acc quik hitwebcasts.acc.com/handouts/acc_quik_hit_2017.pdfhealth systems and tenet are shedding...

©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


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


■  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


■  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


■  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


■  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


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”



■ 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



■ 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



■ 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



■ 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


■ 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



■ 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



■ 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



Roger Strode

Foley & Lardner, LLP 312-832-4565 (D) 414-202-8717 (M) [email protected]

QUESTIONS?

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