Navigating a Healthcare Transaction

After extensive research and careful deliberation, you have finally made the exciting but daunting decision to purchase a healthcare practice. You know that in the next couple of months you are going to need to examine the practice from a different perspective—that of a future owner. You also recognize that in order to facilitate the process, you are going to need to hire sophisticated legal and accounting teams able to help negotiate the transaction and memorialize the parties’ mutual understanding in fair and definitive documents. But what else should you expect in the upcoming months with respect to acquiring your future practice? How can you prepare?

Much of the diligence, documentation, and negotiation in healthcare transactions resemble those required for other types of transactions; however, healthcare-specific transactions also present unique, complex issues and requirements. Knowing what to expect and how to navigate through the transaction process will not only help curtail your legal fees, but will also help alleviate some of the stress that is inevitable in such transactions. While there are a wide variety of issues that may present themselves during a healthcare transaction, below are a few crucial matters that often need to be addressed.

Payer Issues

When purchasing any business, it is critical to become familiar with its financial strengths and weaknesses by analyzing financial statements, books, and records. This analysis is important not only to understand the value of the business, which will help determine the purchase price, but also to understand the future growth potential of the business and whether purchasing it would be a lucrative investment.

One financial area that is specific to healthcare transactions, and may be worth having an expert examine, is the history of payments made by payers. Understanding whether the practice has been billing insurance payers appropriately, or, alternatively, whether the payers have been paying the practice correctly, is critical for a potential buyer because of the possible ramifications of overbilling. For example, in some transactions, such as stock deals, a buyer is responsible for the company’s liabilities, some of which the buyer may not have known about during the transaction. If a medical practice has been overbilling its payers and the buyer purchases the practice in a stock deal, the reimbursement of those payers would generally be the buyer’s responsibility after the transaction is closed. Therefore, it is critical to understand whether the practice has been billing timely and appropriately, and whether the payments have been made to the practice.

Another payer-related issue that is important to understand is that rates set by payers in payer contracts are often case specific. When there is a change of control in ownership, the payer may terminate the existing contract and create a new contract with the practice, which may have different reimbursement rates. Therefore, a potential buyer must realize that rates may change and should anticipate this change when determining whether or not to invest in the practice.

“A critical first step in any healthcare transaction is to understand the licenses that the practice has and the specific processes necessary to transfer the licenses or obtain new ones.” —Stephen M. Harris, Esq.

Regulatory Filings and Licenses

Another critical and often intimidating process involved in a healthcare transaction is navigating the regulatory filings necessary to operate the practice. Often, when a medical practice is purchased or changes ownership, new licenses need to be issued by the appropriate state, county, or agency. These licenses often require a lengthy application, which can include anything from a description of the types of services the medical practice will provide to background checks and fingerprinting of each individual owner.

Each state, county, and agency has very specific time frames during which new licenses must be obtained, sometimes even before the transaction can close. Therefore, a critical first step in any healthcare transaction is to understand the licenses that the practice has and the specific processes necessary to transfer the licenses or obtain new licenses, depending on what the state, county, or regulatory agency requires. This analysis is often quite complicated, so employing an individual or firm who has experience with your specific type of transaction or who has experience with the specific licensing entity or agency you are seeking licensure from may be extremely valuable.

Anti-Kickback and Stark Law Concerns

Another issue associated with a healthcare transaction is whether the sale violates any federal or state laws, including the Anti-Kickback Statute and the Stark Law.

The Anti-Kickback Statute (under 42 U.S.C. §1320a-7b(b)) prohibits anyone from offering, soliciting, paying, or receiving anything of value to induce referrals of items or services covered by federally funded healthcare programs, including Medicare and Medicaid. The purpose of the statute is to ensure that physicians’ medical decisions are based on the needs of individual patients instead of improper incentives or drivers.

The Stark Law (under 42 U.S.C. §1395(nn)) is a set of regulations that prohibit physician referrals of designated health services under Medicare and Medicaid to an entity when a physician (or his or her immediate family members) has a direct or indirect financial relationship with that entity, unless the referral fits into a specific exception outlined in the regulations. Multiple exceptions to the Stark Law include referrals made to other physicians in the referring physician’s group and in-office ancillary services.

These laws can be implicated in a number of ways; for example, you have another practice that may be a referral source for the medical practice. It is important to note that each state may also have its own anti-kickback rules; therefore, before deciding to purchase a practice, you should consider consulting with a healthcare attorney to ensure that you are in compliance with laws at both the federal and state level.

Know the Issues

Of course, these issues can be addressed throughout the transaction; however, knowing that the issues exist, evaluating whether they are going to be hurdles to your transaction, and discussing them with your attorney and her team at the onset of the transaction may help determine what actions are necessary. This forethought can be extremely beneficial for all parties involved in the transaction, making the process that much more efficient and smoother.

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Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins LLC. Contact him at sharris@mcdonaldhopkins.com.

Reprinted with permission from the American College of Rheumatology.