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Understanding Mergers and Acquisition in the Healthcare Marketplace

Mergers & Acquisitions in the Healthcare MarketplaceAs healthcare consultants in the northeast market (NY/NJ/PA), EisnerAmper's Healthcare Services Group has witnessed the financial uncertainty faced by today’s physician practices, surgery centers and hospitals. Due to this uncertainty and financial pressure, these organizations are turning to mergers and acquisitions (M&A) as one way to survive, grow, and flourish in today’s healthcare marketplace.

Declines in cash flow and overpayment audits have fueled practice and hospital consolidation in the last two years along with changing healthcare reform. Local health systems have created business strategies directed towards merging with physician practices in order to grow market share. Physician practices and their management teams are presented with better reimbursement through the health system, protection from overpayment audits and a respected brand name in the local community.

If you are considering selling, merging, or acquiring with healthcare service providers, the points highlighted in the Understanding Mergers and Acquisitions in the Healthcare Marketplace presentation highlights below will provide many crucial and educational facts. The following highlights from our Healthcare M&A presentation were compiled from health care attorneys, accountants and insurance professionals who counsel clients on the M&A landscape everyday.

Our overview of the M&A marketplace covers:

  • How to determine if a merger or acquisition is the right step for your facility or practice
  • Lessons learned during the M&A process
  • Best practices for implementing a merger or acquisition
  • Insurance exposures and other considerations when entering into a merger or acquisition
  • The impact of Health Care Reform (i.e. Accountable Care Organizations) on mergers and acquisitions

Overview of Business Activity

  • The healthcare market is consolidating
  • We will focus on the northeast market – NJ/NY/PA
  • Consolidation is mostly in the following sectors:
    • Hospitals
    • Surgery Centers
    • Physician Practices
     
  • Few negotiations have been finalized to-date
  • The average time estimate for the negotiation process is 15 to 18 months – Some in excess of 3 years
  • Friendly PC, Leased Provider, Employee or Hybrid entity choices in these deals
  • Case Study #1
    • Situation
      • Practice experiences an initial decline in cash flow
      • Practice has started to see more overpayment audits
      • Practice has a sound business model
      • Practice has an effective management team
      • Local health system announces a business strategy to merge with physician practices
      • Practice requests to be considered for merger
      • Negotiations start with both parties
       
     
  • Case Study #1
    • Result of practice assessment
      • Net collection opportunity to increase cash flow annually
      • Significant overcoding in practice
      • Numerous business process recommendations
      • Health system reimbursement higher than practice
      • Staffing levels in line with surveys
      • Overhead percentage slightly higher than surveys
      • Good payer mix
      • Respected brand name in the community
       
     
  • Case Study #1
    • Outcome of Negotiations to-date
      • Negotiations are still active – 12 months to-date
      • Talks progressed from merger to acquisition
      • Effort to increase physician compensation - wRVU
      • Entity discussion towards a friendly PC model
      • Billing under the tax ID of the health system
      • Strategic fit for health system/practice
      • Cultural fit for health system/practice
      • Value to business model
      • Value to branding 
       
     

Legal Issues

Brief Background of Important Laws  

  • Stark and Anti-Kickback laws prohibit payments in exchange for referrals of services paid for by Medicare/Medicaid
  • Anti-Kickback Statute (AKS):
    • Intent-based statute
      • Bona-fide reasons for transaction (e.g., integration)
       
    • Criminal and civil penalties
     
  • Stark law
    • Strict liability
    • Civil penalties
    • Compensation cannot be based on "volume/value of referrals" of designated health services
      • Exception: personally performed services (e.g., wRVU)
       
    • How to structure compensation?
      • "Eat what you kill"
      • Compensation pools
       
     
  • FMV/commercially reasonable payments
  • Important: independent valuation report from reputable source
  • Recent case law (whistleblower actions):
    • U.S. ex. rel. Singh v. Bradford Regional Medical Center
      • Hospital paid group fixed fee for equipment sublease and non-compete
      • FMV fee should not take into account anticipated referrals in certain cases.
      • Court found fixed fee took into account future referrals
       
     
  • U.S. ex. rel. Drakeford v. Tuomey
    • Hospital employed physicians part-time for its outpatient surgery center
    • Physicians paid 131% of their collections (national data cites 49%-63%)
    • Physicians exclusive to Tuomey
    • Court found physicians' compensation inflated to take into account their referrals because each surgery generated a PC and a TC.
     
  • Case Study #1:
    • Potentially large upfront payment to physicians
    • Loss of control/decision-making
    • Broad non-competes
    • Harder to unwind
    • Public disclosure of information if tax-exempt Captive PC
     

Understanding the Healthcare M&A Marketplace

  • Case Study #1
    • Insurance Summary
      • Property- Insurable interest and contract covenants
      • Stark-Fines, Penalties, Defense
      • Billing and Coding-Fines and penalties for overcoding
      • General Liability will not cover dishonest acts. Innocent parties may be covered in the D&O policy
      • Medical Malpractice-Form of risk transfer and legacy issues
      • Management Protection Coverage
      • Who owns the policies?
       
     
  • Case Study #1
    • Insurance Summary
      • Employment Practices-Declining cash flow
      • Workers Compensation-Combinable entities
      • Directors and Officers-Run Off Coverage
      • Fiduciary Liability-Separate entity for employees
       
     
  • Case Study #1
    • Insurance Summary
      • Directors and Officers-Unsound business model
      • Workers Compensation-Leasing situation
      • Crime Insurance-Adequate staffing vs. low productivity
       
     
  • Case Study #2
    • Situation
      • Practice experiences a consistent decline in cash flow
      • Practice has started to experience overpayment audits
      • Practice has a sound business model
      • Practice has a respected brand name
      • Practice does not have an effective management team
      • Founding partner is nearing retirement
      • Local health system has been talking to the practice
      • Practice requests to be considered for merger
      • Negotiations start with both parties
       
     
  • Case Study #2
    • Result of practice assessment
      • Practice productivity lower than survey median
      • Collections per physician are at the survey median
      • Health system reimbursement higher than practice
      • Numerous business process recommendations
      • Staffing levels in line with surveys
      • Overhead percentage in line with surveys
      • Good payer mix
      • Respected brand name in the community
       
     
  • Case Study #2
    • Outcome of Negotiations to-date
      • Negotiations are on hold
      • Talks progressed from merger to acquisition
      • Problem with valuation of practice
      • Effort to increase physician compensation - wRVU
      • Entity discussion towards a hybrid model
        • Friendly PC model for physicians
        • Separate entity for employees
      • Billing under the tax ID of the health system
      • Strategic fit for health system/practice
      • Cultural fit for health system/practice
      • Value to business model
      • Value to branding
         
     

Legal issues

  • Case Study #2:
    • AKS
      • Bona fide reasons for transaction
       
    • Potential areas of concern:
      • Deferred compensation
      • Retained liabilities
      • Preserving group unity (e.g., effect of termination of one or more physicians)
       
     

Understanding the Healthcare M&A Marketplace

  • Case Study #2
    • Insurance Summary
      • Property- Insurable interest and contract covenants
      • Billing and Coding-Fines and penalties for overcoding
      • Medical Malpractice-Form of risk transfer and legacy issues
      • Management Protection Coverage
      • Who owns the policies?
       
     
  • Case Study #2
    • Insurance Summary
      • Employment Practices-Declining cash flow, may have to reorganize
      • Workers Compensation-Combinable entities, effect on reporting of payouts
      • Directors and Officers-Run Off Coverage
      • Fiduciary Liability-Separate entity for employee 
       
     
  • Case Study #2
    • Insurance Summary
      • Directors and Officers-Unsound business model
      • Workers Compensation-Leasing situation
      • Crime Insurance-Adequate staffing vs. low productivity
       
     
  • Case Study #3
    • Situation
      • Practice experiences a significant decline in cash flow in the last 12 to 15 months
      • Practice has started to experience overpayment audits
      • Practice does not have a sound business model
      • Practice has a respected brand name
      • Practice does not have an effective management team
      • Local health system has been talking to the practice for an extended period of time
      • Practice requests to be considered for merger
      • Negotiations start with both parties
       
     
  • Case Study #3
    • Result of practice assessment
      • Practice productivity lower than survey median
      • Collections per physician are at the survey median
      • Numerous business process recommendations
      • Health system reimbursement higher than practice
      • Staffing levels in line with surveys
      • Overhead percentage in line with surveys
      • Good payer mix
      • Respected brand name in the community
       
     
  • Case Study #3
    • Outcome of Negotiations to-date
    • Negotiations are continuing to-date
    • Talks progressed to a leased provider arrangement
      • Health system is leasing providers
       
      • No acquisition of practice by the health system
    • Effort to increase physician compensation - wRVU
    • Billing under the tax ID of the health system
    • Strategic fit for health system/practice
    • Cultural fit for health system/practice
    • Value to business model
    • Value to branding
     

Legal Issues

  • Case Study #3:
    • AKS and Stark:
      • Bona fide reasons: is there real integration?
      • Potentially, fewer issues under Stark
      • If non-compete included, Bradford suggests:
        • Non-competes in leases may be more problematic
        • Non-competes may be viewed as a requirement to refer 
         
  • Easy to unwind

Understanding the Healthcare M&A Marketplace

  • Case Study #3
    • Insurance Summary
      • Property- Insurable interest and contract covenants
      • Billing and Coding-Fines and penalties for overcoding
      • Medical Malpractice-Form of risk transfer and legacy issue
      • Management Protection Coverage
      • Who owns the policies?
       
     
  • Case Study #3
    • Insurance Summary
      • Employment Practices-Declining cash flow
      • Workers Compensation-Combinable entities
      • Directors and Officers-Run Off Coverage
      • Fiduciary Liability-Separate entity for employees
       
     
  • Case Study #3
    • Insurance Summary
      • Directors and Officers-Unsound business model
      • Workers Compensation-Leasing situation
      • Crime Insurance-Adequate staffing vs. low productivity
      • EPLI – Non-competes
      • D&O – "Insured vs. Insured"
       
     

Legal Issues

  • Impact of Health Reform on M&A deals:
    • Patient Protection & Affordable Care Act of 2010 ("PPACA")
    • Value-based purchasing:
      • Transforms Medicare from "passive" purchaser to "active" purchaser
      • How?
        • Modifies Part A and Part B payments for achieving/reporting quality standards
         
       
     
  • Accountable Care Organizations ("ACOs")
    • Definition: Group of providers with joint responsibility for quality and cost of care provided to assigned Medicare beneficiaries
    • Proposed Regulations Issued March 31, 2011 by CMS, as well as regulatory guidance from OIG, CMS, FTS, DOJ and IRS.
     
  • Significant Details Include:
    • ACO must be a legal entity under State law (e.g., corporation, LLC)
    • ACO must have TIN but need not be enrolled in Medicare
    • ACO participants: physicians, physician practices, networks of physician practices, hospitals employing physicians, joint ventures of physicians and hospitals and others
    • ACO must have "shared governance" (i.e., a governing board)
      • At least 1 Medicare beneficiary (without conflict of interest)
      • Optional: community stakeholder
      • ACO participants must have at least 75% control of board
        • Outsiders (non-clinicians) can have up to 25% control of board
         
       
    • ACOs must have:
      • a manager who reports to the board
      • full-time medical director
        • senior executive of ACO
        • board-certified, licensed physician
         
       
    • "meaningful commitment" by participants:
      • Financial
        • Human (time and effort)
         
       
    • Assignment of Beneficiaries:
      • At least 5,000 Medicare beneficiaries
      • Enough PCPs to service 5,000 patients
      • By utilization of a "plurality" (not majority) of services from PCP
      • Retrospective
       
    • Important: each PCP is exclusive to one ACO
    • Specialists can be in multiple ACOs
    • ACO can remove, but not add, ACO participants during 3 year term of agreement
    • ACO must come up with a plan of distribution of savings
    • 2 Models and 2 Tracks for Shared Savings:
      • Both involve sharing of losses at some point
       
    • To get savings, ACO must both:
      • Report and meet quality measures (65 within 5 domains); and
      • Achieve cost savings beyond a minimum rate
       
    • Disclosure of information to patients:
      • Patients can seek care from non-ACO providers
       
    • ACO must have infrastructure to gather and report data (e.g., IT)

     

    “The material contained in this presentation is for general information and should not be acted upon without prior professional consultation.” 

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