In recent years, acquisitions of and investments in healthcare companies have been on the rise, particularly driven by increasing private equity investment activity. These investments can provide unique opportunities for healthcare companies to grow and for investors to realize the benefits of the expanding healthcare industry. While these acquisitions and investments often look and feel like standard acquisitions and investments, the highly regulated nature of the healthcare industry imposes additional risks and requirements on any investor in these companies. This blog will provide an overview of some of the potential risks and legal issues associated with investing in or acquiring a healthcare company.
Administrative Services Agreements
Many states require certain healthcare companies to form as professional corporations or professional limited liability companies, which require ownership and management by medical providers. (Please see “Special Considerations When Forming a Medical Professional Services Company”.) These requirements preclude traditional private equity or venture capital investors from taking a direct ownership stake in such companies or from holding director or other management positions. To satisfy the ownership and management requirements, the acquirer or investor can establish a trusted medical provider as the owner and manager of the company, while entering into a contractual arrangement to provide administrative services to the healthcare company in exchange for a fair market fee as compensation for such services. An administrative services agreement will allow the investor to provide business management and other non-clinical support services to the healthcare company, so it can realize ongoing value through the services fee and oversee and protect its investment while simultaneously ensuring that it does not run afoul of state law restrictions on ownership and management.
Medical providers providing medical treatment must be validly licensed in the state in which they practice. Practice without a valid license can impose significant financial liability on both the provider and the provider’s employer. An investor should perform extensive diligence on the licensing of the healthcare company’s medical providers, both past and present, to ensure that the providers’ licenses are valid and that—if a provider was previously not licensed, even temporarily—the healthcare company took the necessary steps to prohibit the individual from providing medical services. The acquisition or other definitive agreement should include robust representations, warranties, and indemnification provisions to shift any financial risk related to past licensing violations, if any, to the seller.
Federal healthcare programs, including Medicare, impose strict and complicated requirements on billing for medical services. Errors in billing claims, whether intentional or unintentional, require the company to repay the incorrect amounts. Systemic deficiencies in the company’s billing procedures can lead to ongoing difficulties in obtaining payments under federal healthcare programs. The investor should ensure that the healthcare company has robust and compliant billing procedures and should extensively review the company’s billing procedures and any audits of those procedures. Similar to licensing requirements, the acquisition or other definitive agreement should include robust representations, warranties, and indemnification provisions to shift any financial risk related to billing errors or violations to the seller.
Medicare Approval for Changes in Ownership
A healthcare company that has been accepted as a Medicare provider may be required to notify the Centers for Medicare & Medicaid Services (“CMS”) of a change in ownership. Under CMS’s rules, the addition of a partner to a partnership or the merger of a corporation into another will trigger the change in ownership notification requirements. On the other hand, the transfer of corporate stock does not constitute a change of ownership. Also, the regulations do not specifically address changes in ownership of limited liability companies, but the same concepts should apply. The investor or acquirer should consider whether the form of the investment or acquisition will implicate requirements to notify CMS of a change in ownership and plan accordingly.
Investors should understand the unique issues associated with acquiring or investing in a healthcare company. The Business & Corporate Law Group and Healthcare Industry Team at PilieroMazza can help can help investors navigate these issues.