Healthcare Financial Management
Association
Western Pennsylvania Chapter
April 17, 2014
Mergers & Acquisitions in the Healthcare Industry
Focus on Medical Practice Acquisitions
Legal and Business
Issues
George W. Bodenger, Partner
Saul Ewing LLP
(215) 972-1955
gbodenger@saul.com
© Copyright 2014 Saul Ewing LLP
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DISCLAIMER
The content of these presentation materials has been prepared by Saul
Ewing LLP for informational purposes only. The provision and receipt
of the information in these presentation materials should not be
considered legal advice, does not create a lawyer-client relationship,
and should not be acted on without seeking professional counsel who
have been informed of the specific facts. Should you wish to contact a
presenter to obtain more information regarding your company's
particular circumstances, it may be necessary to enter into an
attorney/client relationship.
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Topics to Be Covered
Healthcare Merger & Acquisition Landscape
Hospitals & Physicians & Others Pursuing
Medical Practice Acquisitions
Primary Bodies of Law Affecting Medical Practice Acquisitions
Fundamental Issues for Buyers & Sellers of All Types
Structuring Challenges by Type of Buyer
Key Steps in Transaction Process
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Healthcare Merger & Acquisition Landscape
M&A Market Trends
Hospitals Merging or Being Bought/Sold at Increased Rate
Other Healthcare Business “Rollups” – Urgent Care, Home Health, Wound Care
Healthcare Reform Continues to Drive M&A Transaction Flow
BUT
Physician Practice Acquisitions are Most Common Transactions in
Healthcare Today
Hospitals Acquiring Medical Practices
“Physician Only” Medical Practice Integration
Specialty Physicians and Private Equity
Healthcare Providers and Health Plans
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Healthcare M&A Landscape – continued
Medical Practice Acquisitions
• Hospitals & Physicians Continue Moving Toward Practice
Acquisition/Employment


Tangible Assets Only (i.e., no “goodwill”)
Cost-based Approach to Valuations – Cost of Recreating Practice
• Hospitals and Physician Groups Developing Alternative
Arrangements


Gainsharing
Co-Management Agreements
• New Players in the Marketplace – MOST IMPORTANT


Private Equity
Insurance Plans
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Hospitals & Physicians & Others Pursuing
Medical Practice Acquisitions
Hospitals are Pursuing Because:
Physicians Control Patients
Recruit High End Specialties
Improve Physician Cooperation
Stabilize Medical Staff
Physicians Are Pursuing Because:
Strength in Numbers
Spreading Infrastructure Cost & Risk
Increased Access to Ancillary Services
Private Equity/Insurers Present Attractive Alternatives for
Physicians
Access to Capital
Maintaining Physician Entrepreneurship
No “Been There, Done That”
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Primary Bodies of Law Affecting
Medical Practice Acquisitions
• Anti-Kickback Statute
• Physician Self-Referral Restrictions (“Stark
Law”)
• Corporate Practice of Medicine
• 501(c)(3) (Exempt Organization) Law
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Elements of Anti-Kickback
Statute
Knowing and willful
Solicitation, or receipt/offer for payment
Remuneration (direct or indirect, overt or covert,
in cash or in kind)
Inducement
In return for referrals, or in return for purchasing,
leasing, ordering, arranging or recommending
Patients, goods, facilities, services or items for
which payment may be made in whole or in part
under a Government Health Care Program
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Federal Anti-Kickback Statute cont’d
• Unlike Stark, Criminal Statute – Intent Requirement
• “One Purpose” Test (see Greber)
• Failure to Satisfy Safe Harbor Not Illegal “Per Se ”
Exposures
Felony - punishable by criminal fines up to
$25,000 and/or imprisonment for up to five (5)
years, potential False Claims Act exposure,
potential civil sanctions and monetary
penalties, including exclusion from Medicare &
Medicaid programs
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AKS Safe Harbors Relevant to
Medical Practice Acquisitions
• Bona Fide Employees
• Sale of Practice
• Investment Safe Harbors
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Elements of the Stark Law
Physician (or immediate family member)
Makes a referral
To an entity that furnishes DHS
With which he/she has a “financial relationship”
 Ownership/Investment
 Compensation
Unless an exception applies – VIOLATION!!
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Stark Law Exceptions Relevant to Medical Practice
Acquisitions
Bona Fide Employment
Isolated Transaction
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Tax Exempt Organization Law
• IRC 501(c)(3) – Prohibits Inurement to Private
Shareholders or Individuals
• Affects All Compensation Arrangements between
501(c)(3) Hospitals and Physicians
• Prohibitions on “Private Inurement” and “Impermissible
Private Benefit”
• Compensation Must be “Commercially Reasonable” and
Consistent with “Fair Market Value”
• Rev. Proc. 97-21: Provision of Recruitment Incentives to
Physicians by Tax-Exempt Hospitals
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Medical Practice Acquisitions
Fundamental Issues for Buyers & Sellers of All Types
Purchase of Assets versus Purchase of Stock
Subchapter “C” versus Subchapter “S” Corporation
Fraud & Abuse Successor Liability
Physician Employment
Failure to Document Employment Relationship – “technical” violations of AKS and Stark
Poorly Drafted Restrictive Covenants
Stark Law – Limitations on Patient Referrals
Fair Market Value, Productivity/Value Based Compensation
No “Salary Caps” (exempt organization only)
Strategic/Other
Organizational Structure
Autonomy & Flexibility
Geographic Coverage versus Consolidated Locations
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Medical Practice Acquisitions
Structuring Challenges by Type of Buyer
Hospitals/Health Systems
Corporate Practice of Medicine – Challenging to Employ Physicians
Exempt Organization Law
Cannibalizing Ancillary Services
Private Equity
Completely New Industry
Valuation Concerns
Physician Ownership Limitations
Ancillary Business Upside
Insurance Plans
Health Reform Favors Insurer/Provider Integration
Corporate Practice of Medicine – Unable to Employ Physicians Outright
No Ancillary Business Upside
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Key Steps in Transaction Process
Confidentiality & Non-Disclosure Agreement
Term
Permitted Disclosures
Sharing of Financial and Statistical Information
Steps at Termination of Negotiations
Negotiation of Key Business Terms
Purchase Price
Compensation
Letter of Intent
Exclusive Dealing
Due Diligence
Steps at Termination of Negotiations
Transaction Documents
Asset Purchase Agreement
Employment Agreement
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Questions?
George W. Bodenger, Esq.
Chair, Health Law Practice Group
Telephone: (215) 972-1955
Email: gbodenger@saul.com
Saul Ewing LLP
© Copyright 2014 Saul Ewing LLP
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