Q&A: Attorney Jeff Baird’s Drill-Down on Buying and Selling

AMARILLO, Texas — Buying and selling an HME company is
much more complicated than in the past, according to health care
attorney Jeff Baird, but there are practical steps you can take to
avoid unanticipated pitfalls. “This information is based on
experience,” said Baird. “Even though I have handled the purchase
and sale of HME companies over the years, recently I have spent an
inordinate amount of time representing companies that are buying
and selling. In other words, I have been ‘wallowing in the muck’
trying to put together successful acquisitions and sales.”

Baird’s drill-down on specific issues that HME owners and
potential buyers may not be aware of is a follow-up to his Buying and
Selling an HME Company, December 2009.

Q: There seems to be an increasing number of HME
companies that are getting out of the business entirely, or that
are getting out of a particular product line. Why is
this?

A: I know that I am preaching to the choir
here, but the landscape has changed. The owners of many companies
that were barely getting by before all of the changes hit have
decided that they do not have the money, time or skill set to
maintain accreditation and a surety bond. Others see the
handwriting on the wall in terms of lower reimbursement now and in
the future. Still others do not want to have to deal with the
myriad audits that are coming at them from all directions.

In short, Congress and CMS have made it much more difficult for
HME companies to keep their doors open. Some owners have decided to
get out entirely or to jettison their unprofitable product lines
and focus on those product lines that will produce reasonable
profit margins.

Q: If ABC Medical Inc. wants to purchase XYZ Medical
Inc. in its entirety, should it be an asset or stock
acquisition?

A: Easy question, complicated answer. In an
asset sale, XYZ is the seller; it will sign a bill of sale and
transfer its assets (inventory, vehicles, patient files,
paperclips) to ABC.

In a stock sale, John Doe (who owns the shares of stock in XYZ)
is the seller. He will hand over his stock certificate to ABC; XYZ
will be a wholly owned subsidiary corporation of ABC.

In an asset sale, XYZ’s supplier number, accreditation and
surety bond cannot be transferred to ABC. In an asset sale, as a
general rule any third-party contracts (to which XYZ is a party)
cannot be transferred to ABC. In other words, in an asset
acquisition, all that ABC is buying are “things.” ABC must obtain a
supplier number, accreditation, surety bond and third-party
contracts on its own.

Compare this to a stock sale. In a stock sale, XYZ is not broken
up like it is in an asset sale. Rather, in a stock sale, XYZ
remains intact as an ongoing business entity. XYZ’s supplier
number, accreditation, surety bond and licenses, etc. are tied to
XYZ’s tax ID number. This means, generally speaking, that in a
stock sale, the supplier number, accreditation, surety bond and
licenses remain intact.

In an asset sale, as a general rule the liabilities of XYZ do
not fall on ABC’s shoulders. In a stock sale, the liabilities of
XYZ remain with XYZ. This means that while ABC has paid good money
for John Doe’s stock certificate in XYZ, and while XYZ is now a
wholly-owned subsidiary corporation of ABC, past mistakes by XYZ
can come back to haunt XYZ. This, in turn, may result in ABC’s
investment (in the stock of XYZ) turning sour.

Q: OK, Jeff, in the previous answer you gave me a lot of
legal jargon. Break it down into the English language. Talk about
an asset purchase first, and then talk about a stock
purchase.

A: I will do my best. Let’s say that ABC is
located in Iowa City and that XYZ is located in Cedar Rapids, which
is 20 miles north. Each company has a retail (customer walk-in)
store. ABC wants to buy XYZ and take over its location.

Let’s further say that ABC will buy XYZ’s assets. Closing occurs
on May 1; this is the day that: ABC gives XYZ a check; XYZ gives a
bill of sale to ABC; and XYZ hands the keys to the Cedar Rapids
store to ABC.

Unless creative steps are taken, here is what will happen
next:

• After closing, ABC will obtain a surety bond (in its own name)
  for the Cedar Rapids store.
• After closing, ABC will see to it that the Cedar Rapids store
  is accredited (probably by the same accrediting organization that
  accredits ABC’s Iowa City store.
• After ABC has its accreditation and surety bond (and any
  required state licensure) in place, then it will submit an 855S for
  a new supplier number for the Cedar Rapids store.
• ABC will receive a supplier number for the Cedar Rapids store a
  number of months later.
• ABC will not be able to submit claims to Medicare while it is
  waiting for its new supplier number; and
• Once ABC does receive its supplier number for the Cedar Rapids
  store, then depending on the NSC’s mood, ABC will be able to submit
  claims back to the date that ABC met all requirements preparatory
  to submitting an 855S, or back to the date that ABC submitted its
  855S, or back to the date that ABC received its new supplier number
  for the Cedar Rapids location.

No matter how you look at it, ABC will not be able to bill for
the Cedar Rapids location for a period of time, and then it may or
may not be able to retroactively submit the withheld claims.

Q: What happens in a stock purchase?

A: At closing, John Doe hands over his stock
certificate — and the keys to the Cedar Rapids store —
to ABC. XYZ’s accreditation, surety bond and supplier number remain
with XYZ, which is now a wholly owned subsidiary corporation of
ABC. There is no break in billing. Life is good.

Q: If it is that easy, then everybody should engage in a
stock purchase, right?

A: You’re right. It is not that simple. As
previously stated, in a stock sale, ABC inherits XYZ (warts and
all).

If XYZ has run a clean operation, then ABC will inherit few, if
any, problems. On the other hand, if closing of the stock sale
occurs on May 1 and XYZ starts getting hit with recoupments for
claims submitted prior to closing, then ABC probably overpaid for
John Doe’s stock in XYZ. The consequences can become even more
severe if XYZ has engaged in past fraudulent activities.

In a stock purchase, ABC’s due diligence must be thorough. It is
this concern about future liability that motivates many purchasers
to engage in an asset purchase.

Let’s look at a different scenario. Assume that XYZ sells three
lines of products: oxygen, power mobility and mail-order diabetic
supplies. XYZ wants to get out of the oxygen and diabetic supply
lines of business and focus only on power mobility. John Doe cannot
sell his stock certificate to ABC because he does not want to part
with XYZ. John wants to keep XYZ (and its accreditation, surety
bond and supplier number) so that he can continue on with power
mobility. In this case, John has no choice but to have his company
(XYZ) sell those assets pertaining to oxygen and diabetic
supplies.

Changing gears a bit, keep in mind that in a stock purchase, XYZ
must file a CHOW (change of ownership) with the NSC; file a similar
document with the state licensing agency and with state Medicaid;
notify the surety bond holder; and notify the accrediting
organization.

The accreditor will likely conduct a site inspection of XYZ
(after its stock is sold to ABC) within 30 to 60 days following
closing. Many third-party payer contracts require that if there is
a change of ownership of a company (e.g., XYZ), then notification
must be given to the commercial insurer. Some contracts require the
consent of the commercial insurer in order for the third-party
contract to remain place after the stock transfer.

Q: Can you give me some helpful hints regarding stock
purchases?

A: Sure. In a stock purchase prior to closing,
ABC and XYZ should contact the accrediting organization to
ascertain what is needed in order for the accreditation to continue
smoothly following closing.

The two companies should do the same with the third-party
payers. In other words, what do the commercial insurers require in
order for the third-party contracts to remain in force following
the stock acquisition?

A similar approach needs to be taken with the surety bond
company. Will the surety bond company simply allow the surety bond
to remain in place, or will the bond company want to issue a new
bond?

Q: What about hints regarding asset
purchases?

A: This is where it gets complicated, and where
ABC must think outside the box.

Let’s say that ABC wants to purchase the assets of XYZ, take
over the Cedar Rapids store and not have a break in billing. How
does ABC accomplish this?

One way is for ABC to temporarily turn the Cedar Rapids store
into a warehouse facility. Customers cannot walk into the Cedar
Rapids facility and obtain products. The Cedar Rapids facility will
hold inventory, and a delivery person and repair person can work
out of the Cedar Rapids facility.

When a Cedar Rapids physician refers a customer to ABC, the
phone/fax/email will go to ABC’s Iowa City store. Communication
with the customer (patient intake) will be by an ABC employee in
the Iowa City store. The Iowa City employee will talk to the
customer over the phone. This way, the “point of sale” occurs in
Iowa City.

When a Cedar Rapids customer needs some repair/maintenance
services: The customer will call the toll-free number in Iowa City,
the Iowa City facility will give instructions to the repair person
in the Cedar Rapids warehouse facility and the Cedar Rapids repair
person will drive to the customer’s house and pick up the equipment
to be repaired (and, if necessary, drop off a loaner). The repair
person will repair the equipment at the Cedar Rapids warehouse
facility, and then will deliver the repaired equipment to the
customer’s home.

This “hub-and-spoke” arrangement will continue until ABC
receives its supplier number for the Cedar Rapids facility. When
that happens, then ABC can convert the facility from a warehouse to
a retail showroom.

Here is a variation of the “hub-and-spoke” model. ABC’s Cedar
Rapids facility will sell only to cash and commercial customers.
There will be signs explaining that the ABC Cedar Rapids facility
cannot bill Medicare. If a Medicare beneficiary nevertheless comes
into the Cedar Rapids facility, then the employee can contact the
Iowa City facility by phone, put the beneficiary on the phone, and
the “point of sale” can then take place between the Medicare
beneficiary and the Iowa City employee.

The Iowa City facility will then arrange to have the equipment
delivered to the Medicare beneficiary. Once ABC receives its
supplier number for the Cedar Rapids facility, then this
arrangement will cease and the Cedar Rapids facility can start
selling to Medicare beneficiaries.

The bottom line is that with the scenarios described above, ABC
(the purchaser of XYZ’s assets) will be able to bill for the Cedar
Rapids Medicare beneficiaries out of its Iowa City facility until
it is issued a supplier number for its Cedar Rapids facility. ABC
cannot submit its 855S for its newly acquired Cedar Rapids facility
until ABC receives accreditation for the facility.

If ABC applies for accreditation from scratch for the Cedar
Rapids facility at the time of closing, then it may take several
months for the facility to receive its accreditation. This will
delay ABC’s being able to submit its 855S.

There is a way to speed up this process. Let’s say that the AO
that accredits ABC is ACME Accreditation. When ABC and XYZ sign
their letter of intent (probably about 60 days prior to closing),
then ABC needs to inform ACME of the pending purchase. It is likely
that ACME will, at closing, provisionally accredit ABC’s new Cedar
Rapids facility pending a site inspection that will occur within
approximately 60 days following closing.

Another proactive step that ABC can take is to contact the
commercial insurers (with which XYZ has third-party contracts) at
the time the letter of intent is signed to start the process of the
commercial insurers entering into new contracts with ABC following
closing.

While it’s complicated, another potential mechanism that will
allow ABC to purchase the assets of XYZ without a break in billing
is the “sale/leaseback” model.

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].

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questions about any HME legal issue for an answer from Brown
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