Understanding Mergers and
Acquisition in the
Healthcare Marketplace
May 2011
Understanding the
Healthcare M&A Marketplace
• 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
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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
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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
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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
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
Understanding the
Healthcare M&A Marketplace
• Case Study #1
– Insurance Summary
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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
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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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Understanding the
Healthcare M&A Marketplace
• Case Study #1
– Insurance Summary
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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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Understanding the
Healthcare M&A Marketplace
• Case Study #2
– Situation
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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
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
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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
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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
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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
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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
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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
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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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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
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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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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
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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
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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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Understanding the
Healthcare M&A Marketplace
• Case Study #3
– Insurance Summary
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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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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)
Understanding the
Healthcare M&A Marketplace
• Contact Information
•
Michael McLafferty CPA, MBA, CHFP, FACMPE
Partner, Healthcare Services Group
EisnerAmper, LLP
732-598-8858
Michael.McLafferty@eisneramper.com
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