Health Law Highlights

FTC and DOJ Seek Public Help Identifying “Serial Acquisition Strategy” Targets

Summary of article from Seyfarth Shaw LLP, by Brandon Bigelow, Robyn Marsh:

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) are expanding their investigation into businesses using “roll up” strategies to consolidate competitors and reduce competition across the U.S. economy. Previously, these agencies focused on the healthcare industry, but the new Request for Information invites the public to submit examples of companies using serial acquisition strategies in any industry. This move follows the FTC’s aggressive litigation against such strategies in the healthcare industry, as demonstrated in the case of FTC v. U.S. Anesthesia Partners, Inc. The May 23 Request for Information seeks input from a wide range of sources and invites them to identify specific examples of these strategies and their impact on competition. Public responses, due by July 22, 2024, may influence the government’s enforcement priorities and future actions across various markets and industries.

Health Law Highlights

Five Key Analyses for Healthcare Financial Due Diligence

Summary of article from VMG Health, by Grayson Terrell, CPA:

In the complex landscape of healthcare mergers and acquisitions (M&A), informed decision-making and financial due diligence (FDD) are crucial for both buyers and sellers. FDD involves a detailed investigation of a company’s financial information to validate its true operating potential, with the purchase price usually based on a multiple of the company’s EBITDA. Five key aspects of FDD include Quality of Earnings, Quality of Revenue, Pro Forma Considerations, Net Working Capital, and Debt and Debt-Like Items. These elements help normalize earnings, convert revenues, project future business directions, determine necessary operating capital, and understand a company’s debts and liabilities. Overall, FDD is a necessary step for achieving successful, lucrative transactions in the healthcare sector.

Health Law Highlights

Navigating Tax Due Diligence in Healthcare Acquisitions

Summary of article from VMG Health, by Grayson Terrell, CPA; Joe Scott, CPA; Lukas Recio, CPA; Wayne Prior, CPA; and the Baker Tilly team:

Healthcare M&A transactions require a collaborative approach between financial and tax due diligence experts to identify potential problems and their tax consequences, which can impact the deal structure and negotiation process. Tax considerations, such as whether a sale is taxable or tax-free, greatly influence the structure of a sale. The tax entity type of the target (S corporation, Partnership, or C corporation) is crucial to understand as it affects the arising tax issues. Common healthcare tax due diligence issues include improper independent contractor classification, unclaimed property, improper treatment of owner personal expenses, unreasonable owner compensation, related-party transactions, cash vs. accrual accounting method, pass-through entity tax, 20 percent deduction under Section 199A, built-in gains tax, and non-resident withholding. Each of these issues requires careful consideration and vetting to avoid potential adverse tax implications for the buyer.

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Physician Group Integration: Trends & Challenges

Summary of article from VMG Health, by Cordell J. Mack:

Hospitals and health systems have been integrating with physician groups in an effort to improve healthcare quality, service, and efficiency, with mixed results. Despite this, health system employment of physicians continues to rise, currently accounting for over 50% of all practicing physicians. However, the multispecialty group structure commonly used in these systems presents challenges, including financial misalignment across subspecialties and inconsistent financial reporting. VMG Health suggests an alternative approach involving reorganization of physician enterprise offerings within integrated delivery systems, focusing on improved governance, financial reporting, and physician loyalty. This evolving landscape of physician organizational structures within health systems aims to enhance operational efficiency, growth, and care delivery.

Health Law Highlights

Fast Five: Important Law and Policy Updates for US Health Care Transactions

Summary of article from ArentFox Schiff, by Michele L. Gipp, Jo-Ann Marchica, Kathryn L. Steffen:

The first quarter of 2024 has seen significant changes in the US health care sector, with new guidelines from the Department of Justice (DOJ) and Federal Trade Commission (FTC) potentially affecting mergers and acquisitions, particularly those involving small health care businesses and physician practices. Federal agencies have also sought public comment on health care transactions, focusing on the impact on various stakeholders and the objectives of these transactions, indicating a continued scrutiny on private equity investment. State authorities are also increasing their oversight of health care transactions, with several states implementing new laws or expanding existing ones. As health care organizations face escalating operating costs, they are considering streamlining services through transactions, but must be cautious of potential legal risks, including antitrust issues. Lastly, the resumption of Medicare and Medicaid audits in full force has increased the need for compliance in health care transactions.

Health Law Highlights

PE-Owned Health Care Saw Surge in 2023 Bankruptcies, Report Says

Summary of article from Mergers & Acquisitions, by Bloomberg News:

Private equity (PE)-backed businesses accounted for about 20% of the 80 bankruptcies in the healthcare sector in 2023, according to the Private Equity Stakeholder Project. Additionally, venture-capital backed companies made up another 15% of these filings. The report predicts this trend of healthcare bankruptcies will continue in 2024, especially among companies owned by PE firms. Two of the largest bankruptcies in 2023 were KKR Group’s Envision Healthcare Corp. and GenesisCare. The report also highlighted that increased regulation, high expenses, and the impact of the pandemic have contributed to the distress in the healthcare sector.

Health Law Highlights

The FTC Hosts Workshop on Private Equity in Health Care

From Sheppard Mullin Richter & Hampton LLP, by John Carroll, Joy Siu, Jake Walker:

On March 5, 2024, the Federal Trade Commission (FTC) hosted a workshop titled “Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care”. The event aimed to explore the effects of private equity (PE) investment on the health care system. The workshop brought together representatives from the FTC, Department of Justice (DOJ), Department of Health and Human Services (HHS), academia, and health care professionals. Concurrently, these agencies initiated a “Cross-Government Inquiry on Impact of Corporate Greed in Health Care”, issuing a Request for Information (RFI) to seek public opinions on health care deals involving PE firms.

The workshop revealed a general skepticism from the agencies towards the escalating involvement of PE in the health care industry. They expressed concerns about potential negative impacts, such as increased consolidation and poorer patient outcomes. FTC Chair Lina Khan and Assistant Attorney General of the Antitrust Division of the DOJ, Jonathan Kanter, were among those who voiced worries about the potential for profit motives to override medical judgment and the detrimental effects of PE ownership on patient care.

The workshop also highlighted that antitrust enforcement is looking to address certain practices employed by PE firms in the health care sector. These include serial acquisitions of provider practices, short-term acquisitions with high debt aimed at quick profit and resale, investments in competing companies within the same industry, and PE representation on the boards of competing companies. Testimonies from health care professionals further supported these concerns, citing instances of reduced staffing and lower quality of care following PE acquisitions.

During a discussion, FTC Commissioner Rebecca Slaughter and Rhode Island Attorney General Peter Neronha addressed how Rhode Island’s Hospital Conversions Act allowed the state to impose conditions on a private equity transaction. They advocated for similar legislation and encouraged state attorneys general to use state antitrust and consumer protection laws to combat PE consolidation in the health care system.

The workshop and RFI emphasize an increasing federal and state oversight of PE transactions, particularly in the health care sector. Several states have proposed new legislation to provide state attorneys general with more power to investigate and potentially block investments by PE firms in the health care industry. The goal of the RFI, as stated by Jonathan Kanter, is to understand the modern market realities of the health care industry and enforce the law against unlawful deals. PE firms, sellers, and portfolio companies should be aware of these potential obstacles when considering health care transactions.

Health Law Highlights

Public Sector Predictions for Healthcare Utilization in 2024

From VMG Health, by Jordan Tussy, Colin McDermott, Madi Whyde:

VMG Health’s analysis of 2024 healthcare sector trends, based on earnings calls from various companies, suggests continued growth in utilization driven by patient backlogs, recovering macroeconomic trends, and an aging population. Key findings include:

  • Medical Equipment Suppliers and Distributors: Companies like Intuitive Surgical, Inc., Stryker Corporation, and Cardinal Health, Inc. reported strong demand and growth in 2023, driven by higher system utilization and robust demand for capital products. They expect these trends to continue into 2024.
  • Healthcare Operators: Operators like HCA Healthcare and Tenet Healthcare Corporation echoed the growth in utilization, particularly in the fourth quarter of 2023. They expect continued volume strength and investment in their programs, with growth in key specialties like gastrointestinal (GI) and ear, nose, and throat (ENT) services.
  • Payors: Payors like Humana Inc. and UnitedHealth Group noted higher-than-expected medical costs due to strong utilization, particularly in outpatient care for seniors, orthopedic, and cardiac procedures. They expect these trends to persist in 2024.
  • 2024 Expectations: Companies expect the growth trends of 2023 to persist throughout 2024, driven by elevated backlogs, stabilizing macroeconomic trends, and an aging population. They anticipate continued strong demand, healthy patient activity levels, and robust capital markets.

In conclusion, VMG Health anticipates that 2024 will be a strong utilization year for healthcare service providers, although higher utilization may lead to increased medical claims for payors.

Health Law Highlights

Corporate Transparency Act and Health Care Providers

From AHLA, by Christopher Conn and Patrick Dunbar:

The Corporate Transparency Act (CTA), effective from January 1, 2024, mandates domestic and foreign legal entities operating in the U.S. to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), with certain exemptions. This is to regulate “shell” companies often associated with illicit activities. Health care providers, unless exempt, will also need to comply with these disclosure requirements.

Two types of reporting companies exist under the CTA: domestic and foreign. Domestic entities are those created by filing organizational documents with a secretary of state, while foreign entities are organized under foreign laws but conduct business in the U.S. Health care providers organized as partnerships, sole proprietorships, or other entities not typically required to file with state governments may avoid being classified as a reporting company.

If classified as a reporting company, health care providers must identify their “beneficial owners” and report this information to FinCEN. A beneficial owner under the CTA is a person or entity that exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company.

Non-exempt reporting companies must file beneficial ownership information (BOI) reports with FinCEN, containing specific information about the company, its beneficial owners, and its applicants. Timing requirements for these disclosures vary based on the date of entity formation and changes to previously disclosed information.

The CTA imposes civil and criminal penalties for willful failure to report, or intentionally providing false or fraudulent BOI. Health care providers must ensure disclosure consistency across multiple regulatory and licensing bodies. They should also be aware of the administrative challenges posed by the CTA, including determining beneficial ownership and timely reporting of BOI updates.

Health Law Highlights

Overlooking Executive Comp Packages Puts M&A Deals at Risk

From Bloomberg Law, by Ian Sherwin (Reed Smith):

  • Compensation and Motivation: Understanding the compensation structures and philosophies of a target company is crucial in M&A transactions. This includes executive compensation, which can be a significant cost, involving base salary, bonuses, severance entitlements, and health and welfare programs. It’s also subject to various tax, securities, corporate, and employment-related rules and regulations.
  • Transaction Structures: The nature of the transaction, whether it’s an acquisition or a merger, impacts compensation-related decisions. For private companies, disclosure concerns are minimal, but public companies have significant disclosure obligations. For carve-outs, considerations include potential employment termination and re-hiring by the acquirer, who bears the cost of severance, and the form of consideration for equity awards.
  • Severance and Bonuses: Severance protections can help maintain employee performance during a transaction. The value and duration of severance can vary based on seniority and job level. Transaction and retention bonuses can also be used to motivate and retain key employees. The former encourages employees to complete the transaction, while the latter incentivizes them to stay through certain milestones.
  • Covenants: Buyers often set restrictions on what the target can do between the signing and closing of a transaction. These include changes to benefit plans, compensation, hiring or termination of employees, and equity awards. Targets often seek post-closing employment-related covenants, such as guaranteed compensation and benefit levels, and continued participation in severance programs.
  • Sections 280G and 4999: Golden parachute rules (Sections 280G and 4999 of the Internal Revenue Code) are a major focus in most transactions. If triggered, a 20% excise tax could apply to certain service providers, and the target may lose a compensatory tax deduction. Mitigation strategies can include reasonable compensation analyses, valuing non-competition agreements, and shifting compensation to the current tax year. Private companies may opt for a shareholder cleansing vote to avoid these issues.