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M&A Legal Nuances


 

With changes in reimbursement and new collaborative models on the horizon, medical practices and hospital facilities that have long operated independently have begun dipping their toes into the M&A waters. Large systems and corporate operators who have deep experience in ventures that merge, join or purchase facilities outright are well aware of the intricacies involved in crafting such deals and employ a team of seasoned lawyers, accountants and consultants to ensure regulatory mandates don’t sink the transaction. For the newer, smaller players  who arrive at the M&A shores expecting smooth sailing, the legal and regulatory undertow can quickly make them feel like they’ve gotten in over their heads. ACA ImpactJay Hardcastle, partner with Bradley Arant Boult Cummings and chair of the firm’s Healthcare Practice Group, said the Affordable Care Act impacted the M&A landscape in two very signficant ways. In the pre-ACA world, he said hospitals expected their rate of reimbursement would rise each year as part of the market basket update. Second, many hospitals relied heavily on the Medicaid Disproportionate Share Hospital (DSH) payments that helped offset costs from uncompensated care.  The idea behind Obamacare, Hardcastle said, was to balance DSH and market basket reductions with increases in Medicaid and private coverage. Of course, he continued, the Supreme Court desicion that each state has the right to decide whether or not to expand its Medicaid program has left many hospitals in states like Tennessee in financial pergatory with reduced federal payments and no increase in Medicaid rolls. “You’re running into some very cash-strapped hospitals who are looking for partners to help them weather the storm,” he said. Hardcastle noted that although these facilities don’t seem like very attactive targets in the short term, there are investors and partners who believe they can acquire facilities at a bargain price today with an eye toward long-term returns as efficiency improves and reimbursements are revisited in the future.On the practice side, he noted physicians were selling to hospitals long before ACA. However, healthcare reform has probably magnified some of the trigger points that prompt physicians to sell their practice. Hardcastle said three reasons often given are that physicians believe 1) a hospital system has more clout and can negotiate better payer rates; 2) hospitals are generally willing to pay a base salary, perhaps with productivity incentives, that exceed what the physician could do on his or her own; and 3) the physicians are simply tired of the administrative hassel to run a practice. “Rightly or wrongly, physicians belive if they are with a ‘cash rich’ hospital system, they can feel safer ... have more security,” he said. Easier Said Than Done“I think people underestimate the operational difficulties of these sorts of endeavors,” Hardcastled said. He added there are cultural hurdles to address, particularly when a non-profit is being acquired by or merging with a for-profit system. Religous and ethical directives also come into play when two hospitals or a practice and a hospital stand on opposite sides of hot button issues such as abortion, birth control and end-of-life decisions. “When you go through an acquisition, there’s uncertainty about who is going to be runing the hospital, and that often causes stress and friction,” Hardcastle said. “The bigger hospital tells the smaller hospital, ‘Look, you’re losing dollars so do it our way.’ A classic example of that is with staffing ratios,” he continued. “It’s just a lot harder than it sounds to cut your cost and not hurt quality.”Hardcastle added, the leaders of small hospitals typically play a prominent role in the community so selling the hospital impacts more than just staff and patients ... it can have a much broader effect on the larger community, as well. “Often the smaller hospital will extract from the bigger hospital some sort of concession to infuse the community with a certain amount of capital,” Hardcastle noted. However, he added, there are different ways to structure the sale and legal considerations to creating a foundation.Closing the DealWhile some M&A deals might be more complex than others, all have a level of difficulty that require outside expertise. However, Hardcastle said, it isn’t enough to simply bring in an attorney to represent your interests. Instead, he noted, “You have to bring in attorneys who buy hospitals as part of their practice. There are too many nuances.”A good resource for physicians or hospitals looking for that type of expertise is the American Health Lawyers Association (healthlawyers.org). The American Bar Association and most state bar affiliates also have sections on health law. In Middle Tennessee, where healthcare is a $70 billion industry, there are numerous attorneys and firms that have the specialized knowledge necessary to close the deal.

AHLA Health Care Transactions ConferenceLoews Vanderbilt Hotel • NashvilleApril 10-11, 2014The American Health Lawyers Association is presenting a unique opportunity for attorneys to learn more about the latest commercial developments, strategies and deal forecasts in healthcare transactions. Programming features insight into the business and legal issues involving healthcare transactions including emerging care models, M&A trends, financing techniques, deal risk management strategies, post integration lessons and more. Registration is open both to AHLA members and non-members. Group rates and discounts are available, but all fees increase after March 19. For more information go to healthlawyers.org and click on ‘Events and Education.’

The Antitrust Issue“Healthcare deals have become more of a focus for the Federal Trade Commission,” stated Beth Vessel, a partner at Waller. She added the FTC has been forthright in saying their investigators are looking at mergers and acquisitions that might tend to lessen competition in a market.Vessel, who works extensively in the healthcare sector and often advises clients on antitrust law related to due diligence, noted it isn’t enough to think about a deal only in terms of how it effects the main participants ... it’s equally critical to look at the larger implications of the transaction.“You also want to look at your documentation creation policy,” she continued. “If you are talking about a transaction, you want to be very careful what you put in writing, even emails.” An off-the-cuff remark in an email along the lines of — ‘with this merger, we’ll really dominate the cardiac market’ — could be enough to have federal agents knocking on your door. Vessell said the Hart-Scott-Rodino Act created a federal pre-merger notification program where buyers and sellers involved in large transactions must provide information about competition, their market share and plans. Currently, transactions valued at $70.9 million are subject to HSR filings. However, the valuation trigger point tpically changes early in the year so that figure is expected to shift this month.Smaller transactions, she noted, also are subject to proving the rules were followed when it comes to antitrust allegations. “Just because you don’t have to file a report under Hart-Scott doesn’t mean you won’t have to provide documents in connection with an investigation,” she said. A complaint by another provider or a payer could be enough for the FTC to step in and examine the deal more closely.Vessel also said those involved in a proposed transaction must remember not every deal closes. Being a little too free with information in the beginnning could cause problems down the road.“When you are doing due dilligence on the front end, you need to be careful not to provide competitively sensitive information on pricing,” she explained. “If you are competitors and if the transaction falls apart, it might be viewed as price fixing. You want to be careful not to to appear like there is price collusion.”To avoid this issue, the two parties might consider bringing in ‘clean teams’ — outside lawyers and accountants who can aggregate information so that each side has the information needed to make decisions without having specific price points.“You’re supposed to act like competitors until the deal goes through, as much as you can,” Vessel concluded.

 
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