Q&A: Buying and Selling an HME Company

AMARILLO, Texas — According to health care attorney Jeff
Baird of Brown
& Fortunato, there are any number of reasons behind the
decision to buy or sell an HME company. “An entrepreneur may have
built a business up from scratch and is now ready to cash out and
walk 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 on Fiji),” said Baird.

“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,” he continued.
“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, Baird points out, and he highlights them in the
following Q&A.

Q: What is the difference between a “stock purchase” and
an “asset purchase?”

A: 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 (e.g., inventory, desks, insurance contracts, patient files)
to XYZ.

When this happens, then ABC will end up being a shell
corporation; it will end up having no assets other than the money
paid by XYZ. On the other hand, if XYZ purchases the stock of ABC,
then the seller is John Smith. At closing, he will give his stock
certificate to XYZ. When this happens, ABC will remain 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.

Q: When the assets or stock of ABC are sold to XYZ, does
XYZ inherit ABC’s skeletons?

A: 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 (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.

Q: What if it is important to XYZ that it be able to use
ABC’s Medicare supplier number?

A: 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); let’s 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. Absent a creative solution (there are a couple of
them), 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 National Supplier Clearinghouse. So long as prior notice is
given to the AO, then the accreditation should remain in place,
although there will probably be a subsequent site visit.

Q: Whether it is a stock or asset sale, how can ABC make
itself attractive to a prospective purchaser (such as
XYZ)?

A: 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 payer audit and
whether they are sufficient to allow XYZ to continue billing safely
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; and 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 (that 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.

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 pharmacies, infusion companies, home medical equipment
companies and other health care providers throughout the United
States. Baird is Board Certified in Health Law by the Texas Board
of Legal Specialization. He can be reached at 806/345-6320 or
[email protected].

Do you have a legal question about an HME issue? Send your
questions to HomeCare
Monday for an answer from health law firm Brown &
Fortunato. (No names will be used if your question is
published.)