Mergers & Acquisitions in the Healthcare Industry Focus on Medical

Transcript Mergers & Acquisitions in the Healthcare Industry Focus on Medical

Healthcare Financial Management Association Western Pennsylvania Chapter April 17, 2014

Mergers & Acquisitions in the Healthcare Industry Focus on Medical Practice Acquisitions

Legal and Business Issues George W. Bodenger, Partner Saul Ewing LLP (215) 972-1955 [email protected]

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The content of these presentation materials has been prepared by Saul Ewing LLP for informational purposes only. The provision and receipt of the information in these presentation materials should not be considered legal advice, does not create a lawyer-client relationship, and should not be acted on without seeking professional counsel who have been informed of the specific facts. Should you wish to contact a presenter to obtain more information regarding your company's particular circumstances, it may be necessary to enter into an attorney/client relationship.

Topics to Be Covered

Healthcare Merger & Acquisition Landscape Hospitals & Physicians & Others Pursuing Medical Practice Acquisitions Primary Bodies of Law Affecting Medical Practice Acquisitions Fundamental Issues for Buyers & Sellers of All Types Structuring Challenges by Type of Buyer Key Steps in Transaction Process

Healthcare Merger & Acquisition Landscape M&A Market Trends Hospitals Merging or Being Bought/Sold at Increased Rate Other Healthcare Business “Rollups” – Urgent Care, Home Health, Wound Care Healthcare Reform Continues to Drive M&A Transaction Flow

BUT

Physician Practice Acquisitions are Most Common Transactions in Healthcare Today Hospitals Acquiring Medical Practices “Physician Only” Medical Practice Integration Specialty Physicians and Private Equity Healthcare Providers and Health Plans

Healthcare M&A Landscape – continued Medical Practice Acquisitions • Hospitals & Physicians Continue Moving Toward Practice Acquisition/Employment   Tangible Assets Only (i.e., no “goodwill”) Cost-based Approach to Valuations – Cost of Recreating Practice • Hospitals and Physician Groups Developing Alternative Arrangements  Gainsharing  Co-Management Agreements • New Players in the Marketplace – MOST IMPORTANT  Private Equity  Insurance Plans

Hospitals & Physicians & Others Pursuing Medical Practice Acquisitions

Hospitals are Pursuing Because:

Physicians Control Patients Recruit High End Specialties Improve Physician Cooperation Stabilize Medical Staff

Physicians Are Pursuing Because:

Strength in Numbers Spreading Infrastructure Cost & Risk Increased Access to Ancillary Services

Private Equity/Insurers Present Attractive Alternatives for Physicians

Access to Capital Maintaining Physician Entrepreneurship No “Been There, Done That”

Primary Bodies of Law Affecting Medical Practice Acquisitions

• Anti-Kickback Statute • Physician Self-Referral Restrictions (“Stark Law”) • Corporate Practice of Medicine • 501(c)(3) (Exempt Organization) Law

Elements of Anti-Kickback Statute

Knowing and willful Solicitation, or receipt/offer for payment Remuneration (direct or indirect, overt or covert, in cash or in kind) Inducement In return for referrals, or in return for purchasing, leasing, ordering, arranging or recommending Patients, goods, facilities, services or items for which payment may be made in whole or in part under a Government Health Care Program

Federal Anti-Kickback Statute cont’d

• Unlike Stark, Criminal Statute – Intent Requirement • “One Purpose” Test (see Greber) • Failure to Satisfy Safe Harbor Not Illegal “Per Se ”

Exposures Felony - punishable by criminal fines up to $25,000 and/or imprisonment for up to five (5) years, potential False Claims Act exposure, potential civil sanctions and monetary penalties, including exclusion from Medicare & Medicaid programs

AKS Safe Harbors Relevant to Medical Practice Acquisitions • Bona Fide Employees • Sale of Practice • Investment Safe Harbors

Elements of the Stark Law

Physician (or immediate family member) Makes a referral To an entity that furnishes DHS With which he/she has a “financial relationship”  Ownership/Investment  Compensation Unless an exception applies – VIOLATION!!

Stark Law Exceptions Relevant to Medical Practice Acquisitions

Bona Fide Employment Isolated Transaction

Tax Exempt Organization Law

• IRC 501(c)(3) – Prohibits Inurement to Private Shareholders or Individuals • Affects All Compensation Arrangements between 501(c)(3) Hospitals and Physicians • Prohibitions on “Private Inurement” and “Impermissible Private Benefit” • Compensation Must be “Commercially Reasonable” and Consistent with “Fair Market Value” • Rev. Proc. 97-21: Provision of Recruitment Incentives to Physicians by Tax-Exempt Hospitals

Medical Practice Acquisitions Fundamental Issues for Buyers & Sellers of All Types Purchase of Assets versus Purchase of Stock Subchapter “C” versus Subchapter “S” Corporation Fraud & Abuse Successor Liability Physician Employment Failure to Document Employment Relationship – “technical” violations of AKS and Stark Poorly Drafted Restrictive Covenants Stark Law – Limitations on Patient Referrals Fair Market Value, Productivity/Value Based Compensation No “Salary Caps” (exempt organization only) Strategic/Other Organizational Structure Autonomy & Flexibility Geographic Coverage versus Consolidated Locations

Medical Practice Acquisitions Structuring Challenges by Type of Buyer Hospitals/Health Systems Corporate Practice of Medicine – Challenging to Employ Physicians Exempt Organization Law Cannibalizing Ancillary Services Private Equity Completely New Industry Valuation Concerns Physician Ownership Limitations Ancillary Business Upside Insurance Plans Health Reform Favors Insurer/Provider Integration Corporate Practice of Medicine – Unable to Employ Physicians Outright No Ancillary Business Upside

Key Steps in Transaction Process

Confidentiality & Non-Disclosure Agreement

Term Permitted Disclosures Sharing of Financial and Statistical Information Steps at Termination of Negotiations

Negotiation of Key Business Terms

Purchase Price Compensation

Letter of Intent

Exclusive Dealing Due Diligence Steps at Termination of Negotiations

Transaction Documents

Asset Purchase Agreement Employment Agreement

Questions?

George W. Bodenger, Esq.

Chair, Health Law Practice Group Telephone: (215) 972-1955 Email: [email protected]

Saul Ewing LLP

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