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1
PRE-LOI
EXPERTS WEIGH IN
Key items to validate before you submit your LOI for a physician practice management company.
Know the entity type and consult your tax advisor before you submit your LOI—your transaction structure is HIGHLY dependent on this and may require late structure changes if not properly planned.
QUESTIONS TO ASK
Do you know where providers are currently being compensated in comparison to national averages and local averages?
DISCOVERThese may be roadblocks to recruiting and retaining and should drive your valuation considerations.
QUESTIONS TO ASK
When you begin evaluating a healthcare organization, it’s important to learn about its cybersecurity compliance posture. Click to see what questions you should ask.
DISCOVER- Is there a culture of compliance?
- How is compliance enforced?
- How does the organization promote compliance and cyber awareness?
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EXPERTS WEIGH IN
Why is it important to complete a coding and compliance check before the LOI?
Medicare and other governmental payors require that a compliance plan be developed and implemented if the healthcare entity is filing claims with same. An effective compliance program can bring more value to the targeted entity during the diligence process and negate/reduce potential post-close risk/penalties.
2
DILIGENCE PROCESS
QUESTIONS TO ASK
Will your anticipated compensation model work based on actual target performance?
DISCOVERIf you have a standard compensation model, your anticipated results during pre-LOI valuation may not materialize. If midlevel productivity is less than expected, provider compensation reductions may not be achieved. Ensure that appropriate cost reductions are considered in definitions. Miscommunication around provider compensation is often a cause of deal failure.
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EXPERTS WEIGH IN
How are you assessing compliance with Stark and AKS?
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QUESTIONS TO ASK
Why is it important to look at the entity’s HIPAA compliance program when making a healthcare acquisition?
DISCOVERWhether the target entity is a provider, covered entity, payor, or business associate, the target should have a robust HIPAA program in place in order to avoid compliance issues post-transaction.
QUESTIONS TO ASK
Always ask the company being acquired, “How many security breaches have you reported to CMS in the last year?”
DISCOVEREvery single provider should have reported at least one breach, because incidental breaches of data happen nearly every day. If the entity’s answer is “none,” that could be a red flag that its cybersecurity and compliance program is inadequate.
Five key coding and compliance areas to spotlight when working on deals involving healthcare providers
QUESTIONS TO ASK
Consider systems integration plan—is the target’s system better suited than current?
DISCOVERConsider an enhanced MSO platform to provide a stable, scalable plan for growth. Invest early on to provide a consistent support system for future additions, which is an appealing feature for targets.
3
DEAL EVALUATION
QUESTIONS TO ASK
What are two items to consider during the deal evaluation stage of an M&A transaction?
DISCOVER- Be sure to consider payor mix changes, provider churn, and potential compliance issues.
- Think about structuring the deal to facilitate longer escrow/indemnity periods and potential rollover equity at risk.
EXPERTS WEIGH IN
Getting step-up and dealing with common issues for physician sellers
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Caution: In September 2019, the Department of Justice (DOJ) announced a $21.35 million settlement with compounding pharmacy Patient Care America after alleging that the private equity firm took on a management role and then knew and approved of an illegal referral arrangement.
It’s important to protect prescribers and companies by ensuring that transactions are commercially reasonable and FMV (fair market value) compliant.
Knowing the risk profile in advance will help the buyer make informed decisions about the deal value, terms, the expected cost of remediation of security weaknesses or breach response, return on investment of the acquisition, and profitability and cost of future litigation resulting from a breach.
A PE firm must evaluate three potential breach risks as part of its valuation:
- Has the organization been breached before the purchase?
- Will it be breached during the acquisition process?
- Are there weaknesses in the entity’s program that could expose it to future breaches?
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QUESTIONS TO ASK
Have you considered escrow/indemnification provisions to address any potential compliance issues?
DISCOVERCompliance issues identified during the late stages of diligence are very difficult to negotiate at closing, as most compliance reviews do not utilize a statistically valid sample. Given this limitation, an extrapolation may not fully determine the extent of the financial impact from these compliance issues.
EXPERTS WEIGH IN
What happens during the deal evaluation from a coding and compliance standpoint?
4
CLOSING
Healthcare transactions lend themselves to pro forma adjustments within diligence given the commonality of provider turnover, opening of new locations, and payor rate changes. It is important to monitor performance and production for the period between diligence and close. Verify such changes are consistent with assumptions used in diligence calculations.
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QUESTIONS TO ASK
Does the tax basis of fixed assets matter when purchasing non-clinical assets from an MSO?
DISCOVERConsider the assigned values to equipment, as gains from the sale of non-clinical assets can be recaptured as ordinary income. Evaluate these assigned values and value the practice with the remaining amounts. This can help make the deal more tax efficient for sellers, while allocating value to appropriate categories.
- Exit readiness analysis/fair value accounting compliance
- ESOP valuation
- Fairness opinions
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There are many moving parts of an acquisition that are dynamic and complex. Leadership should design a plan that can take advantage of each company’s strengths and close any identified gaps.
QUESTIONS TO ASK
What IT solutions are in place, and which will become the “platform” solution on a post-close basis?
DISCOVERHaving a central, cloud-based, single data-based IT solution (PM/EMR/Communications) will provide the portfolio company with a scalable solution so the organization can experience growth in a consistent fashion. Reporting and monitoring are much more efficient and effective if one solution is utilized across the organization.
Engaging MSO services provides access to laser-focused professionals performing back-office functions so the entity can focus on physician/provider recruitment, clinical quality, and other strategic initiatives.
5
FIRST 90 DAYS
Update opening balance sheet healthcare receivables as part of net working capital settlements utilizing similar methodology as diligence—if collections lag after transaction, understand the root cause and ensure estimated future collections are reasonable and reflect appropriate reserves to ensure sellers are not overpaid in this settlement.
The first 100 days after an acquisition are crucial for a successful integration of a new business.
QUESTIONS TO ASK
Healthcare companies need to consider certain tax elections and methods when assessing NEWCO tax returns.
DISCOVER- Consider the use of Nonaccrual Experience Method to deduct bad debts.
- If eligible for cash basis tax reporting, consider whether to file using the cash or accrual method. If you have formed an MSO, consider the impact accrued management fees would have on practice and management entity tax returns.
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QUESTIONS TO ASK
What should be considered when valuing licenses/contracts in a corporate practice of medicine state?
DISCOVERIn states where corporate practice of medicine is prohibited, the practice will remain its own independent entity owned by physicians. Clinical decision making remains with practice management, while non-clinical functions are handled by an MSO. These management services need to be clearly defined and provided at a fair market rate.
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EXPERTS WEIGH IN
Andrew McDonald “The Benefits of an MSO”
Billing and productivity monitoring should be assessed and built into compensation agreements. The overall financial impact of these items can result in significant differences from diligence and budgets if not monitored. Compliance issues and related risks may arise if not identified via monitoring and dealt with in an appropriate manner.