Pre-Transaction Issues Why Buy/Sell? General Considerations Types of Transactions. Contract Provisions and Due Diligence. Post-Closing Issues

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1 33 rd Annual Convention of the TNMHO and TAPM Chris DeMeo Munsch Hardt Kopf & Harr, P.C. March 29, Pre-Transaction Issues Why Buy/Sell? General Considerations Types of Transactions Contract Provisions and Due Diligence Post-Closing Issues 2 Failing to prepare is preparing to fail John Wooden 3 1

2 1. Why Buy To grow Medicare Advantage and commercial payer business Buy other provider-type practices to create independent referral network Clinical Integration/Continuum of Care 2. Why Sell Too many rules/compliance burden Margins too small Audits and other battles with payers 1. Locating Company to Buy/Sell Broker/Investment Banker Consultant Trade Association Cold-calling 2. What Am I Buying/Selling Rentable Equipment, Medicare PTAN Number, Medical Records, Contracts, Account Receivables, Office Equipment/Leases, Goodwill 3. Buy/Sell Price Basis for Value Per asset/group of assets EBITDA/Revenue Comparable sale 4. Finance Options Private Equity Self-financing Lender-financing 5. Structure Asset Purchase/Sale Stock Transfer Merger 6. Liability Individual Liability Successor Liability 2

3 Potential Advantages Transferability of PTAN Quick and fairly simple Few third party consents Less disruptive to clients/employees Potential Disadvantages Increased liability for Seller s actions (known and unknown) All or none sale Potential Advantages Choice of assets to buy (parts of Company, division, contracts) Limited liability Possible retention of certain Account Receivables Potential Disadvantages No transferability of PTAN Complex and time-consuming Requires third-party consents Patient and payer notification issues Financial Company Company Entity Notify CMS Docs Req d *Company A (SPA) Company B = Company B Yes No (No CHOW) *Company A (APA) Company B = Company A Yes Yes (CHOW) *Company A not a Medicare provider at time of sale; Company B is a Medicare provider **Company A and Company B are Medicare providers 3

4 Financial Company Company Entity Notify CMS Docs Req d *Company A (MERGE) Company B = Company A Yes Yes (CHOW) *Company A (MERGE) Company B = Company B Yes No (No CHOW) **Company A (MERGE) Company B = Company C Yes Yes (CHOW) *Company A not a Medicare provider at time of sale; Company B is a Medicare provider **Company A and Company B are Medicare providers CHOW occurs when: a change of 50% or more in the ownership of the business organization or sole proprietorship that is licensed to operate the agency; or a change in the federal taxpayer identification number. 11 Hospice license may not be sold or assigned. An application for a license when there is a CHOW is an application for an initial license. Cannot admit/initiate services until receive an initial license. 12 4

5 Notify HCSSA Licensing Branch 60 days before the effective date of the ownership change. Deliver completed application postmarked at least 30 days before the expected date of the ownership change. If the license has expired, you may not perform a change of ownership. 13 When you squeeze an orange, what comes out? Orange juice. Whatever is inside comes out under pressure Jeff Van Gundy 5

6 Any acquisition, merger or sale is governed by a written agreement. Be specific! Majority of time is spent negotiating contract terms and provisions. Good contract will limit post transaction surprises and potential litigation issues Letter of Intent or Memorandum of Understanding Purpose: Identify key business and contractual understandings which will form the basis of the final contract Terms sheet Saves negotiation time Binding vs. non-binding Brevity Confidentiality Representations and Warranties Licensure/accreditation Exclusions from federal government payer program? Do Purchaser and Seller have authority to bind their companies? Secured/unsecured creditors? Debts? Liens or encumbrances on equipment? Land? Vehicles? Who is responsible if a payer audit occurs? Previous fraud Payment Lump sum vs. payments promissory note, financed, interest, collateral If asset purchase, is payment determined by each asset? Groups of assets? Escrows, Reserves, Earn-Outs, Indemnity 1. Indemnification Caps Baskets Escrows/Holdbacks 2. Non-Disclosure Agreement/Confidentiality Identify confidential information 3. Non-Competition Time/scope/geographic limitations 4. Patient Notification Issues 6

7 5. Employment Is Seller going to stay on as employee or consultant? Is Purchaser going to keep any or all employees of Seller? Health plan issues 6. HIPAA BAA; How to transfer Protected Health Information? 7. Effect of Breach What is "material" Injunction/TRO/Damages/Specific Performance 8. Personal Guarantee 9. Arbitration/ADR 10. Jurisdiction/Venue 20 HIPAA Security Rule Compliance Risk Assessment Technical Safeguards encryption, passwords, mobile device issues Administrative Safeguards - Policies and Procedures Physical Safeguards Privacy Rule Compliance NPPs Authorizations BAAs Breach Notification Rule unauthorized disclosure compromised PHI. 7

8 Fraud and Abuse Medical Director Agreements Sales force agreements Collection of patient responsibility payments Arrangements with nursing homes and other providers Compliance program Licensure/CoPs Exclusion list Business issues contracts Loans consent Leases consent, termination provisions Vendors termination provisions It ain t over till it s over Yogi Berra 24 8

9 Stock Purchase Agreement Purchase price adjustment calculation Post-Closing Indemnification claims Asset Purchase Agreement Purchaser Submit Change of Ownership to Medicare Inform patients of asset purchase in order to transfer Seller Submit voluntary termination of Medicare number via CMS 855-S Inform patients of asset purchase in order to transfer 1. Know what you are signing 2. Be patient 3. Expect problems to arise (even after contract is signed) 4. Use experienced M&A attorney and health care regulatory attorneys Chris DeMeo Munsch Hardt Kopf & Harr, P.C Pennzoil Place 700 Milam Houston, TX (713) (office) (713) (cell) 9