is something to consider. Does it work? Does it really support the strategy? Have you walked through the licensing process? Are you really providing the notices needed? Is there a certificate of need process in your state? If you've changed your service line, are the licensing requirements different?
Are you going to have a gap in reimbursement during the conversion? Are you going to be able to staff the converted unit? What's going on with unions? Are you going to have any issues that you need to assess there? You also want to be careful about paying attention to related requirements. Are you a trauma-designated hospital such that you can't close a certain service line, because then you will lose your trauma service? Are there existing In California, Attorney General conditions that mean you can't make these changes. In other states, there might be other conditions that really hamper the types of changes and conversions you can make.
Again, required notices, look at your community benefits. Are there any medical staff by-law issues? Is your medical staff on board with the changes? Again, are there union problems? And… think about your continuity of care and reputational management. How are you going to sell the change to the community? Repurposing and optimizing. For those of you who downloaded the slides early, there was a mistake on this slide, so please, please download the new slides. A California notice provision just had a mistake in it. As far as the notice… If you're closing your ED, you need a 120-day notice ahead of the closure.
So again, a couple things to think about. We have… labor, EMTALA, medical staff, community opposition, when you're thinking about repurposing. Oh! All right, so let's talk about the key themes and what I hope you will take away. Capacity constraints are operational, financial, and regulatory. They are not just physical. Workforce shortages affect every strategy. I didn't delve into this presentation addressing workforce shortages.
I think that's a great topic all on its own, but you really do need to be thinking about what are your strategies for addressing any workforce shortages, and is your capacity building initiative dependent on magical thinking about a workforce that just isn't there. Reimbursement assumptions need to be stress tested early. I see so many clients going down a road, and the reimbursement just isn't as they were hoping, so you really do want to model it. Bring in reimbursement consultants and give them a hard time about it. Make sure you know what payment is going to look like.
Then again, regulatory review is increasingly driving transaction timelines. When I first started practicing, regulatory review certainly made transactions harder. At this point, regulatory review is really driving the transaction timeline, it's a much bigger issue for closing a transaction. Similarly, with a build, and also regulatory review can play into the partnering or the optimizing. The fastest solution is often optimizing existing assets. That is the least appealing situation.
It's always more fun to build something new or acquire something new than to fix up what you have, but you do want to push your business and operations folks about optimizing existing assets. Is there anything we can do to fix what's going on with what we have? Most systems will need a blended strategy. Of course, I'd love if you were able to draw from all four of these. Obviously, financially, that's typically not available for everyone. So… I'm looking off so I see the slides as well, but here's our comparison matrix of the four strategies, and this is another one that I want you to have at your fingertips.
If you're buying it, this is moderate speed. There can be months of diligence, you can have a difficult partner or the opposing party across the table can draw it out. You can have months of regulatory review. The capital cost is high since you're acquiring it. The regulatory burden is very high, because this is a full change of ownership. The risk profile can also be high, because you might be inheriting liabilities, you might have integration risks. Build is the slowest. It's a multi-year process, design takes a long time, raising funds takes a long time.
The actual building can be delayed both by approvals as well as typical construction delays. Capital costs, this is likely the highest. The regulatory burden, similar to buy it, is also very high, because you really are getting everything approved from the ground up. A new tower, new hospital, or new building survey can be very difficult. And the risk is on construction, financing, as well as reimbursement. Partnering for it can be moderate to fast, depending on who your partner is and how quickly you can come to an agreement and structure the arrangement. Capital cost could be shared among the parties, so that can be more moderate.
Regulatory burden can also be moderate, although you want to really have vetted your partner to make sure you understand what you're getting into. As I've said, you want to make sure you've looked at antitrust and make sure you're looking at fraud and abuse considerations. As far as risk profile, you want to be careful about how you've set up governance. Again, be thinking about what happens when the partnership goes wrong. Or there's disagreements, and you want to be thinking about deadlock, and you also want to be thinking about how you can exit. Repurpose and optimize is the fastest.
This is low to moderate cost, depending on what you're doing. Regulatory burden can vary depending on what you're doing. There's sometimes notices, sometimes filings, sometimes licensure changes. The risk is really, if the project is done well, the risk is really about problems with your workforce, reputation to your reputation, Why have they closed the delivery service? And any problems with the community, wondering why you might need to make those changes. So again, the lawyer's job here is to map every approval on the timeline, think through the sequence of the approvals.
Keep track of, for instance, board minutes reflecting deliberations, thinking about alternatives, what the charitable purpose is for nonprofits. Think about whether the community benefit narrative supports the strategy. So we do have time for my thought exercise, and we may have time for some questions and comments. So let's think about… you want to build your capacity, and there's a distressed community hospital. So you're a nonprofit system considering acquiring a financially distressed community hospital. It has an aging infrastructure with seismic needs. Let's go ahead and assume it's in your individual states.
I don't want to pigeonhole it into California. You have significant ED demand, the distressed community hospital has significant ED demand, the community hospital has a weak commercial payer mix, and persisting staffing shortages, as well as challenging collective bargaining agreements. So again, thinking through whether the acquisition will actually solve the capacity problem, are the beds going to be staffed if we're… if we have workforce shortages? Is there something about the way our health system functions, that would mean that we wouldn't necessarily have the same workforce issues. What approvals are going to drive timing?
We have our state-level approvals, we have licensure, we have, we might have antitrust approvals. What liabilities are being inherited? Are there overpayment problems? Are there seismic costs? Are there litigation risks? Is the reimbursement going to change post-transaction? This is a nonprofit. Are you a nonprofit? How is reimbursement going to change? What are you going to do with collective bargaining agreements and unions? And how are you going to be able to turn things around? All right, that… opens us up to questions.
I know that I speak quickly, I hope this wasn't a fire hose presentation, but I am happy to take a look at the questions. You can pop them into the Q&A chat. And see… okay, I have a question about micro-hospitals in California. Some states allow a micro-hospital with very few services. So, for instance, it might just be a hospital that allows surgery. The reason I say no micro-hospital in California is that California has basic services that every single hospital has to offer. You have to have surgery, you have to have diet and nutrition, you can certainly have a micro-hospital as far as small bed size.
You just have… You just typically, in California, can't have a hospital that doesn't offer the basic services. Are there questions from folks, or is anyone sitting out there thinking, why didn't she talk about this? My hospital has this really cool idea, or why did she say we should do this? This is the worst idea ever. You might be thinking, can a member substitution avoid Attorney General review in California? Probably not. You would want to make sure that you have run your transaction Through the law, you've talked to your lawyer, you as in-house counsel have really run through the law to make sure, but typically they cannot.
Good, good comment from my wonderful colleague, Terry, which is, have you considered getting healthcare litigation to review draft contracts for ambiguities and red flags that have come up in litigation? I think that is a great idea. I do think that, in general, beyond capacity building, I would love to have litigation more involved in contracts to say, you know, Christine, you have drafted this up, and I can tell you that 9 times out of 10, this is not going to work the way you think it is, so I agree with Terry.
Bring your litigators on board. Particularly, also bring your litigators to the table when you're looking at existing litigation during your partnership or your acquisition. I am a… I'm a big fan of bringing your experts to the table. They will oftentimes tell you something that you didn't know. I'm going to give everyone one more minute. Make sure that you have clicked on the link for the evaluation. Please feel free, I'm going to move to my contact slide.
Please feel free to email me your thoughts if I got anything wrong, if you think there's something huge I missed, or if you just want to talk about things you're thinking about, I would love to hear from you. Also, you're welcome to call me. This is, as I mentioned, a topic I've been thinking about for a long time. I think we will all continue to think about this. This isn't going away. So, I would love to engage in further conversation. Thank you all so much for joining me today, and I look forward to continuing the conversation on this.