HEALTHCARE TRANSACTION FUNDAMENTALS: THE ANATOMY

Transcription

1 HEALTHCARE TRANSACTION FUNDAMENTALS: THE ANATOMY OF A DEAL Presented by the American Bar Association Health Law Section, Young Lawyers Division and Center for Professional Development

2 American Bar Association Center for Professional Development 321 North Clark Street, Suite 1900 Chicago, IL CDs, DVDs, ONLINE COURSES, DOWNLOADS, and COURSE MATERIALS ABA self-study products are offered in a variety of formats. Find our full range of options at Submit a Question Visit to submit a question on the content of this course to program faculty. We ll route your question to a faculty member or qualified commentator in 2 business days. The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association Health Law Section, Young Lawyers Division or Center for Professional Development unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only American Bar Association. All rights reserved. This publication accompanies the audio program entitled : The Anatomy of a Deal broadcast on January 19, 2016 (event code: CE1601HTF).

3 TABLE OF CONTENTS 1. Presentation Slides 2. Case Study 1: Hospital-Affiliated Practice Entity Structure 3. Case Study 2: Hypothetical ASC Transaction 4. Sample Healthcare Diligence Request List

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5 : The Anatomy of a Deal Tuesday, January 19, :00 1:30 PM Eastern Co-sponsored by the ABA Health Law Section, Young Lawyers Division and the ABA Center for Professional Development Presented by: Frank Carsonie and Jim Pinna Moderated by: Jennifer Hutchens These materials and associated remarks are intended to facilitate a general discussion of the legal issues that may arise in the context of healthcare transactions. They are not intended to be comprehensive or to serve as a substitute for legal advice, and they should not be relied upon as such. Attorneys and other professionals need to draw their own conclusions relative to the facts and circumstances of any particular situation and take into account all applicable laws when formulating advice. 2

6 Agenda Healthcare Regulatory Issues Tax-Exempt Issues Valuation Issues Transaction Structure Case Study 1 Case Study 2 3 Healthcare Regulatory Issues The Fundamentals of a Healthcare Transaction ABA Health Law Section Teleconference (September 25, 2014) 4

7 Federal Stark Law Strict liability statute Financial relationship with physician results in prohibition on referral and billing of designated health services to Medicare patients under the Stark Law, unless the financial relationship meets an exception Stark Law exceptions typically require: Written agreement specifying terms Fair market value Compensation that is set in advance and does not vary based on referrals Commercial reasonableness Always consider potential Stark Law changes on the regulatory horizon 5 Federal Stark Law (cont d) Will the transaction create direct or indirect financial relationships between referring physicians and hospital or other DHS entity? Example: What financial relationships are created between the referring physicians and the hospital-affiliated practice entity or the hospital? Employed physicians will have a direct compensation relationship with the hospital-affiliated practice entity Employed physicians may have an indirect compensation relationship with the hospital Physicians may be receiving payments for their practice assets What Stark Law exceptions apply to these financial relationships? Frequently used exceptions: Employment exception Personal services exception Fair market value exception Rental of office space/equipment exception In-office ancillary services and definition of a group practice 6

8 Federal Anti-Kickback Statute Criminal statute Prohibits knowing and willful offer, payment, solicitation or receipt of remuneration to induce or reward referrals of services reimbursable by a federal healthcare program Prohibits remuneration if one purpose is inducement of referrals, even if other appropriate purposes Certain facts can create inference of improper purpose (e.g., payments greater than fair market value or payments tied to volume or value of referrals) Important to ensure: Commercial reasonableness Documentation of fair market value No special treatment related to volume or value of referrals 7 Federal Anti-Kickback Statute (cont d) Will referring physicians receive remuneration as part of the transaction? Is there an applicable safe harbor/exception? What if a safe harbor/exception cannot be fully met? Is there applicable OIG guidance that affects the analysis, such as OIG advisory opinions, compliance guidance or fraud alerts? Are there any indicia of improper intent to induce referrals? Risk calculus 8

9 Antitrust Issues Does the transaction result in concentration of market power that may be subject to challenge? Is an HSR Filing necessary? Is the target being acquired by a current competitor of the target? How is competitively sensitive information treated in connection with due diligence and the transition at closing? Any need to limit sharing of information until closing? Third party black box analysis if needed 9 State Law Issues Identify all state licenses, permits and certifications, such as facility licenses, pharmacy licenses, CLIA certificates, imaging registrations, elevator permits, etc. Determine what filings and notifications must be made and the timeline for making all filings Any attorney general filings for nonprofit entities? State CON issues Does the state require a CON in conjunction with the transaction, or what type of process is required to transfer the CON? CON analysis may impact the structure of the transaction Consider whether there are any other state notice requirements 10

10 State Law Issues (cont d) Are there corporate practice of medicine restrictions? May impact structure and governance of hospital affiliated practice entity Consider state regulatory laws, such as minianti-kickback and mini-stark law requirements, or other unique state healthcare regulatory requirements 11 Tax-Exempt Issues The Fundamentals of a Healthcare Transaction ABA Health Law Section Teleconference (September 25, 2014) 12

11 Tax-Exempt Issues Tax-exempt issues often drive transaction structure and governance --- key issues to consider: Remuneration paid by tax-exempt entity Whether activities of affiliated entity or joint venture may impact tax-exempt entity Any state law reporting requirements triggered because of the involvement of tax-exempt entities Remuneration paid by tax-exempt entity must be fair market value to ensure no private inurement issues need to consider: Any contribution of assets or provision of services by taxexempt entity Remuneration paid by subsidiary or affiliate that receives subsidy/funding from tax-exempt entity 13 Tax-Exempt Issues (cont d) Activities of hospital affiliated practice entity or joint venture attributed to tax-exempt hospital If activities not substantially related to charitable purposes, could result in taxable unrelated business income or impact tax-exempt status (if substantial part of overall activities) Are activities of hospital affiliated practice entity or joint venture substantially related to charitable purposes of hospital? Look at nature of activities are they consistent with charitable activities discussed in IRS guidance? Look at governance control can tax-exempt hospital ensure that activities of affiliated practice entity or joint venture will be solely in furtherance of charitable purposes? May run contrary to certain corporate practice of medicine restrictions and limit level of control exercised by physicians 14

12 Valuation Issues The Fundamentals of a Healthcare Transaction ABA Health Law Section Teleconference (September 25, 2014) 15 Valuation Issues Valuation issues are important to Stark Law, Anti- Kickback Statute and tax-exempt considerations Stark Law exceptions generally require that compensation be consistent with FMV Payments in excess of FMV may support inference of improper remuneration under the Anti-Kickback Statute Payment in excess of FMV may implicate private inurement issues for tax exempt entities Identify what arrangements may require FMV analysis Determine what is used to document FMV Independent third-party valuation Market comparables 16

13 Valuation Issues (cont d) Stark Law and Anti-Kickback Statute require that remuneration to potential referral sources cannot take into account the volume or value of referrals Must be consistent with price for item or service as the result of bona fide bargaining between parties who are not otherwise in a position to generate business for each other Unlike other types of business valuations that may be able to take into account potential referral of business or other synergies Avoid silo approach to analyzing components of transaction and consider all aspects/compensation of transaction Physician employment compensation, management agreements and other ancillary agreements may have an impact on value of transaction as a whole Example: consider post-transaction physician compensation impact on fair market value of physician practice 17 Valuation Issues (cont d) Appropriate application of valuation methodologies Valuator should have experience in healthcare valuations Market comparables are not always comparables --- hypothetical buyer, not specific buyer with strategic purpose Anticipated referrals must be excluded from determination of FMV. Bradford case (2010) non-compete payments were not FMV under Stark Law when valuation report improperly took into account anticipated referrals by physician lessors to hospital Need to also consider commercial reasonableness Tuomey case (2013) jury concluded that unusual part-time employment agreements between hospital and physicians violated the Stark Law when compensation/benefits were higher than actual professional collections Potential inferences from employing physicians at higher salaries and incurring losses -- Citizens Medical Center, Schaengold, North Broward and Adventist settlements 18

14 Transaction Structure The Fundamentals of a Healthcare Transaction ABA Health Law Section Teleconference (September 25, 2014) 19 Due Diligence Use the diligence process to identify regulatory issues Refer to sample regulatory diligence list Items identified as concerns in diligence can impact the form of transaction --- for example: Medicare billing concerns Assignment clauses in contracts CHOW requirements for licenses Healthcare regulatory diligence should examine compliance, HIPAA procedures, physician contracts, supplier and vendor contracts, managed care contracts, licenses and status of regulatory compliance such as reviewing surveys, governmental correspondence, etc. Concerns identified in the diligence may not impact the structure but can also be used to formulate appropriate health care reps and warranties and indemnification 20

15 Reimbursement How will services be billed and collected? Note recent limitations on reimbursement for new offcampus hospital outpatient departments under 2015 Budget Bill Does transaction create a change of ownership for purposes of Medicare, Medicaid, state licensure, etc.? Will Medicare or Medicaid numbers be assigned (consider potential liabilities)? What state and federal filings, notices or applications will be required and what are time frames for filings? Will contracts be assigned? What consents will be required for assignment? Be sure to look at default provisions and not just assignment clauses. 21 Transaction Structure Structure of transaction Asset purchase commonly used to avoid assumption of liabilities (except for Medicare obligations if the Medicare number is assumed) Stock purchase or merger liabilities are generally assumed so important to consider any governmental repayment obligations and indemnification, sometimes used to avoid CHOW or CON issues Financial Issues Will A/R and working capital be assumed? Will debt and/or equipment leases be assumed? Any releases on liens required for asset purchase? Reps and Warranties Address health care compliance, HIPAA and licensure reps and warranties Protect against any concerns identified in diligence Indemnification Determine if indemnification limitations and length of indemnity is adequate Consider special indemnification for breach of healthcare reps and any governmental overpayment concerns Consider strength of the indemnification (i.e., will the seller have funds?) Handling of medical records 22

16 Contact Information for Presenters Frank W. Carsonie BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP 41 South High Street, Suite 2600 Columbus, OH Phone: James M. Pinna HUNTON & WILLIAMS LLP 951 E. Byrd St. Richmond, VA Phone: Contact Information for Moderator Jennifer C. Hutchens ROBINSON, BRADSHAW & HINSON, P.A. 101 North Tryon Street, Suite 1900 Charlotte, NC Phone:

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18 : The Anatomy of a Deal CASE STUDY 1: HOSPITAL-AFFILIATED PRACTICE ENTITY STRUCTURE The Facts: Local nonprofit health system ( Health System ) has a wholly-owned, non-profit subsidiary called Hospital Physician Employer Entity or HPEE. The three physicians of local, independent Pediatric Practice have been in negotiations with HPEE for several months about joining HPEE. Pediatric Practice and its physicians, HPEE and Health System all believe the pediatric patients in City will truly benefit from this important alignment for many years to come. HPEE and each physician will enter into an employment agreement outlining, among other things, physician compensation and reasonable non-solicitation and noncompetition provisions in favor of HPEE. HPEE will also make offers of employment to the current non-physician employees of Pediatric Practice. HPEE and Pediatric Practice will enter into definitive documentation (e.g., a Purchase Agreement) at closing, pursuant to which, among other things, HPEE will purchase all of Pediatric Practice s furniture, fixtures, equipment, and other tangible assets that are used in connection with the professional activities in all Pediatric Practice offices for a price equal to fair market value. HPEE will enter into a written lease pursuant to which HPEE will lease the primary office location that is currently occupied by Pediatric Practice. Subject to confirmation by HPEE that the rent and all other terms of the applicable lease are within fair market value, the parties may enter into a written lease assignment, pursuant to which Pediatric Practice will assign the current lease agreement to HPEE or its affiliate (with landlord consent, if required). HPEE respects Pediatric Practice s individual culture. After all, Pediatric Practice has been operating in City as an independent medical practice for over 30 years. HPEE desires that the physicians continue to have instrumental involvement in day-to-day decision-making regarding operational, clinical service, and other aspects of the physicians practice following the transaction closing date. HPPE will establish an operations committee that will serve as a forum in which HPEE and the physicians will share practice information and collaborate with regard to the continued efficient and effective operation of the physicians practice. 1

19 CASE STUDY 1: HOSPITAL-AFFILIATED PRACTICE ENTITY STRUCTURE (cont d) Health System Purchase Agreement Pediatric Practice HPEE MD MD MD Employment Agreement Discussion Points: Key Transaction Considerations o Representations and Warranties in the Purchase Agreement o Indemnification in the Purchase Agreement o Noncompetition Covenants Safe Harbors/Exceptions to Anti-Referral Statutes Physician Compensation as a Key Employment Agreement Negotiation Licensure Considerations Tax Considerations Success Factors Beyond the Contract 2

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21 Healthcare Transaction Fundaments: The Anatomy of a Deal CASE STUDY 2: Hypothetical ASC Transaction Physician Investors Old ASC Entity Current Situation * Old ASC Entity owns and operates a Medicare certified ambulatory surgery center * Physician Investors currently own 100% of the ownership interest in Old ASC Entity * Physician Investors are interested in affiliating with Hospital Investor, an affiliate of a local nonprofit hospital system that can provide access to capital, management resources and greater brand recognition * Hospital Investor is interested in expanding its network of outpatient surgical facilities to provide greater access to patients Old ASC Entity Distribution of Units in New ASC Entity Physician Investors Contribution of Assets of Old ASC Entity Distribution of Units in New ASC Entity New ASC Entity Sale of Units In New ASC Entity Hospital Investor Purchase Price Proposed Transaction * Physician Investors desire to sell a portion of their ownership in Old ASC Entity to Hospital Investor * Hospital Investor desires to limit exposure to potential liabilities associated with Old ASC Entity by have all of the assets associated with the surgery center operated by Old ASC Entity contributed into New ASC Entity * Old ASC Entity will contribute the assets of the surgery center to New ASC Entity and receive ownership units in New ASC Entity that it will distribute to Physician Investors * Physician Investors will sell a portion of the ownership units in New ASC Entity to Hospital ASC Entity Physician Investors Hospital Investor New ASC Entity Resulting Structure *New ASC Entity will own and operate a Medicare certified ambulatory surgery center *Physician Investors and Hospital Investor will hold the ownership interest in New ASC Entity

22 Healthcare Transaction Fundaments: The Anatomy of a Deal CASE STUDY 2: Hypothetical ASC Transaction Key Discussion Points Regulatory Compliance *Evaluating compensation and ownership arrangements created by the transaction *Exceptions / safe harbors under Stark Law and Anti-Kickback Statute *Other OIG guidance applicable to transaction structure *Valuation of assets and compensation arrangements to confirm FMV *Attribution of JV activities to tax-exempt entity *Antitrust issues Transaction Structure *Asset purchase versus stock purchase or merger *Addressing potential liabilities with reps, warranties and indemnification *Noncompete covenants *Transfers of licenses, Medicare provider numbers, CONs *Managed care contracting JV Entity Structure *Type of entity and associated tax treatment *Governance, management and control *Qualifications for ownership and limitations on transfers

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24 : The Anatomy of a Deal SAMPLE HEALTHCARE DILIGENCE REQUEST LIST 1 1. List of Medicare and Medicaid provider numbers and NPIs issued to the health care entity (and if applicable, to its individual healthcare providers). 2. Copies of HIPAA policies and procedures, including, but not limited to, policies and procedures relating to privacy and security, notices of privacy practices, breach notification, storage and supervision of medical records and training (including any HIPAA training materials). 3. Copies (or template agreement) of HIPAA business associate agreements. If template agreement is provided, please provide a list of parties that have entered into business associate agreements with the entity using this template and copies of all BA agreements which do not utilize the template. 4. Copies of any policies implementing requirements of the Deficit Reduction Act (Section 6032) relating to employee education about the federal False Claims Act and state law relating to the same. 5. Is the health care entity accredited? If so, please provide proof of accreditation and last three surveys for each located accredited, if available. 6. Copies of policies and procedures for supervising attending staff, nursing staff, other professional staff, and any branches, off-campus locations, or affiliated locations, as well as policies relating to patient care and quality assurance. 7. Copies of any information regarding a corporate compliance program, including, but not limited to, minutes of the compliance committee for the past three years, copies of any internal or external compliance audits or monitoring, and a copy of the plan and policies. 8. Copies of the most recent Medicare / Medicaid applications filed for enrollment, updates and/or change of ownership. 9. Copies of the most recent licensure or renewal applications, including attachments. 10. Description of marketing practices, including descriptions of any gifts or complimentary services to physicians, hospital discharge planners and existing or potential patients (including, but not limited to, meals, event tickets, items of more than $5 value, cash or cash equivalent, coupons, and services). 11. Copies of CMS tie-in notices approving Medicare certification for each location, affiliate, subsidiary, etc. 12. Copies of all Medicaid waiver contracts with state Medicaid agencies, such as, but not limited to, Community Benefit Alternative or Primary Home Care agreements. 13. Copies of licensure, Medicare and Medicaid surveys and/or reports for the last three (3) years. 1 This sample Healthcare Diligence Request List is intended to be a starting point. The facts and circumstances of each deal will require often substantial modifications to the types of requests listed here.

25 14. Copies of all current licenses, registrations or certificates issued to the health care entity by any federal, state, county, municipal or other governmental agency, in connection with its operations. 15. A list of any complaints, audits, notices or investigation of the entity, affiliates, subsidiaries, branches or any individual associated therewith, past or present, by the Centers for Medicare and Medicaid Services, state licensing agencies, state Medicaid agencies, state Attorney General offices, Federal Trade Commission, EEOC, Occupational Health and Safety Administration, Department of Labor, Department of Justice, Office of Inspector General of the U.S. Department of Health and Human Services or any other federal or state agency, and all information available regarding any such investigation. 16. Copies of correspondence with any state or federal governmental agency within the last three years. 17. Copies of Medicare and Medicaid costs reports for the past three years 2 (both settled and open reports), including a copy of the Notice of Program Reimbursement. 18. Copies of all CLIA certificates or waiver certificates. 19. List of all services or functions for the entity that are licensed, registered, certified or accredited separately. 20. Copies of all contracts, employment contracts, loans and leases with physicians, clinics, physician groups, allied health professionals, laboratories, pharmacies, DME suppliers, hospitals, home health agencies, assisted living facilities, hospices, physical therapists, social workers, medical supply companies, group purchasing organizations, and any other health care providers or health care facilities (including, but not limited to, medical director agreements, coverage agreement, exclusive arrangements, etc.). 21. List of any inquiries from governmental agencies received concerning potential violations of laws, rules, regulations pending, etc. for the most recent five years. 22. Copies of all third party payor and managed care agreements. 23. A list of all licensed, certified or permitted employees and the status and terms of such licenses. 24. Any state or federal court or administrative agency orders, judgments, settlements or decrees to which the entity or any affiliate, subsidiary or branch is subject or which affects its operations. 25. A summary of any fraud and abuse claims or other actions pending or threatened by a governmental agency, including, but not limited to the OIG, CMS, any state Attorney General s office, or state Medicaid agency. 26. Copies of any patient referral agreements. 27. Do any Board members who are also physicians have a service or management contract with the entity (directly or indirectly through a group, PC or partnership)? 2 The Buyer may have a reimbursement consultant review cost reports. 2

26 28. Do any physicians have an ownership interest in the entity? If so, describe and provide copies of bylaws, operating agreement, shareholder s agreement, etc. 29. Does the entity have business dealings (e.g., supplies, services, consulting, loans, etc.) with an individual who is an officer or director of the entity or its board or with any firm that is owned or partially controlled by such persons or which employs such persons? If yes, provide relevant documentation, including contracts. 30. A list and copies of any lease agreement or arrangement (including any oral arrangements) by and between the entity and any physicians. Please also provide fair market value documentation for each such agreement or arrangement. 31. A list and copies of physician recruitment agreements by and between the entity and any physician or physician group under which any obligation remains for the entity to advance payments or for the physician or group to make repayment or fulfill any service obligations. 32. A list of and copy of any and all agreements with the last 2 years by the entity pertaining to any proposed or completed purchase or acquisition from any physician or group engaged in practice in any service area of the entity or on the medical staff of the entity. 33. Does the entity or any affiliate have any ownership or membership interest directly or indirectly in any IPA, PHO, MSO, MSA, PPO, HMO, foundation or medical practice or have an agreement or arrangement to purchase, manage, support, fund, lend to, or guarantee the debt, performance or losses of any IPA, MSO, MSA, PHO, PPO, HMO, or medical practice? If so, provide relevant documentation. 34. A copy or description of the entity s courtesy discount policies for physician and other professionals, if existing. 35. If applicable, a copy of reports for the last two years of charity care and community benefits by the entity (i.e., nonprofit hospital). Summarize status of audits. 36. A list and copy of all agreements with state, county, city, or other governmental unit or organization. 37. A list of all material contracts not otherwise provided, including, but not limited to, any group purchasing contracts. 38. A list and copy of all decrees, orders, judgments and settlement agreements entered into against the entity or any affiliate or subsidiary within the past two years. 39. For a hospital, copies of the entity s medical staff bylaws and rules and regulations, admissions, emergency department, EMTALA, payment and charity care policies. 40. List and copy of all joint venture agreements entered into by the entity, affiliate, subsidiary, or shared business enterprise. 3