1 | What are the most important reasons to invest into the German healthcare market?

Well managed healthcare facilities create steady cash flows and reasonably high margins. However, many owners of healthcare facilities are no longer able to improve efficiency in a way that meets the increased requirements of patients and of the healthcare institutions that pay for the services they provide (commonly referred to as “payors”).

This is why there is currently an unprecedented wave of consolidation in the German healthcare market. Multinational players can be expected to develop most rapidly by profiting from better synergies and optimised sourcing of supplies, services and qualified staff.

2 | Who are normally the owners and potential sellers of healthcare facilities?

In addition to the traditional ownership of healthcare facilities by municipalities, regional authorities, universities, religious communities, charitable foundations or other not-for-profit organisations, private ownership of healthcare facilities by individuals such as doctors, legal entities or private equity funds is permitted and is becoming more frequent in Germany.

Private equity funds and private investors are displaying more activity, not just as passive owners and lessors of the real property and equipment, but also as owners of the operating entities.

3 | What types of healthcare facilities exist and which authorities are responsible for regulatory matters?

Based on the relevant regulatory requirements and payment systems, the most common categories of healthcare facilities are: (i) full service hospitals providing surgery and treatments for acute diseases etc.; (ii) preventative medical care and rehabilitation centres; (iii) nursing homes providing (among others) long term care for elderly patients, patients with chronic or severe physical or mental conditions and disabilities; and (iv) psychiatric facilities.

Regardless of private or public ownership, healthcare facilities are subject to regulation and supervision by regional governmental authorities. The German federal government does not play a significant role.

4 | Who would normally be the payors in the German healthcare facilities?

The most significant payors are the approximately 130 different social security healthcare funds which have a semi-public status and are financed by mandatory social security contributions collected from almost all salaried employees in Germany. These social security healthcare funds are obliged to provide all necessary healthcare services by way of in-kind benefits to more than 80% of the population. With regard to self-employed patients and German civil servants and their families, some or all of the costs are reimbursed to patients by private health insurers. Medical tourism financed by foreign sponsors and investors, for example from Middle Eastern sovereign funds, has also gained economic importance.

In the past, payments to hospitals and certain other healthcare facilities were mostly calculated as fixed fees charged for each patient on the basis of daily rates and/or for each medical treatment actually provided. Since 2004, the healthcare facilities and payors have been entering into framework agreements which provide for a certain budget covering the case as a whole which is based on the average severity and complexity of treatments for the relevant ailment (so-called ‘diagnosis related groups’). These budgets are further refined by incentives (or discounts) to address expected shortages (or over-capacities) and other factors. These framework agreements are gradually supplementing and/or superseding the old system of fixed fees per patient and treatment.

Investments in hospitals and certain other healthcare facilities are often co-funded by municipalities and/or regional governments. In these cases, European law on subsidies and/or public procurement needs to be complied with.

5 | How difficult is it to retain the existing permits after a change of control?

Operating permits are only required for privately owned full service, psychiatric and maternity hospitals and are granted to the legal entity operating the healthcare facility. In case of an asset deal, such permits need to be reapplied for. However, the granting of the permit is not discretionary and it will normally remain in effect as long as there are no significant changes, for example in the management, staffing or equipment of the relevant healthcare facility.

Operating permits normally impose obligations on the operator to comply with certain reporting requirements in case of significant changes such as a change of control. Increasingly, permits also include obligations to implement internal and external quality control measures which in the past have mostly been complied with on a voluntary basis only.

6 | How difficult is it for hospitals to retain payor relationships after a change of control?

The key requirement for full service hospitals to be able to obtain payments from social security healthcare funds and co-funding for investments is for the relevant facility to be included in the regional hospital plan. Each regional government is in charge of maintaining the plan on a rolling basis, taking into account the requirements and the submissions received from interested healthcare facilities. While decisions must not be arbitrary, the regional government has fairly broad discretion in the selection of hospitals to be included in the plan.

Alternatively, or in addition to the status of being included in the hospital plan, many healthcare facilities enter into framework agreements with the payors (Versorgungsverträge). Both the partial or complete termination of these contracts by the payors and a unilateral removal of a healthcare facility from the hospital plan by the health authorities are only permitted with one year’s notice, and only if it can be demonstrated that the healthcare facility is no longer needed and/or no longer meets the standards.

The hospital plan status of a full service hospital is normally not affected by an acquisition. However, as with permits, framework contracts with payors may have to be novated in case of an asset deal.

Both hospital plans and framework contracts between healthcare facilities and payors increasingly contain additional provisions which require the operator of the healthcare facility to increase the quality and/or efficiency of the services. In an M&A situation, it is necessary to verify that these obligations have been complied with.

7 | How onerous is the ongoing supervision of healthcare facilities?

For healthcare facilities, a number of different authorities conduct regular site inspections (e.g. focusing on qualification of staff, hygiene, fire protection, safety etc.) and seek to deal with any issues raised by these by providing the healthcare facility with a list of issues to be solved within a certain period of time.

Privately owned full service hospitals are also required to hold an operational permit which can be withdrawn if warnings and administrative fines for non-compliance with regulatory standards, quality issues or mismanagement are persistently ignored. In practice, this happens rarely.

8 | What are the most important healthcare specific aspects of due diligence?

The legal due diligence needs to focus on whether the target healthcare facility has complied with all reporting and quality obligations contained in public law permits and framework agreements with payors.

Where applicable, compliance with clinical trial regulations and incentives (in particular those offered by pharmaceutical and medical device companies, clinical research organisations and other suppliers) is significant from a liability and compliance perspective.

Insurance for professional indemnity and medical liability are important elements of the due diligence. Medical liability can apply to individuals such as doctors and medical staff but also to the entity operating the healthcare facility itself in the event of a breach of its obligations in respect of the management of its operations. Majority shareholders are normally not exposed to medical liability claims.

9 | What other focus areas should the legal due diligence have?

Other focus areas for the legal due diligence should include: the ownership and potential encumbrances of the real estate; employment relationships; public funding; compliance (in particular the absence of unethical patient recruitment practices) and compliance with anti-bribery regimes.

10 | Other relevant trends

Both European and German legislators are issuing an increasing number of rules helping patients to raise complaints so as to make the quality of healthcare facilities more transparent and to allow patients to pursue medical liability claims.

Payors have started to scrutinise the efficiency of services provided by healthcare facilities much more systematically than has been the case so far.

Within the European Union, the cross-border operation and consolidation of healthcare facilities has become easier. However, integration in the healthcare sector still lags behind other industry sectors.