Understanding Mergers and Acquisition in the Healthcare Marketplace May 2011

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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• 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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• 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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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


– 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

• 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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• 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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• Directors and Officers-Unsound business model

• Workers Compensation-Leasing situation

• Crime Insurance-Adequate staffing vs. low productivity

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• 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



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• Practice productivity lower than survey median

• Collections per physician are at the survey median




• Overhead percentage in line with surveys

• Good payer mix


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• Negotiations are on hold

• Talks progressed from merger to acquisition

• Problem with valuation of practice


• Entity discussion towards a hybrid model

– Friendly PC model for physicians

– Separate entity for employees





• Value to branding16


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)







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• Employment Practices-Declining cash flow, may have to reorganize

• Workers Compensation-Combinable entities, effect on reporting of payouts



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• 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



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• Practice productivity lower than survey median

• Collections per physician are at the survey median




• Overhead percentage in line with surveys

• Good payer mix


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• 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






• Value to branding

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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







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• Employment Practices-Declining cash flow

• Workers Compensation-Combinable entities



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• EPLI – Non-competes

• D&O – “Insured vs. Insured”

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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.


• 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


– 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


– 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

Legal Issues


– 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

[email protected]

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mailto:[email protected]

Documents

Understanding Mergers and Acquisition in the Healthcare Marketplace May 2011