Jeffrey S. Baird Esq. is chairman of the Health Care Group at Brown & Fortunato, P.C., a law firm based in Amarillo, Texas. He represents HME companies, pharmacies, infusion companies and other health care providers. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320.
There are many reasons to buy or sell an HME company. An entrepreneur may have built the business from scratch and is ready to cash out and stroll the beaches of Cancun. At the opposite end of the spectrum, the owner may be tired of the daily regulatory surprises that are hitting the HME industry and is ready to sell and do something else like selling coconuts in Fiji.
A prospective buyer may understand that the industry is experiencing a massive paradigm shift and that with 78 million “baby boomers” approaching old age, the demand for what the HME industry has to offer will increase exponentially. Therefore, the buyer feels that it is a good time to “get in.” Regardless of the reason behind wanting to sell—or to buy—there are basic legal considerations that the parties must understand.
QUESTION: What is the difference between a “stock purchase” and an “asset purchase?”
ANSWER: Let’s look at “ABC Medical Equipment Inc.” John Smith is the sole stockholder of ABC; he holds a stock certificate that says that he owns ABC. Let’s say that “XYZ Medical Equipment, Inc.” wants to purchase either the stock or the assets of ABC.
If XYZ purchases the assets, then the seller is ABC. At closing, ABC will execute a Bill of Sale that transfers all of its assets, such as inventory, desks, insurance contracts and patient files, to XYZ. When this happens, ABC becomes a “shell” corporation; it has no assets other than the money paid by XYZ.
On the other hand, if XYZ purchases the stock of ABC, then the seller is Smith. At closing, he will give his stock certificate to XYZ. When this happens, ABC remains intact; the only difference is that it is now owned by XYZ, rather than being owned by Smith. In other words, ABC is now a subsidiary corporation of XYZ.
QUESTION: When the assets or stock of ABC are sold to XYZ, does XYZ inherit ABC’s skeletons?
ANSWER: As a general rule, when XYZ buys the assets of ABC, XYZ inherits no liabilities other than those that XYZ chooses to inherit. For example, if 12 months after closing the government brings fraud allegations against ABC for actions committed by ABC before closing, then this is ABC’s problem—not XYZ’s problem.
Remember, in an asset sale, Smith continues to own ABC.
On the other hand, when XYZ buys Smith’s stock certificate—and ABC becomes a subsidiary corporation of XYZ—then ABC remains intact as an operating entity. This means that if 12 months after closing the government brings fraud allegations against ABC for actions committed by ABC before closing, then ABC, which is now owned by XYZ, will have exposure. XYZ can give itself some protection by requiring Smith to indemnify it against this type of liability. However, such indemnification is only as good as “Smith’s pockets are deep.” There is also a risk, although probably not a great risk, that after a stock sale, the government will attempt to impose ABC’s liability on XYZ. As a general rule, XYZ should be able to beat back such an attempt.
QUESTION: What if it is important to XYZ that it be able to use ABC’s Medicare supplier number?
ANSWER: A supplier number cannot be transferred or assigned. This means that in an asset purchase, XYZ must obtain its own supplier number and accreditation certificate for the physical location from which XYZ will operate using ABC’s assets.
Let’s say that XYZ purchases ABC’s assets and takes over ABC’s physical location (“ABC location”); lets further say that XYZ has another location that has a supplier number assigned to it and is accredited by an accrediting organization (“AO”). At closing, the AO will probably give provisional accreditation to the ABC location with a site visit to occur in the future. However, it will still take XYZ approximately six weeks to obtain a new supplier number at the ABC location. XYZ will not be able to bill Medicare out of the ABC location until it receives its supplier number. Once XYZ does receive its supplier number for the ABC location, then the accrued claims should be able to be submitted.
The preceding discussion has been focused on an asset purchase. Let’s now talk about a stock purchase. ABC’s Medicare supplier number is tied to its tax ID number. If XYZ purchases Smith’s stock certificate, then ABC remains intact and its supplier number remains intact. This means that there will be no break in billing. Of course, a change of ownership (CHOW) will need to be filed with the NSC. If prior notice is given to the AO, then the accreditation should remain in place, although there will probably be a subsequent site visit.
QUESTION: Whether it is a stock or asset sale, how can ABC make itself attractive to a prospective purchaser, such as XYZ?
ANSWER: ABC should have an outside CPA prepare a current balance sheet and a year-to-date profit and loss statement. Unless ABC is quite large, the financial statements normally do not need to be audited. ABC should have copies of federal and state income tax returns for the last three years. ABC should contract with an outside billing consultant for an onsite visit to conduct an audit of ABC’s documentation and billing procedures.
A valid concern of XYZ is whether ABC’s documentation and billing procedures can withstand a third party payor audit and whether they are sufficient to allow XYZ to safely continue billing after closing. If XYZ has concerns about ABC’s documentation and billing procedures, then XYZ may reduce its offering price in order to compensate for the concerns, delay the purchase or refuse to close on the purchase altogether. By having the audit performed, ABC can clear up many of XYZ’s anticipated concerns in advance. ABC needs to verify that it:
• Has an active Medicare supplier number for each of its locations
• Is accredited for each of its locations
• Has a surety bond for each of its locations
If ABC is a qualified provider to one or more state Medicaid programs, then it needs to verify that it has the requisite active Medicaid provider numbers. ABC needs to examine its relationship with each individual who is involved in marketing on behalf of ABC. With a narrow exception, which is hard to meet, ABC’s marketing reps must be bona fide full- or part-time employees, not independent contractors.
ABC needs to verify that it is not paying any remuneration to any referral source in exchange for referrals and/or arranging for referrals. Additionally, ABC needs to be able to assure XYZ that the referral sources are loyal to ABC because of the excellent service that ABC has given over the years to its customers; that the referral sources’ loyalty is not limited to Smith; and that, in all likelihood, the referral sources will continue to refer to ABC once it is sold to XYZ. ABC needs to verify that it has the appropriate documentation in the patients’ files. ABC needs to verify that it has all requisite licenses, permits, registrations and certificates to conduct its business.
Preferably, before negotiating with XYZ, ABC needs to resolve any ongoing audits, reviews or investigations by a PSC, CMS, DOJ, OIG, IRS or any other type of agency or entity. Preferably, before negotiating with XYZ, ABC needs to make a concerted effort to resolve any ongoing litigation. ABC needs to verify that its customers are satisfied with the services they receive from ABC. In short, XYZ will attempt to reduce the purchase price if it concludes that there are uncertainties that might affect the value of ABC subsequent to closing.
QUESTION: Procedurally, what steps do ABC and XYZ take to bring all of this to closing?
ANSWER: ABC and XYZ will execute a mutual nondisclosure agreement. This will allow ABC to forward financial and other confidential data to XYZ so that XYZ can make a preliminary determination as to whether it wishes to follow through with the acquisition. Assuming that XYZ wishes to proceed, then the parties will sign a non-binding letter of intent (LOI). The LOI will need to be as detailed as possible and contain as many of the actual terms as possible that the parties believe will be included in the Stock Purchase Agreement (SPA). Between the time that the parties execute the LOI and the SPA, XYZ will conduct due diligence. This will entail a number of steps, including the following:
• Reviewing patient files
• Reviewing correspondence and other documents with MACs, CMS, PSCs, state Medicaid programs and other government agencies
• Reviewing results of past third party payor audits
• Interviewing ABC’s employees
Assuming that XYZ is satisfied with its due diligence, then the parties will sign the SPA and will close. XYZ will likely pay about 75 percent of the purchase price at closing and pay the other 25 percent within six to 12 months after closing. XYZ will have the right to offset against the “back-end” portion of the purchase price in the event that ABC breaches the “reps and warranties” contained in the SPA.
Prior to closing, XYZ will ascertain which of the ABC employees XYZ wants to retain after closing. A condition of closing should be that the designated employees sign employment agreements with XYZ that include reasonable noncompete and nondisclosure provisions.