Knowledge Expansion

Guide to closing a private equity transaction: Healthcare regulatory issues

Insight Article

Partnerships, Mergers & Acquisitions

Strategic Planning

Compliance Regulations

Hal Katz

Part 4 of the Series: Guide to closing a private equity transaction

The healthcare industry is heavily regulated at both the federal and state levels, and regulatory issues are among the greatest areas of concern for a buyer. The buyer reviews the information disclosed through the due diligence process to confirm both pre- and post-closing regulatory compliance.

No business is perfect, and it’s not uncommon for areas of past non-compliance to be uncovered. A buyer needs to understand what they’re potentially inheriting in terms of risk. This gives the parties a chance to correct deficiencies, which may include a self-disclosure or refund, and make improvements going forward. At the federal level, healthcare regulatory issues include fraud and abuse, privacy and Medicare billing requirements, just to name a few. At the state level, each state determines who may own an interest in a business engaged in the practice of medicine (aka “corporate practice of medicine”), what is required to operate a medical practice or other healthcare facility, how professional and management fees may be calculated, and what is within the scope of practice of each license type, not to mention state specific privacy and fraud and abuse requirements.

Friendly terms, friendly transaction

As for the impact on structuring the transaction, in states with strong corporate practice of medicine prohibitions, investors typically use a “friendly PC” model, which means the buyer acquires the seller’s assets using a management company. Under the friendly PC model, a physician (who is either one of the physician sellers or a physician already affiliated with the buyer) serves as the sole owner of the professional corporation. A long-term management agreement is then put in place between the friendly PC and management company, whereby the management company assumes responsibility for managing the PC in exchange for a management fee.

Stark and Anti-Kickback statutes

Fraud and abuse laws generally are intended to prohibit paying a kickback for making a referral. The federal Stark Law specifically applies to physicians (and their immediate family members) who make referrals to entities that they have a financial relationship with for “designated health services.” The Federal Anti-Kickback Statute applies to everyone not just physicians. Both the Stark and Anti-Kickback statutes have exceptions and safe harbors that allow certain relationships if satisfied, such as:

  • Personnel services
  • In-office ancillary services
  • In-direct compensation arrangements
  • Space and equipment leases
  • ASC (Ambulatory Surgery Center) ownership

Many states also have a Stark and/or Anti-Kickback equivalent statute, which may apply to all products and not to just governmental programs. Both federal and state fraud and abuse laws also impact the financial terms that can be negotiated in the sale to the buyer.

What to look for

To evaluate seller’s fraud and abuse compliance, and what changes may be necessary post-closing, the buyer looks at the specific business relationships in place and assesses the terms of the arrangements. For starters, the buyer evaluates the methodology used by the seller to calculate amounts paid to its physicians and other providers. For example, it’s confirmed whether amounts paid are in the form of compensation, ownership distributions or a combination of the two, as well as whether such amounts are consistent with fair market value and pursuant to written agreements. In a similar manner, the seller also assesses medical directorships, consulting agreements, leases and marketing agreements. The same approach is taken to understand the seller’s billing and coding practices. This includes how mid-level providers are utilized.

Review, review, review

Federal and state licensure requirements can significantly impact structure and timing of a transaction. The buyer confirms each aspect of the business is properly licensed. This involves making sure the licenses are all current and accurate (e.g., all current locations identified and matched with the correct managing officer or physician). The buyer closely reviews all licenses to also determine which require notice of a change of ownership before the transaction and which require notice within some period after the transaction closes. Some licenses have a preclearance process, which can be helpful in ensuring everything goes smoothly. Depending on the desired transaction structure, a new Medicare provider number or EIN (aka tax ID number) may be required. This is typically the case when moving the business into a newly formed entity.

Window of opportunity

While healthcare regulatory issues can create concern and risk for both buyer and seller, they can often be addressed through corrective action and negotiations between the parties. Such issues are rarely “deal-killers” and instead can be an opportunity for a deeper mutual understanding and appreciation of the business being acquired, as well as the parties to the transaction.

Next in the series will be a discussion of the deal points often negotiated in private equity transactions.

Previous articles in the series: 

Part 1 - Guide to closing a private equity transaction: Preparing for a transaction
Part 2 - Guide to closing a private equity transaction: Negotiating the letter of intent
Part 3 - Guide to closing a private equity transaction: Due diligence

Additional Resources

About the Author

Hal Katz
Partner Husch Blackwell LLP Austin, TX

Hal has focused his practice on the healthcare industry during the last 20 years, representing for-profit, nonprofit and governmental entities. He has been on the front line of healthcare evolution and innovation, witnessing firsthand successes and failures at both the industry and business levels.
 

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