© Copyright 2014 Saul Ewing LLP Legal and Business Issues George W. Bodenger, Partner Saul Ewing...

© Copyright 2014 Saul Ewing LLP

Legal and Business Issues

George W. Bodenger, PartnerSaul Ewing LLP(215) 972-1955

[email protected]

Healthcare Financial Management Association

Western Pennsylvania Chapter

April 17, 2014

Mergers & Acquisitions in the Healthcare IndustryFocus on Medical Practice Acquisitions

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DISCLAIMERThe 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 CoveredHealthcare 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 RateOther Healthcare Business “Rollups” – Urgent Care, Home Health, Wound

CareHealthcare Reform Continues to Drive M&A Transaction Flow

BUTPhysician Practice Acquisitions are Most Common

Transactions in Healthcare Today

Hospitals Acquiring Medical Practices“Physician Only” Medical Practice Integration

Specialty Physicians and Private EquityHealthcare 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 SpecialtiesImprove Physician Cooperation

Stabilize Medical Staff

Physicians Are Pursuing Because:Strength in Numbers

Spreading Infrastructure Cost & RiskIncreased Access to Ancillary Services

Private Equity/Insurers Present Attractive Alternatives for PhysiciansAccess 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 willfulSolicitation, or receipt/offer for paymentRemuneration (direct or indirect, overt or covert,

in cash or in kind)InducementIn return for referrals, or in return for purchasing,

leasing, ordering, arranging or recommendingPatients, goods, facilities, services or items for

which payment may be made in whole or in part under a Government Health Care Program


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 ”

ExposuresFelony - 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


AKS Safe Harbors Relevant to Medical Practice Acquisitions

• Bona Fide Employees• Sale of Practice• Investment Safe Harbors


Elements of the Stark LawPhysician (or immediate family member)Makes a referralTo an entity that furnishes DHSWith which he/she has a “financial relationship”

Ownership/Investment Compensation

Unless an exception applies – VIOLATION!!


Stark Law Exceptions Relevant to Medical Practice Acquisitions

Bona Fide Employment

Isolated Transaction


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


Medical Practice AcquisitionsFundamental Issues for Buyers & Sellers of All Types

Purchase of Assets versus Purchase of StockSubchapter “C” versus Subchapter “S” Corporation

Fraud & Abuse Successor Liability

Physician EmploymentFailure to Document Employment Relationship – “technical” violations of AKS and

StarkPoorly Drafted Restrictive Covenants

Stark Law – Limitations on Patient Referrals

Fair Market Value, Productivity/Value Based Compensation No “Salary Caps” (exempt organization only)

Strategic/OtherOrganizational StructureAutonomy & Flexibility

Geographic Coverage versus Consolidated Locations

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Medical Practice AcquisitionsStructuring Challenges by Type of Buyer

Hospitals/Health SystemsCorporate Practice of Medicine – Challenging to Employ Physicians

Exempt Organization LawCannibalizing Ancillary Services

Private EquityCompletely New Industry

Valuation ConcernsPhysician Ownership Limitations

Ancillary Business Upside

Insurance PlansHealth Reform Favors Insurer/Provider Integration

Corporate Practice of Medicine – Unable to Employ Physicians OutrightNo Ancillary Business Upside

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Key Steps in Transaction Process

Confidentiality & Non-Disclosure AgreementTerm

Permitted DisclosuresSharing of Financial and Statistical Information

Steps at Termination of Negotiations

Negotiation of Key Business TermsPurchase PriceCompensation

Letter of IntentExclusive Dealing

Due DiligenceSteps at Termination of Negotiations

Transaction DocumentsAsset Purchase Agreement

Employment Agreement

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Questions?George W. Bodenger, Esq.

Chair, Health Law Practice GroupTelephone: (215) 972-1955

Email: [email protected] Ewing LLP

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© Copyright 2014 Saul Ewing LLP Legal and Business Issues George W. Bodenger, Partner Saul Ewing...

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