Nonprofit hospices can combine their businesses in a number of ways, including traditional acquisitions, board member substitutions and other types of affiliations.

However, member substitutions are becoming more common, according to Meg Pekarske, partner at the law firm Husch Blackwell. While this model offers benefits it can also become a political minefield that can sink an affiliation.

“The governance issues are really where the cultural concerns come out in the details of a deal. In these members substitutions … the parties oftentimes are more collaborative and are looking for an affiliation and are looking to retain some level of identity in the member substitution,” Adam Royal, attorney at Husch Blackwell, said in a recent podcast. “That’s how the governance issues kind of come to bear. You have to think through what the board’s of these two entities are going to look like post-member substitution.”

In many of these types of affiliations, two or more providers are coming together to form a non-operational parent company with its own board of directors. “Non-operational” means that the parent company does not hold any provider numbers, and the care is provided by the legacy organizations that have become its subsidiaries, Pekarske said in the podcast.

This means that the parties to the affiliation must hash out some potentially complex details when it comes to governance, including the size of the combined board, representation from each of the legacy companies, the board’s responsibilities and potential executive leadership changes.

This could also require some difficult conversations about some people leaving the board or bringing in new members. Throughout this process, the providers and its leaders should keep their focus on what is best for the organization, rather than particular individuals, Pekarske indicated.

“Governance has been the sort of biggest thing to work through, and embedded is there as identity and some level of control. Ego kills deals too — this whole idea of who’s going to be in charge …” Pekarske said. “Hopefully there’s enough humility, but also it is our fiduciary duty to do what’s best for the organization, as opposed to you personally. That’s where things can get dicey.”

In member substitutions that involve a new parent company, the subsidiaries may also have their own boards. So among the issues that need to be settled is determining the roles and responsibilities for each of those boards, as well as governance for the parent organization, according to Royal.

Among different organizations, the subsidiary boards could have a high degree of independence, whereas in others authority is more concentrated in the parent’s governing body, he said.

“On the one hand, we want as much consolidation as possible to achieve efficiencies in governance. But on the other hand, you’re sort of bringing together two parties that in the nonprofit space are tied to their communities and have representation of the community on the board, and they want to protect some of that,” Royal said. “They don’t want to completely lose their identity, and the boards are sort of the representation of that identity.”

Questions like these should be discussed early in the affiliation process to achieve best results and to determine upfront if the two organizations are a good fit to combine, according to Pekarske. 

“We encourage people that talk about some of these dealbreaker things early on, because I don’t think you want to be two years into a transaction before you get to the hard stuff …” she said. “Maybe just start there, before we go into sort of nuts and bolts of things that have killed deals.”