AMARILLO, TX – Assume that John Smith owns 100% of ABC Medical Equipment, Inc. Assume that Jim Johnson desires to purchase ABC. Set our below are guidelines for the seller and buyer to follow:
Asset Sale vs. Stock Sale
Asset Sale – The seller will be ABC. The buyer will normally be a legal entity (XYZ Medical Equipment, Inc.) set up by Johnson. ABC will sell its “hard” assets to XYZ. These include inventory and non-inventory assets such as computers and delivery vans. As part of the sale, ABC will transfer its patient files to XYZ.
- After the sale is completed (i.e., after “closing” occurs), Smith will continue to own ABC. However, ABC will be a shell corporation with no assets other than the money paid to it by XYZ.
- As a general rule, XYZ will not assume any of ABC’s liabilities. For example, assume that closing occurs on 10/1/18. Assume that on 3/1/19, a UPIC audit is instigated against ABC for actions taken by ABC prior to closing. This audit is ABC’s problem; it is not XYZ’s problem.
- Assume that ABC’s facility is on Main Street. Assume that at closing, XYZ intends to take over the Main Street facility. In an asset sale, ABC’s accreditation and PTAN cannot be transferred to XYZ. Rather, XYZ will need to obtain its own accreditation and PTAN for the Main Street facility. After closing, XYZ cannot “use” or “bill under” ABC’s PTAN until XYZ obtains its own PTAN. Let’s assume that at the time of closing (10/1/18), XYZ has met all of the prerequisites to apply for a PTAN for the Main Street facility (i.e., XYZ is accredited, has a surety bond, and has the state DME license). Assume that at closing, XYZ submits its 855S. Assume that on 1/1/19, XYZ receives its PTAN for the Main Street facility. Between 10/1/18 and 1/1/19, XYZ should be able to serve Medicare beneficiaries but hold its Medicare claims. And then on 1/1/19, XYZ should be able to submit all of the accumulated Medicare claims at once.
- Assume that ABC has third party payor (“TPP”) contracts. These can include “straight” commercial insurance, Medicare Advantage, and Medicaid Managed Care. It is likely that ABC cannot transfer (“assign”) these TPP contracts to XYZ. As such, XYZ will need to approach the payors and ask them to sign new contracts with XYZ.
Stock Sale – The seller will be Smith and the purchaser will likely be Johnson (individually). All that Smith will sell will be a piece of paper…his stock certificate signifying his ownership of ABC. ABC will remain intact as an ongoing corporation…same Tax ID #, same PTAN, same accreditation, same TPP contracts, etc. The only thing that has changed is that Smith is “out” as the stockholder and Johnson is “in” as the stockholder. As such, ABC (now owned by Johnson) remains in place at the Main Street facility; there is no break in billing.
- ABC’s liabilities, known and unknown, will remain with ABC after closing. Any pre-closing liabilities will “fall on ABC’s shoulders”…they will not “fall on Johnson’s shoulders.”
- Change of ownership (“CHOW”) notifications will need to be submitted to ABC’s accrediting organization, the state licensure agency, the NSC, and the state Medicaid program. In talking about TPP contracts, let us draw a distinction. The contracts will likely say that ABC cannot transfer or assign the contracts to another party. However, with a stock sale, ABC is not transferring or assigning the TPP contracts; rather, the contracts will remain in place with ABC. The only change is that ABC now has a different stockholder. Some TPP contracts will be silent regarding a change of ownership of ABC. If that is the case, then a CHOW does not need to be given to the payor. On the other hand, some contracts may say that ABC must notify the payor in advance if there is a change of ownership.
Mechanics of a Sale
Mutual Nondisclosure Agreement (“MNDA”) – The parties will sign an MNDA. This says that the parties will disclose confidential information…and they will keep the information confidential.
Disclosure of Financials – The seller will disclose financial documents about ABC to the buyer. These might include tax returns, bank statements, and financial statements that ABC has previously given to a lender.
Letter of Intent (“LOI”) – This is detailed, but non-binding. It sets out the “terms of the deal.”
Due Diligence – The buyer will conduct due diligence. Essentially, this means that the buyer will “kick the tires” of ABC so that the buyer will know what it is that it is buying. Due diligence includes:
- The buyer will order a UCC lien search to determine if there are any recorded liens against ABC’s assets.
- The buyer will determine if ABC’s corporate charter is in good standing. Obviously, this is important with a stock purchase. But it is also important with an asset purchase because the buyer will want confirmation that ABC has the legal authority to sell its assets.
- The buyer will determine if ABC’s PTAN, accreditation, DME licensure, and Medicaid provider number are in good standing. This is of paramount importance with a stock purchase. However, this determination is also important with an asset purchase. The buyer will want confirmation that ABC’s business model is based on a firm legal foundation.
- The buyer will need to determine what inventory and non-inventory assets ABC has. ABC will also need to determine how many patient files ABC has.
- The buyer will need to review all, or a sample of, ABC’s patient files to determine how accurate and complete they are.
- The buyer will need to review ABC’s TPP contracts. If the transaction is an asset sale, then the buyer will want to know if any of the contracts are assignable (probably not) and if they are not assignable, what the contract says about the buyer approaching the payors about new contracts. If the transaction is a stock sale, then the buyer will need to determine how to give CHOW notifications to the payors.
- The buyer will need to determine how ABC generates its business. If business is generated on the basis of improper marketing practices…or on the basis of improper relationships with physicians and other referral sources…then the buyer will likely want to back out of the transaction. For obvious reasons, this is important with a stock purchase. But it is also important with an asset purchase because the buyer will not want to buy a business that has a flawed operating model.
- The buyer will need to review (i) past audits, (ii) current audits, and (iii) audits that the seller believes may happen in the future. Reviewing audits is important in a stock purchase. However, they are also important with an asset purchase because a poor audit history will indicate flaws in ABC’s business model.
- The buyer will want to interview ABC’s employees to determine which of them the buyer will want to keep after closing and which of them need to be let go. If certain employees need to be let go, then the seller needs to handle this task at or before closing.
Closing – With an asset sale, (i) the parties will sign an Asset Purchase Agreement, (ii) ABC will sign a Bill of Sale, and (iii) other closing documents will be signed. With a stock sale, (i) the parties will sign an Stock Purchase Agreement, (ii) Johnson will sign a Stock Transfer, and (iii) related closing documents will be signed. An important section in the APA and SPA is the one entitled “Representations and Warranties” (also known as “Reps and Warranties”). It is under this section that the parties make certain promises to each other. These promises will be enforced after closing. The seller will want the “Reps and Warranties” to be relatively mundane; the seller will want as many Reps and Warranties as possible to be prefaced by “To the best of seller’s knowledge.” On the other hand, the buyer will want the seller to be “locked into” the Reps and Warranties. In particular, the buyer will want absolute commitments from the seller (the buyer will not want to see “To the best of seller’s knowledge….”). The buyer will want to pay a portion of the purchase price (e.g., 75% to 80%) at closing and “hold back” the balance of the purchase price until sometime after closing. This will give the buyer a “pot of money” to offset against in the event that unexpected surprises (resulting from ABC’s actions prior to closing) occur after closing.
Jeff Baird will present the following webinars:
AAHOMECARE’S EDUCATIONAL WEBINAR
Proper vs. Improper Arrangements Between DME Suppliers and Manufacturers
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Tuesday, October 2, 2018
2:30-3:30 p.m. EASTERN TIME
Manufacturers and DME suppliers are dependent on each other. The DME supplier needs to have access to products at a reasonable cost. The manufacturer is dependent on successful DME suppliers that can purchase products from the manufacturer. And so it is important for manufacturers and DME suppliers to work together. The law allows manufacturers and suppliers to work together…so long as certain legal guidelines are met. This webinar will discuss the proper arrangements that manufacturers and DME suppliers can enter into…and those arrangements that need to be avoided. For example, it is legally permissible for the manufacturer to offer volume-based discounts and rebates to suppliers. On the other hand, it is not permissible for a manufacturer (“offering manufacturer”) to offer discounts, rebates, or anything else of value to a supplier in exchange for the supplier “flipping” its customers from another manufacturer’s brand to the offering manufacturer’s brand. As yet another example, a manufacturer can generate leads for a DME supplier so long as the arrangement does not “cross the line” into kickback territory. And a manufacturer and a supplier can enter into a cooperative marketing arrangement so long as they jointly pay the expenses of the program. This program will cover these…and other…examples.
FEES: Member: $99.00 Non-Member: $129.00
AAHOMECARE’S EDUCATIONAL WEBINAR
How to Fight the Awarding of a Sole Source Contract by a State Medicaid Program
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C. & Pam F. Colbert, Esq., Brown & Fortunato, P.C.
Tuesday, October 23, 2018
2:30-3:30 p.m. EASTERN TIME
It is the proverbial “Irresistible Force Meeting the Immovable Object:” State Medicaid rolls are continuing to expand…but Medicaid programs are constrained by limited money. In an attempt to contain costs, State Medicaid programs are contracting with Medicaid Managed Care Plans (“Plans”) to provide health care services and products to beneficiaries under a capitation payment (fee per member per month). The Plan then contracts with providers and suppliers to provide the products and services to Medicaid beneficiaries. Plans focus on profits. In order to generate profits, Plans are (i) cutting reimbursement and (ii) contracting with a small number of providers and suppliers…and in some cases, Plans contract with only one provider/supplier. If a DME supplier is facing drastically reduced reimbursement and/or being bumped off of Plan’s panel, the supplier needs to know what responsive steps to take. This program will (i) discuss what a Plan is and how a state Medicaid program will contract with it; (ii) examples of Plans drastically reducing reimbursement and limiting the number of DME suppliers on their panels; and (iii) steps that the supplier can take to respond to the Plan’s actions. These steps include (i) utilizing the Plan’s appeal/grievance process; (ii) determining if the state has an applicable “any willing provider” statute; (iii) filing a complaint with the State Insurance Commission; (iv) lobbying the State Medicaid program; (v) lobbying the state legislature; (vi) lobbying CMS; (vii) conducting public awareness campaigns; and (viii) contacting Medicaid beneficiaries directly.
Register for How to Fight the Awarding of a Sole Source Contract by a State Medicaid Program on Tuesday, October 23, 2018, 2:30-3:30 p.m. ET, with Jeffrey S. Baird, Esq. and Pam F. Colbert, Esq., of Brown & Fortunato, PC.
Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or firstname.lastname@example.org.