Understanding Mergers and Acquisition in the
Healthcare Marketplace
May 2011
• 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
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
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
Legal Issues cont’d
– 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
Legal Issues cont’d
– 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
Legal Issues cont’d
– 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.
Legal Issues cont’d
• 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
• 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?
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• Case Study #1– Insurance Summary
• Directors and Officers-Unsound business model
• Workers Compensation-Leasing situation
• Crime Insurance-Adequate staffing vs. low productivity
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• 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 branding16
Understanding the Healthcare M&A Marketplace
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)
• 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?
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Understanding the Healthcare M&A Marketplace
• 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 employees
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Understanding the Healthcare M&A Marketplace
• Case Study #2– Insurance Summary
• Directors and Officers-Unsound business model
• Workers Compensation-Leasing situation
• Crime Insurance-Adequate staffing vs. low productivity
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
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
• 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 issues
• Management Protection Coverage
• Who owns the policies?
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Understanding the Healthcare M&A Marketplace
• 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
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Understanding the Healthcare M&A Marketplace
• 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”
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Understanding the Healthcare M&A Marketplace
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
Legal Issues
• 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.
Legal Issues cont’d
• 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
• Significant Details cont’d:
– 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
• Significant Details cont’d:
– 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)
Legal Issues
• Significant Details cont’d:
– 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
• Significant Details cont’d:
– 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
Legal Issues
• Significant Details cont’d:
– 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)
PPACA provisions:• More coordinated patient care
• Focus on quality and cost savings
• Substantial upfront cost e.g., formation of ACOs (IT and other infrastructure, training etc.)
• Impact: higher degree of integration in industry – For offensive or defensive reasons (e.g., PCPs)
• Contact Information• Michael McLafferty CPA, MBA, CHFP, FACMPE
Partner, Healthcare Services Group
EisnerAmper, LLP
732-598-8858
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Understanding the Healthcare M&A Marketplace