AMARILLO, TX – From a purchaser’s standpoint, acquiring a DME supplier has challenges that are not found in non-health care industries. Being dependent on Medicare, Medicare Advantage, and other third-party payors (collectively referred to as “TPPs”) is a mixed blessing.
TPPs can provide a steady flow of money. On the other hand, TPPs may, pursuant to a post-payment audit, recover revenue they have previously paid. Further, a supplier is vulnerable if a large portion of its gross revenue is dependent on a particular managed care contract. From a purchaser’s standpoint, financial statements (balance sheet and profit/loss statement) that initially look attractive might end up becoming less attractive.
If a supplier has engaged in past fraudulent practices (e.g., payment of kickbacks or billing fraud), it can be liable to the government for a great deal of money. When acquiring a supplier through a stock purchase, the acquired company carries with it the liabilities that arose prior to the purchase. When acquiring a supplier through an asset purchase, the purchasing entity is usually not liable for prior acts of the selling entity. Historically, most acquisitions of DME suppliers were asset acquisitions. This has flipped. Today, most acquisitions of DME suppliers are stock transactions.
What a Purchaser Looks for in Acquiring a DME Supplier
Product and Payor Mix
How much of the seller’s business is related to (i) traditional Medicare, (ii) Medicare Advantage, (iii) traditional Medicaid, (iv) Medicaid Managed Care, (v) products that are cash only, (vi) products that require a physician’s order, and (vii) products that do not require a physician’s order?
Provider and Supplier Number Issues
How many physical locations does the selling supplier have? Does the selling supplier have a Part B supplier number (“PTAN”) and a Medicaid provider number for each location?
Competitive Bid Contract
Is the selling supplier a party to a competitive bid contract? If so, what products does the contract cover and how many CBAs does the contract cover?
Is the selling supplier a qualified provider to one or more state Medicaid programs?
Commercial Insurance Contracts
How many commercial insurance contracts does the supplier have? Are the contracts Medicare Advantage contracts, Medicaid Managed Care contracts and/or employer-based group health contracts? Are the contracts hard to obtain? For example, are the panels closed? Are the contracts terminable upon e.g., 30 days notice? Are the contracts assignable in an asset purchase? Will the contracts remain in force following a stock purchase? Have any contracts been terminated? If so, why?
Employment and Independent Contractor Issues
Does the supplier market through W2 employees or 1099 independent contractors? If the latter, do the arrangements comply with the Personal Services and Management Contract, safe harbor to the federal anti-kickback statute? If the former, are the marketing reps truly bona fide employees?
Referral Source Issues
Does the supplier have any written or verbal agreements with health care referral sources such as physicians, hospitals, home health agencies or respiratory therapists? Do these arrangements comply with applicable federal and state kickback and self-referral laws?
Does the selling supplier have appropriate documentation in the patients’ files?
Numbers, Licensure and Sanction Issues
Have any numbers, licenses, permits, registrations or certificates of authority to operate any part of the selling supplier ever been revoked, suspended, investigated, or voluntarily surrendered?
Litigation, Audits and Reviews
What have been the results of past litigation, audits and reviews? Are there any ongoing litigation, audits and reviews? Are there any anticipated litigation, audits and reviews?
A purchaser will carefully examine a seller’s financial documents such as (i) Balance Sheet (Statement of Assets and Liabilities), (ii) Profit and Loss Statement (Statement of Income and Expenses), (iii) bank statements, and (iv) tax returns.
How a Supplier Can Make Itself Attractive to a Purchaser
The selling supplier should have a CPA prepare a current Balance Sheet (Statement of Assets and Liabilities) and a year-to-date Profit and Loss Statement (Statement of Income and Expenses).
Income Tax Returns
The selling supplier should have copies of federal and state tax returns for the last three calendar or fiscal years.
Documentation and Billing Audit
The selling supplier may want to contract with an outside billing consultant to conduct a mock audit of the supplier’s documentation and billing procedures.
The selling supplier needs to verify that it has an active Medicare PTAN for each of its locations from which it services Medicare beneficiaries.
Medicaid Provider Numbers
The selling supplier needs to verify that it has an active Medicaid provider number for each of its locations from which it services Medicaid patients.
Employees and Independent Contractors
The selling supplier needs to examine its relationship with each individual who is involved in marketing on behalf of the supplier (“marketing rep”). If the selling supplier designates a marketing rep as an employee, then the supplier must assure itself that the marketing rep will be classified by the IRS as a bona fide employee. If the selling supplier designates a marketing rep as an independent contractor, then the supplier must assure itself that the arrangement complies with the Personal Services and Management Contracts safe harbor to the federal anti-kickback statute.
The selling supplier needs to verify that it is not paying any remuneration to any referral source in exchange for referrals and/or arranging for referrals. Additionally, the selling supplier needs to be able to assure the purchaser that the referral sources are loyal to the supplier because of the excellent service the selling supplier has given over the years to its patients. In other words, the loyalty cannot be based on gifts/other remuneration from the selling supplier.
The selling supplier needs to verify that it has the appropriate documentation in the patients’ files.
Numbers, Licenses and Permits
The selling supplier needs to verify that it has all required numbers, licenses and permits.
Audits, Reviews and Investigations
Ideally, all audits, reviews and investigations will be resolved before the supplier attempts to sell.
Ideally, all litigation will be resolved before the supplier attempts to sell.
The purchaser will likely attempt to reduce the purchase price if the purchaser concludes there are uncertainties that might affect the value of the acquired supplier subsequent to closing. By addressing these issues prior to entering into negotiations with the purchaser, the selling supplier will be in the position to insist on the best purchase price possible.
Stock Versus Asset Acquisition
In an asset acquisition, as a general rule, the purchaser does not assume any liabilities of the seller except for the liabilities that the purchaser expressly agrees to assume. For example, if the seller has engaged in prior fraudulent activities, then generally speaking, the government will not attempt to impose successor liability on the purchaser.
PTANs are tied to tax identification numbers. In an asset acquisition of a DME supplier, the acquired DME operation will be continued under a new tax ID number (the purchaser’s tax ID number). If the purchaser moves the acquired DME operation to an existing DME location owned by the purchaser (for which the purchaser already has a PTAN), then there will be no requirement for the purchaser to apply for a new PTAN. However, as is often the case, if the acquired DME operation will be continued at the seller’s old location, or at a different location that does not already have a PTAN, then the purchaser will need to apply for a new PTAN for that location. Before submitting an application for a new PTAN, the purchaser must (i) be accredited for the location and (ii) have a state DME license for the location. In addition, the purchaser must have a surety bond for each location that has a PTAN issued to it.
During the period before the purchaser receives a new PTAN, depending on when the purchaser meets the preconditions for submitting an application for a PTAN, the purchaser can provide products and services to Medicare beneficiaries out of the new location, can accrue the claims to be submitted at a later date, and can submit the accumulated claims to Medicare after the new PTAN is received. In short, the purchaser will experience a break in cash flow.
On the other hand, in a stock acquisition, the DME operation remains with the same corporation (the entity whose stock is sold) and the PTAN remains attached to the same tax ID number. There is no break in billing and the purchaser does not experience a cash flow interruption. Normally, following a stock purchase, the numbers, licenses and insurance contracts of the selling supplier will remain in place. Before and after closing, the supplier will need to submit change of ownership (“CHOW”) notifications to agencies and commercial insurers. If the selling supplier engaged in prior activities that result in an overpayment or a recoupment demand or in an allegation of fraud, then the corporation that is purchased remains liable for the prior activities.
Steps to Bring an Acquisition to Fruition
The purchaser and seller will initially execute a confidentiality/non-disclosure agreement. This will allow the seller to forward financial and other confidential data to the purchaser so that the purchaser can make a preliminary determination as to whether it wishes to follow through with the acquisition. Once the purchaser decides that it wishes to follow through with the acquisition, the parties will sign a (mostly) non-binding letter of intent. Normally, when executing the letter of intent, the purchaser and the seller will have decided whether the acquisition is an asset acquisition or a stock acquisition.
Between the time of execution of the letter of intent and the time of execution of the definitive agreement, the purchaser will conduct due diligence. Financial Due Diligence entails the review of bank statements, cash flow statements, tax returns, and financial statements. Corporate Due Diligence entails reviewing documents to confirm that the seller is a legal entity in good standing. Regulatory Due Diligence entails reviewing documents to confirm that the seller is compliant with health care statutes and regulations.
The seller and purchaser will then execute the definitive agreement (i.e., Asset Purchase Agreement or Stock Purchase Agreement) and related closing documents. The purchaser will desire to pay a portion of the purchase price after closing. The definitive agreement will give the purchaser the right to offset against the “held back” portion of the purchase price in the event the purchaser sustains post-closing damages because of misrepresentations made by the seller prior to closing. On the other hand, the seller will desire to be paid as much of the purchase price as possible at closing.
At closing, the parties will execute the appropriate documents necessary to transfer assets or assign stock, assign leases or sublet premises, assign contracts and other documents necessary to transfer the business. Prior to closing, the purchaser will ascertain which employees of the seller that the purchaser wishes to retain. As a condition of closing, the purchaser may require that the principals of the seller remain as employees, for a period of time, of the purchaser (asset sale) or the acquired company (stock sale). As a condition of their employment, the principals of the seller can introduce the purchaser and the purchaser’s management and employees to key referral sources. Principals of the seller will likely need to execute reasonable non-compete/non-disclosure agreements.
Jeffrey S. Baird, Esq., is chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. 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.