Health Law Blog - Healthcare Legal Issues

Archive for the ‘Mergers and Acquisitions’ Category

Primary Care Integration Strategies – The Division Model Group Practice

Wednesday, May 21st, 2014

 Divisional Merger IntegrationIt 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.

Clinical Integration – Key Factors of Integrated Networks

Monday, May 19th, 2014

Key Clinical Integration Factors

Here are just a few of the key factors that are indicative of clinical integration.

  • Collaboration and Coordinated Care
  • Care Protocols
  • Provider Selection Criteria
  • Enforcement of Standards
  • Use of Shared Data
  • Robust Quality and Efficiency Standards
  • Provider Training
  • Continual Process

I am releasing a series of articles on various legal aspects of clinically integrated networks.  Sign up for our Newsletter or grab the RSS feed to receive notification when I publish articles in the series.

 

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.

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.

Clinical Integration Elements – FTC Actions

Monday, December 16th, 2013

clinical integration structuresElements of Clinical Integration

Identified in FTC Reviews; No Action Letters

 

With the release by the FTC of the Norman PHO letter, I thought it would be appropriate to summarize some of the key factors relevant to clinical integration decisions.  This list is not necessarily exhaustive.  Additionally, it is worth pointing out that clinical integration factors are slightly different as applied to Accountable Care Organizations.  The Norman PHO letter was released about 9 months ago.  It involved a physician-hospital organization that had historically operated as a messenger model contracting mechanism for its providers.  The PHO wanted to implement higher levels of clinical integration and sought an opinion from the FTC as to whether its structure raised risk under the antitrust laws.  The resulting opinion from the FTC is perhaps the most complete iteration to date of the various factors that the FTC considers when examining levels of clinical integration.

 Clinical Integration factors include:

1.         The organization is accountable for the quality and cost of services.

2.         Accountability for overall care of patients.

3.         Strong primary care component (sufficient to support specialty network).

4.         Central governance, leadership and management of system.

5.         Central clinical and administrative systems.

6.         Ability to report on outcomes, quality, utilization, and clinical process.

7.         Actively promotes evidence-based medicine through continual process.

8.         Coordinates care across system.

9.         Information technology and central data analysis.

10.       Financial investment or financial risk by members.

11.       Degree of exclusivity.  Exclusivity begins to indicate clinical integration.

12.       Joint contracting is required to meet system goals and create efficiencies.

13.       Systems are in place to enforce member obligations to comply.

Factors taken from Norman PHO, Tri-State, GRIPA, MedSouth and treatises on clinical integration.  Also uses factors required of ACOs as guidance although ACO requirements differ.

Role of Compliance Officer In Mergers and Acquisitions

Wednesday, May 22nd, 2013

The Role of the Compliance Office in Mergers and Acquisitions

compliance due diligence mergers acquisitionsHealth care reform initiatives have accelerated consolidation within the health care industry in a way we have not seen since the 1990s.  Consolidations take a number of forms.  Regardless of the structure, consolidation activities can involve the assumption of compliance risk by the acquiring party.

Current consolidation is taking place in a more complex regulatory environment that existed during the 1990s.  The government has new fraud enforcement tools and has indicated that it is not afraid to use them.  Providers are subject to a much higher degree of regulatory risk than has ever existed.  Additionally, compliance as a separate and distinct professional has developed since the 1990s.

The rise of the compliance profession as a separate and distinct profession from the legal profession has caused a degree of tension between the roles of the compliance and legal professions.  The relative roles of legal counsel and the compliance office continue to be defined.  The merger and acquisition process is one area where those roles collide.

The merger and acquisition process, including the due diligence process, has historically been in the domain of the attorneys.  However, the need to be proactive in regulatory compliance speaks loudly for a strong compliance officer presence on every merger and acquisition team.

Compliance role in an acquisition includes both assessment and integration.  Compliance assesses the effectiveness of the target’s past compliance efforts as a necessary step toward mitigation of the inheritance of past compliance liabilities.  Based on this assessment, the compliance officer will make judgments regarding the potential impact on the structure of the transaction and additional risk areas that may require further assessment.  The scope of compliance due diligence is a judgment call that is most appropriately made in consultation between compliance and legal.  The difficult issue is not whether due diligence should be conducted but rather “what diligence is due” under all of the facts and circumstances.  These decisions require the perspective of both compliance and legal.

If a judgment is made that past compliance efforts have been robust, the compliance officer may be more comfortable with a lower level of risk area audits.  If the target had an “on the self only” compliance program, the compliance officer will likely find it necessary to drill down further into specific risk areas.  The key here is that this decision requires the judgment of an experienced compliance professional.

The second role of compliance in mergers and acquisitions is integrative.  The pre-closing stage is a key time for the compliance officer to integrate the target into the compliance culture of the acquiring entity.  Compliance due diligence will likely include interviews of the target’s compliance department, upper management, and other key employees.  These interviews can serve an important integrative role of introducing the target to the compliance culture of the acquiring entity.  The information that is collected will form the beginning of a compliance “work plan” for the new division and will help the compliance office identify specific risk areas that may require further examination either before or after closing.  The same information will help compliance integrate the new division into its overall compliance work plan.

I do not want to suggest by any means that compliance take over the merger and acquisition process.  A multi-disciplinary team approach, with legal assuming lead transactional role, is most appropriate.  Legal counsel must recognize the value of the compliance office and the separate and distinct skill that compliance brings to the closing table.  In reality, this is the key to the larger issue of division of roles between compliance and legal.  Each is a separate and distinct professional area with a unique skill set.  In the context of a health care organization, each profession depends on the other to fully perform their role.

Compliance Audits in Mergers and Acquisitions

Thursday, May 16th, 2013

Compliance Audits in Mergers and Acquisitions

Compliance Mergers Acquisitions Due DiligenceThere is a current trend in the health care industry toward mergers and acquisitions.  As providers consolidate acquisition issues, such as due diligence, become major issues.  Transitional attorneys are well versed in the routine of transactional due diligence.  Health care and compliance attorneys are often asked to become involved in defining the appropriate scope of health care compliance due diligence in the context of a merger and acquisition transaction.

The structure of the contemplated transaction has a major impact on the scope of due diligence that should be performed regarding health care compliance areas.  Where the Medicare provider number of the acquired organization is part of the deal, robust audits of billing and compliance practices is necessary to identify any potential false billing or overpayment claims.  In this type of transaction, the acquiring provider will certainly have successor liability for all matters that took place (or did not take place) with respect to the provider number prior to closing.

Even when the provider number is not acquired, the transaction needs to be structured in a way that minimizes exposure to successor liability under state law.  Even when structured in a manner that insulates a provider from past liabilities, as a practical matter, the past methods of doing things will be carried on the acquiring entity following the acquisition.  Billing practices will carry forward for some period of time.  Referral relationships may exist without a written agreement being in place as required under state law exceptions or safe harbor rules.  It will take some period of time to identify specific problems that might be carried forward into the new organization, even under the most robust compliance program.

In any event, the compliance perspective should be involved to provide insight as part of every health care acquisition.  The scope of compliance needs to be appropriately scaled to reduce potential risk exposure to the acquiring organizations.

For more information regarding health care mergers and acquisitions, contact John Fisher, II at Ruder Ware.

Physician Specialty Group Affiliations and ACO Involvement

Wednesday, July 18th, 2012

Specialty Affiliations and Mergers – Consider How You Fit Into An Accountable Care Organization

Merging Physician Specialty PracticesOne result of health care reform is a resurgence in affiliations and mergers of specialty practices throughout the country.  The structures of various physician specialty consolidations take a variety of forms, from IPAs, to divisional model groups, through completely integrated group practices.  Each structure raises its own legal considerations and challenges.  Regardless of what structure is used to consolidate specialty practices, the end result must be to create a facility to assure optimal participation under a reformed health care system.  This necessarily will include assuring participation in an Accountable Care Organization.

Specialty groups need to create a structure that does not exclude them from participation in an ACO.  One thing to consider when structuring a specialty group affiliation is the size and market share of the group in relation to the ACO antitrust safety zone that was issued by the Federal Trade Commission and the Department of Justice.  The ACO safety zone provides that an organization that meets the requirements to be an Accountable Care Organization will be considered to be “clinically integrated” under the antitrust laws. The DOJ and FTC state that they will not challenge ACOs that fall within the safety zone, absent extraordinary circumstances.

Normally, an organization that consists of independent competing physicians and other providers cannot jointly contract because an agreement on pricing issues amounts to a per se violation of the antitrust laws.  The goal in structuring such an organization is to provide for clinical and/or financial integration that is sufficient to take the organization out of the per se analysis into what is called the “rule of reason” analysis.  The per se rule means that the organization is automatically deemed to violate the antitrust laws.  On the other hand, the rule of reason involves a weighing of the pro-competitive affects of the organization against the anti-competitive affects.  The ACO Safety Zone amounts to a proclamation by the agencies that groups that meet the requirements to be an ACO will be judged under the more lenient “rule of reason.”

The ACO Safety Zone does not stop there.  It goes on to define when an organization will receive favorable analysis under the rule of reason.  For an ACO to fall within the safety zone, independent ACO participants that provide the same service (a “common service”) must have a combined share of 30 percent or less of each common service in each participant’s service area (“PSA”) wherever two or more ACO participants provide that service to patients from that PSA. The PSA for each participant is defined as the lowest number of postal zip codes from which the participant draws at least 75 percent of its patients, separately for all physician, inpatient, or outpatient services. Thus, for purposes of determining whether the ACO is eligible for the safety zone, each independent physician solo practice, each fully integrated physician group practice, each inpatient facility, and each outpatient facility will have its own PSA.

The Safety Zone adds some elements of certainty that did not exist under the usual “rule of reason” analysis.  For example, the Safety Zone contains a definition of the “market” to be used for purposes of safety zone analysis.  Normally the definition of “market” is a factual issue which makes an antitrust analysis difficult.  For ACO Safety Zone purposes we know that the market is considered to be the lowest number of postal zip codes from which the participant draws at least 75 percent of its patients.

Specialty organizations should keep these numbers in mind when determining the breadth of participation in their organizations.  Less integrated groups such as IPA and divisional model groups should perform this analysis and structure their groups to fall within the ACO Safety Zone.  Larger groups will have troubles plugging into an ACO that wishes to take advantage of the ACO Safety Zone.

These requirements only apply to independent groups.  A fully integrated physician group is considered to be a “single actor” for purposes of the antitrust and is therefore unable to conspire with itself on pricing issues.  This begs the question of what constitutes a “fully integrated” group for purposes of the antitrust laws.  Certainly a group that results from the merger of various practices, all who become employees of the new organization, without the creation of a divisional structure, would be considered to be a “fully integrated group.”  On the other hand, an IPA of individual practices or smaller groups would not be considered to be a “fully integrated” group.  Structures that fall between these two extremes constitute a “gray area.”  A Divisional Model Group or a Group Practice Without Walls, that has very little centralization of governance or activities and maintains most of its structure at the division or practice site level, could potentially raise questions as to whether sufficient levels of integration have been achieved to create a “fully integrated” group.

Because of the sensitivity of IPAs and divisional model structures, it is important that groups consult with competent health care or antitrust counsel who has sufficient sensitivity to these issues.  Failure to properly design a group can lead to future questions about the group’s ACO participation.  For example, if a divisional model contains more than 30% of the providers in the relevant PSA and is “collapsed” for antitrust purposes, the group’s participation in the ACO may be questioned by the ACO organizers.  Divisional models are being used frequently as a method to consolidate physicians because of the relative ease of implementing the structure.  Recently, there have been rumors that the FTC may be examining divisional groups to determine whether they are integrated enough to support them being considered a “fully integrated” group.

The same analysis applies to an IPA which is not financially integrated and includes over 30% of the providers in the local market.  In the end, you do not want to have your purposes of forming the group frustrated because these issues were not properly considered when structuring the organization.

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

Search
Disclaimer
The Health Care Law Blog is made available by Ruder Ware for educational purposes and to provide a general understanding of some of the legal issues relating to the health care industry. This site does not provide specific legal advice and you should not use the information contained on this site to address your specific situation without consulting with legal counsel that is well versed in health care law and regulation. By using the Health Care Law Blog site you understand that there is no attorney client relationship between you and Ruder Ware or any individual attorney. Postings on this site do not represent the views of our clients. This site links to other information resources on the Internet; these sites are not endorsed or supported by Ruder Ware, and Ruder Ware does not vouch for the accuracy or reliability of any information provided therein. For further information regarding the articles on this blog, contact Ruder Ware through our primary website.