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©2016 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500
November 7, 2017
ACC Quik Hit Roger Strode Foley-Chicago, IL Ralph Wilson Humana
©2016 Foley & Lardner LLP
Agenda
■ Transaction Trends ■ Deal Term Updates ■ Due Diligence ■ Antitrust Pressure ■ Physician Transaction Update
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Transaction Trends
■ Hospital and health system consolidation continues to be robust − Some larger for-profit providers, such as Community
Health Systems and Tenet are shedding hospitals to local buyers § CHS signed LOIs with $1.2B in revenues (announced last week)
− 15 hospital deals announced in September ■ We are continuing to see private equity recaps of
physician practices in dermatology, anesthesia, radiology, neurology and orthopedics ■ 11 LTC deals announced in September ■ Managed Care: CVS-Aetna merger looms large
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■ Due diligence continues to be critical to most deals getting done—We are seeing a heavy emphasis on diligence matters − Often due to the fact that buyers are taking assignment of
provider numbers − In certain situations, agreements to self disclose prior to
closing, or immediately after closing, are common ■ Valuations appear robust—Not unusual to see 9-13x
(sometimes greater) multiples on TTM EBITDA for platform companies in the private equity space − Physician recaps in areas such as dermatology and orthopedic
surgery are breaching 12X TTM − There is a lot of pressure on hospital systems to try and meet
these multiples due to competition from for-profit buyers
Deal Term Updates
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■ Escrows of 10%-15% of transaction value not uncommon ■ Representations and Warranties insurance is being used
on an increasingly regular basis − Coverage is generally around 10-15% of TEV − Self insured retentions (deductibles) are approximately 1-2% of
of TEV; that SIR generally establishes the indemnity cap for Seller indemnity obligations for breaches of reps/warranties − Buyer pays the premiums in approximately 2/3 of the deals − Beware of carve outs for certain issues, such as “health care
compliance” reps and warranties − Sellers should be prepared for a second round of diligence from
counsel
Deal Term Updates
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■ Survival Periods (R&W) − General: 12-18 months − Fundamental: Unlimited − Taxes/Benefits: SOL + 60-90 days − Health Care: SOL = 60-90 days or 4-5/6 years (depending upon
negotiations) ■ Caps − Can be lowered through use of R&W insurance (as low as 1-2%
of transaction value in some cases) − No cap, generally, on breaches of covenants or breaches of
fundamental R&W − Higher caps, generally, on breaches of health care R&W
■ Baskets
Deal Term Updates
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■ The FTC and DOJ have become significant partners in health care transactions in recent years ■ Emboldened by “wins” enforcement activity has been
aggressive ■ Agency attention has applied to both (HSR) reportable
and non-reportable transactions − Advocate-North Shore Merger (Chicago-Metro) − St. Luke’s (Boise)
■ Anti-Steering litigation on the rise ■ Use of COPAs may see more sunlight
Antitrust Update
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Hot Diligence Issues
■ Corporate Practice of Medicine − New York state settlement with Aspen Dental Management − Many states have some form of CPOM concept and fee-splitting
prohibitions − “Friendly PC” structures are commonly used in the acquisition of
medical/dental/professional health care practices by for—profit managers/consolidators of those businesses (e.g., P/E backed firms)
− Significant risks can arise when a non-professional vendor is engaged to manage or consult a licensed professional or an entity comprised of licensed professionals.
− New York State AG alleged that ADMI did not simply provide business support and administrative services but subjected its managed dental practices to extensive “undue control”
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Hot Diligence Issues
■ Corporate Practice of Medicine − AG determined that
§ Practices were individually owned in name only, and ADMI was acting effectively as a de facto owner
§ Management fee captured a percentage of the practices’ revenue,
§ ADMI exercised control over bank accounts, advertising and marketing practices, decisions involving patient care and treatment plans, and clinical staff employment matters
− Significant fine paid and restrictions agreed to by ADMI
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Hot Diligence Issues
■ Anti-Referral Issues − Violations of Physician Anti-Referral laws (Stark) remain
a significant concern − OIG Fraud Alert (June 2015)
§ Emphasized the need for FMV payments to MDs for bona fide services
§ Problematic arrangements include (i) those above FMV, (ii) compensation that takes into account v/v of referrals, (iii) MDs failing to provide contracted services and (iv) affiliated health care entity paying for physician office staff
§ Shot across the bow to physicians who sometimes believe they won’t be targeted for abusive situations
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Hot Diligence Issues
■ Anti-Referral Issues − Physician compensation, particularly stacking of compensation that
leads to high aggregate compensation amounts − Focus on FMV, including the selection of benchmarks and the quality
of reports − Focus on the accuracy, reliability and completeness of information
provided to advisors − Questioning of commercial reasonableness of compensation
arrangements when reasons for the arrangement are not well
documented
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Hot Diligence Issues
■ Anti-Referral Issues − Hospital losses or failure to make a profit construed as evidence of
non-fair market value, non-commercially reasonable compensation − Tracking of hospital referrals and contribution margins construed as
evidence of illegal behavior
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■ Anti-Referral Issues − North Broward Settlement
§ $69MM settlement for FCA and Stark law violations (including a 5 year CIA)
− Adventist Settlement § $115MM to settle Stark law and Medicare coding
claims
Hot Diligence Issues
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■ Anti-Referral Issues − Employment Safe Harbor (AKS) is not bullet proof and
doesn’t give you cover under the Stark Law − If you have high compensation relative to MGMA
percentiles, have good documentation to support the compensation − Watch use of internal reports, related to physician
use/referral to ancillaries—regulators will use it to “connect the dots” − If you lose money on physician practices, have
rationale and a story − Don’t pay for physician use of BMWs
Hot Diligence Issues
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■ Other Areas of Concern − Pressure on multiples and purchase price
§ Hospitals being pressed to meet purchase price multiples offered by private equity and other for-profit entities
§ Physicians refer to hospitals post closing − Physician billing and coding
§ Improper use of modifiers § Improper billing of physician extenders (“incident to
billing) § Billing when charting is incomplete
Hot Diligence Issues
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Roger Strode
Foley & Lardner, LLP 312-832-4565 (D) 414-202-8717 (M) [email protected]
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