Q&A: transactional issues with healthcare M&A in USA

Transactional issues

What is the typical structure of a healthcare-related business combination in your jurisdiction?

A healthcare transaction can take the form of an asset purchase, stock purchase or merger, depending on federal and state healthcare laws, federal income tax laws, and the desire of the buyer to mitigate or accept risk.

How long do healthcare business combinations usually take, and what factors tend to be most significant in determining the timing to completion?

From the time a letter of intent or term sheet is signed, it typically takes 60 days to six months to consummate the transaction depending on consents of governmental authorities and third parties that may be required. Transactions subject to governmental review – for example, federal antitrust review – can take even longer to consummate. More recently, a number of states in the United States have enacted laws requiring notice to and review by the state attorney general of certain healthcare transactions.

What are the typical representations and warranties made by a seller in healthcare business combinations? What areas would be covered in more detail compared with a more general business combination?

Representations and warranties regarding compliance with federal and state fraud and abuse laws (eg, the federal Stark Law, federal Anti-Kickback Statute and corresponding state laws), federal and state privacy and security laws, and billing and coding requirements under federal and state government healthcare programme and third-party commercial insurance payor contracts are typical in any transaction involving a healthcare provider entity. Healthcare providers that employ physicians or other individual providers may be required to make representations regarding their individual licences and qualifications to provide medical services.

Describe the legal due diligence required in healthcare business combinations. What specialists are typically involved? What searches would typically be carried out?

Legal diligence in transactions involving healthcare providers typically involves healthcare regulatory counsel who is responsible for reviewing all relationships between the healthcare provider entity and potential referral sources. This includes a review of all contracts with physicians, employees and independent sales representatives, as well as the target’s compliance programme, and policies and procedures. Third-party consultants may also be engaged through counsel (to preserve attorney-client privilege) to perform billing and coding audits and background checks, including checks for exclusions from federal and state healthcare programme databases, and to assess the overall effectiveness of the target’s compliance programme. Other areas of legal speciality, including tax counsel, employee benefits counsel, commercial real estate counsel and environmental counsel, among others, may be involved, depending on the nature of the transaction.

Additionally, in the wake of the covid-19 pandemic, it is important for buyers to specifically review a seller’s compliance with the need and certification requirements for any funds received under the US Payroll Protection Program (PPP) and CARES Act as they may be subject to future audit. Specifically, although PPP loans should have been repaid or forgiven by now, any PPP loan in excess of US$2 million will be subject to an automatic future audit by the Small Business Administration. 

If due diligence is not correctly undertaken, what specific healthcare risks might buyers inherit?

A buyer in a stock purchase or merger transaction may be subject to exposure under the federal Stark Law (civil penalties), federal Anti-Kickback Statute (criminal penalties), federal False Claims Act (civil and criminal penalties), federal Health Insurance Portability and Accountability Act (civil and criminal penalties), among others, and corresponding state laws. These liabilities typically can be excluded if the transaction is structured as a purchase of assets, except in the case where the buyer is permitted to and elects to assume the certification provider number of a seller under a federal or state government healthcare programme. For example, with respect to a hospital provider participating in the federal Medicare programme, the buyer in an asset transaction is deemed to assume the seller’s Medicare Part A certification provider number, unless the buyer specifically notifies the Centers for Medicare and Medicaid Services of its intention not to assume the number within 45 days prior to the closing of the transaction. On the other hand, the Medicare certification provider number of a physician practice billing under Medicare Part B may not be assumed by the buyer in an asset transaction.

How do buyers typically approach specific material diligence issues in healthcare business combinations?

If a material healthcare regulatory issue is identified, a buyer typically seeks specific indemnification from the seller for that issue. To mitigate further risk post-closing, the buyer also may require the seller to quantify and self-report the issue to the appropriate governmental authority, make a repayment in the event it is determined that an overpayment has been received, and correct the issue identified prior to closing.

What types of pre-closing conditions are most common in healthcare business combinations?

Consents of governmental authorities and consents under third-party payor contracts are the most common closing conditions in any healthcare business combination. The purchase agreement may also require that no material adverse effect shall have occurred with respect to the business between the signing of the purchase agreement and the closing of the transaction.

What sector-specific covenants are usually included to cover the period between agreement and completion in healthcare business combinations?

In the event consents of governmental authorities or consents under third-party payor contracts are required, the purchase agreement will typically include covenants that delineate responsibility for and coordination of efforts between the parties in obtaining such consents. If specific issues are identified during diligence, the purchase agreement may also include covenants that require the seller to take corrective action between signing and closing, and undertake certain self-reporting obligations to the appropriate governmental authorities.

What specific provisions are commonly seen in warranty and indemnity insurance policies for healthcare business combinations compared with general business combinations?

Warranty and indemnity insurance policies will exclude any breaches of healthcare laws that are identified during legal diligence and known by the buyer. Policies may exclude billing and coding compliance based on the error rate identified during a third-party billing and coding audit. A third-party billing and coding audit is typically required to obtain such insurance coverage. Healthcare representations have largely moved from fundamental representations to a special representation with a lower indemnity cap and survival period, and even in some cases to general representations depending on the level of negotiation in a competitive process. Buyers may look to obtain excess coverage for healthcare representations, typically an additional 10 per cent, thereby moving the total coverage from 10 per cent (for general representations and warranties) to 20 per cent in the aggregate.

Is there any sector-specific documentation typically used in healthcare business combinations? Does this differ depending on the structure of the transaction?

For healthcare providers that are enrolled in federal and state government healthcare programmes and sell assets in an asset purchase, depending on the type of healthcare provider, the government programme certification provider number may be assumed by the buyer by filing a change of ownership application with the governmental agency. In other cases, the buyer may be required to complete a new, initial enrolment application.

In a stock purchase, the government programme certification provider number remains intact, and the buyer will be required to file a change of information application with the applicable governmental agency. State licences typically cannot be transferred in an asset sale. Instead, the buyer will be required to complete a new, initial enrolment application and will be issued a new licence. In a stock sale, some states may require a new, initial enrolment application, while others only require a notification of the change in the direct or indirect owners of the provider entity.

In addition, certain states have certificate-of-need laws that apply to healthcare services (such as hospitals, skilled nursing facilities, ambulatory surgery centres and home health agencies). Depending on the state and structure of the transaction, a letter of no review or order of the applicable state governmental agency may be required before the parties proceed with the closing of the transaction.

More recently, a number of states in the United States have enacted laws requiring notice to and approval by the state attorney general of certain healthcare transactions. These statutes are typically designed to address larger transactions involving large institutional or private equity buyers.

Which post-completion undertakings are common in healthcare business combinations? Which undertakings are common?

Many government programmes and state licence applications can be submitted to the applicable governmental authority post-closing. For example, the Medicare programme requires that a change of ownership or managing control application be submitted within 30 days of the closing of a transaction when the federal tax identification number of the provider is changing, while a change of information application must be submitted within 90 days following the closing of a transaction when the federal tax identification number of the provider stays the same but there is a 5 per cent or more direct or indirect ownership change in the provider entity. The licensure statutes and regulations of some states require notice of a transaction prior to closing, while others permit notification following the closing of the transaction. For example, in some states, the parties may be required to notify a state agency that has issued a licence to the seller 30 to 60 days prior to the closing of a transaction. In an asset purchase and, in some cases, in a stock purchase, the buyer may be required to submit a new licence application prior to the closing. On the other hand, other states permit the notification and new licence application to be filed within a stated period of time following the closing, and the licence will be issued retroactively to the closing date.