Medicare Liability (and more) Buyer Beware

medicareBy: Jeff Cohen

Healthcare businesses are bought and sold every day!  Though sophisticated people are fully aware of the risk difference between an entity sale and an asset sale, some do not understand the lingering nature of Medicare related liability.

When a legal entity (company, limited liability company, whatever) is bought, the liabilities of that entity are often assumed by the buyer.  This is because buyers that purchase selling healthcare entities like the idea of keeping both term managed care agreements and the Medicare provider number intact.  Keeping them intact can help ensure continual cash flow of the seller, but will also create Medicare liability to the buyer. 

Buyers usually think the presence of representations and warranties and indemnification provisions in transaction documents will be enough to protect the buyer in the event of a governmental investigation or civil penalties.  “I don’t have to worry about it.  The buyer assumed all those liabilities.”  Wrong.  When a healthcare company is sold, if the Medicare participation agreement is assumed by the buyer (typically to avoid any cash flow interruption in the face of about four months of the application process), the buyer automatically assumes all related liabilities, REGARDLESS of what the transaction documents state.  For this reason, buyers must be extremely cautious when considering an entity purchase (as opposed to an asset purchase—where the stuff owned by the company is bought, but the company itself is not bought).  Buyers of entities must seriously consider at least:

  • An independent audit of the selling entity;
  • Thorough reps and warranties;
  • Extensive indemnification provisions; and
  • Prefunding the indemnification provisions with purchase price holdbacks and such.

Another frustration for both sellers and buyers of healthcare businesses is the Florida Health Care Clinic Act.  The law requires healthcare businesses to obtain a health care clinic licensed (HCCL) if healthcare items or services are provided and claims submitted for reimbursement (to insurers).  Cash only services and items where no assistance is provided in connection with insurance claims submission generally escapes the law’s grasp.  The biggest exception to the law is where the business is owned by a physician and his/her spouse, child, etc.

So why is the HCCL law a problem?  Because (1) many purchasers of healthcare businesses are not exempt physicians, and (2) it takes time for a new HCCL application to be filed and processed (at least 60 days) of for change of ownership (CHOW) for an existing HLLC to be filed and processed.  Buyers and sellers that aren’t aware of this state law issue and do not plan for it will be frustrated.  And while temporary management arrangements (where the buyer becomes manager, not owner) can work while the HCCL application is pending, it’s more efficient just to plan for the HCCL or CHOW in the first place.

What’s the lesson:  be aware of the first things first.  Measure twice; cut once!

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