Health Law Blog - Healthcare Legal Issues

Archive for January, 2014

Medicare Successor Liability In Healthcare Transactions

Thursday, January 30th, 2014

Medicare Successor Liability In Healthcare Transactions

 successor liability chow acquisitions health care medicareNormally in an asset transaction, the acquiring party will only assume the liabilities that it agrees to assume pursuant to the transaction documents.  The due diligence and closing process identifies potential liabilities that could attach to the assets being acquired.  Identified liabilities are normally released as a condition of closing.  For example, if the seller has bank financing that creates a lien on assets, the buyer requires the liability to be paid off and the lien to be released prior to closing so that the purchaser does not take the assets subject to the liability.

The situation is somewhat different when it comes to Medicare liabilities.  Generally, where a change of ownership (commonly referred to as a CHOW) occurs as defined under Medicare regulations, the purchaser is deemed to assume most liabilities under the Medicare program, even if the contracts say otherwise.  When it comes to Medicare, an asset agreement is normally considered to be a CHOW.  As such, the Medicare liabilities are automatically assumed by the purchaser unless an affirmative election is made by the buyer well in advance of closing.

The automatic assumption of Medicare obligations will only apply when a “provider” is being sold.  Medicare regulations specifically define what constitutes a “provider.”  A provider is generally limited to entities who receive reimbursement under Part A, such as hospitals, home health agencies, hospices, skilled nursing facilities, and a handful of others.  Physicians and others who are not specifically listed as “providers” will not be subject to the automatic assignment of the provider’s provider agreement and corresponding liabilities.  We must still be concerned about potential successor liabilities in the case of non “providers,” but for reasons that are much different than the Medicare successor liability rules.

Parties who are acquiring providers can exclude themselves from the automatic assignment of the provider agreement, but they must follow the correct procedures.  Primarily, the acquiring organization must affirmatively reject automatic assignment by properly notifying Medicare.  Notifying the seller or putting a clause in a contract does not suffice.  The rejection must be delivered to the CMS regional office within forty-five (45) days before the transaction is to be closed.  Rejection of the provider agreement comes with some serious negatives that should be weighed by the acquirer.  The primary downside is that the acquiring entity may have interruption in revenues because a new provider application and complete survey will need to be conducted before Medicare authorization is resumed.  In short, the acquiring provider must decide whether to take on past liabilities or assume the loss of revenues during the re-certification process.

In many cases, the due diligence process will help the acquiring organization make a determination of whether to reject the provider agreement.  If the selling organization historically operated a highly effective and robust compliance program, the purchasing organization may be more comfortable assuming the risk of successor liability.  A good and experienced compliance officer can assist counsel in the process of identifying specific risk areas.  If the selling provider has paid little or no attention to high risk areas, the acquiring provider might consider rejecting the provider agreement and corresponding liabilities.  Alternatively, the acquiring party could decide to push further into the due diligence of these high risk areas by requiring risk area specific audits to help quantify any risk that could be present in these identified areas.  Depending on the outcome of the risk specific audit process, the acquiring provider may decide to take several different approaches.

If problems are discovered but it is important for the transaction to go forward anyway, the buyer may insist upon the seller going through a repayment and/or self disclosure process as a condition of consummating the transaction.  Clearly, this approach will lead to significant delays and may meet resistance from the sellers.

In some cases, the buyer may agree to go forward with the transaction but make adjustments to the transaction.  These adjustments might involve adjustments to the purchase price, strengthening of representations, warranties, or indemnifications, among other options.  The outcome will depend on the extent of the potential problem and the ability of the seller to make good on post-closing obligations, such as indemnifications.  Often times, the seller will be selling its only significant assets and will have limited liability to honor a post closing covenant or indemnity.  Some transactions may permit the posting of security to assure post closing obligations.  Nevertheless, purchasers should be extremely careful before assuming unknown liabilities for acts that occurred prior to closing.  The discovery of problems may foretell additional problems that lie dormant until after closing.

The safest route for a buyer to take is to thoroughly due diligence and require complete remediation of any significant compliance issue that could result in successor liability prior to closing.  In any event, compliance trained individuals should be involved in the due diligence and assessment process.

Referral Fee Fine Despite Kickback Concerns – OIG Advisory Opinion 14-01

Friday, January 24th, 2014

Independent Placement Agency Fee By Senior House Approved By OIG

senior housing kickback oig opinionThe Office of Inspector General posted its first advisory opinion of the year this past Tuesday.  OIG Advisory Opinion No. 14-01 responds to a nonprofit senior housing and geriatric care provider’s question of whether it may pay an independent placement agency a fee for referring new residents to its facilities.  Despite concerns that the arrangement could potentially generate prohibited remuneration under the anti-kickback statute, the OIG opinion states it would not impose sanctions in connection with the arrangement.

Here’s the facts:

  • The senior care provider operates 11 senior residential communities, two skilled nursing facilities, and a management company.
  • The residential communities offer to their residents various services – including skilled nursing services (e.g. wound care) and help with daily living activities (e.g. housekeeping).
  • A Medicaid program pays for services provided to residents in three of the residential communities.  Other than this, the skilled nursing facilities are the only entities that provide federally reimbursed health care services to residents.
  • Two of the residential communities pay an independent placement agency for referring new residents.  The placement agency receives a fee for every referral – a percentage of the new resident’s charges for his or her initial month or two.
  • The placement agency is prohibited from referring, and the residential communities are prohibited from accepting, residents who are known to rely on Medicaid, Medicare, or other state or federal funding.
  • Neither of the residential communities provide services reimbursed by Medicare.

Although the two residential communities pay a placement fee for a resident who may in the future receive federally reimbursed services from one of the senior care provider entities (which would potentially be illegal remuneration under anti-kickback laws), the OIG advisory opinion indicates that this referral arrangement is fine because:

  1. The placement fee is calculated only considering initial rent and services.
  2. The contracts underlying the arrangement prohibit both placement and acceptance of potential residents who are known to rely on government funding for their health care.
  3. Neither of the residential communities using the referral arrangement provide services reimbursed by Medicare.
  4. The senior care provider does not track referrals or common residents or patients nor do they limit their residents’ choice of providers.

Please feel free to contact John Fisher, CHC, CCEP, in the Ruder Ware Health Care Industry Focus Group for more information.

Primary Care Integration Strategies – Divisional Group Practice Mergers

Tuesday, January 7th, 2014

Division Model Group Practice – Primary Care Integration Strategies 

Primary Care Integration Divisional Model It is no secret that the role of primary care is central to the creation of systems to respond to health care reform and changing reimbursement models.  To the extent primary care providers have not already relinquished their strategic positions by becoming employed, entering provider service agreements or service line management agreements with hospital controlled systems, primary care providers maintain a strong position in the market.

Primary care groups are still faced with the need to create or participate in organizations that provide for the best means to manage patient care.  Primary care groups are seeking strength in numbers by creating larger groups.  The goal is to best maintain their competitive position, to diversify risk, to create efficiencies through shared savings opportunities, and to maintain appropriate levels of influence over care cycles, protocols and division of emerging, episodic-based payment.

In order to achieve these goals, some independent primary care groups are considering merger with other groups.  Oftentimes, merging providers will seek ways to maintain some degree of intra-office independence while still taking advantage of the benefit of a larger group.

Provider mergers and acquisitions, particularly between competing independent practices in the same specialty area, can create sensitive antitrust issues.  Generally, competing providers are prohibited from agreeing to the price of services.  However, otherwise competing providers who legitimately merge into a single group are legally incapable of conspiring because they are a single entity.

The tension between the desire to maintain a degree of independence and the need to effectively merge practices leads to consideration of what has become known as a “divisional merger.”  A divisional merger is similar in many ways to the concept of a group practice without walls that was prevalent during the 1990s.  Under this model, individual offices or groups of offices form divisions that maintain some degree of operational and financial independence.  Structuring divisional model groups can be extremely tricky.  Balance needs to be created in the amount of financial, governance, and operational authority that is ceded to the central board of directors and maintained in the divisions.  If too much authority is maintained at the divisional level, there is a risk that a “failed merger” will have taken place.  If a failed merger is found, the individual providers or divisions will be considered to be independent and capable of conspiring in violation of antitrust laws.

Divisional mergers raise a host of additional legal and business issues.  A divisional model group must be structured to comply with Stark Law and Anti-Kickback prohibitions.  Generally, the group and its financial structure must comply with applicable Stark Law exceptions and must be structured as a qualifying “group practice.”  An issue that arises in virtually all divisional model structures involves the treatment of ancillary revenues; in particular, “designated health service” revenues under the Stark Law.  Although primary care practices tend not to generate as much DHS revenue as specialty practices, clinical laboratory and diagnostic revenues are common.

A divisional merger will be subject to all of the same transactional and due diligence issues that apply to any other type of merger or acquisition.  Each participant will need to assess the risk associated with merging under one entity with other participants.  This involves a lengthy process of due diligence and addressing issues that are raised through the process.  Oftentimes, numerous sets of legal counsel are involved in the structural and transactional issues.


In the end, assuming that the divisional merger is properly structured, the combined entity can create significant benefits to primary care participants.

John H. Fisher

Health Care Counsel
Ruder Ware, L.L.S.C.
500 First Street, Suite 8000
P.O. Box 8050
Wausau, WI 54402-8050

Tel 715.845.4336
Fax 715.845.2718

Ruder Ware is a member of Meritas Law Firms Worldwide

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