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  • Writer's pictureSam Khan

Anatomy of Health Care Transactions: The Ongoing Integration Mania

Updated: Jul 18, 2023




Health Care Transactions Overview:


The enactment of the Patient Protection and Affordable Care Act (ACA) sparked a surge in health care mergers, acquisitions, and contracting. This was in response to the many changes that the ACA introduced, which impacted health care providers and reimbursements significantly. As such, a lot of providers opted for mergers or acquisitions to withstand the ACA changes.


However, this wasn't the first instance of such consolidation in the health care industry. In the 1980s and 1990s, hospital systems merged extensively due to economic and regulatory factors such as capitation, managed care, fraud and abuse, financial stability, and provider diversification. A wide array of health care providers, including hospitals, physician groups, nursing homes, ancillary providers, and payors, formed integrated delivery systems or ventured into joint collaborations and affiliations.


The motivations for such integrations included offering a full range of health care services, improved access to capital, better managed-care contracts, alleviating administrative responsibilities, and survival amidst market pressures. The common perception was that size equated to success, and offering a broad spectrum of services was vital to attract patients and lucrative insurance contracts. Accordingly, the health care market witnessed significant consolidation, reducing the number of hospital providers in certain regions. This situation resulted in the formation of health care giants that provided a wide range of services from outpatient to tertiary care, rehab services, nursing home services, and even HMOs.


Despite the uncertainty surrounding the ACA due to the current political climate, health care mergers, acquisitions, and contracting remain robust. For example, PricewaterhouseCoopers referred to 2016 as the “year of merger mania." While deal values and volumes slightly decreased in 2017, certain sectors like behavioral health and managed care saw growth. The industry recorded over 200 deals in the third quarter of 2017 alone, indicating a continued trend of provider integration and consolidation.


This Article will explore various types of health care transactions and contractual arrangements. It will also provide an overview of certain key legal issues and contractual terms necessary for structuring, drafting, and negotiating health care transactions and contracts. Despite the prevalence of established integration structures, the marketplace still presents unexpected turns. But many of the fundamentals are the same. So, let’s highlight some of the basics.



Initial Discussions & Preliminary Documents


The first vital decision that hospitals, providers, and payors must make in deciding how to align and integrate their interests is the structure of such integration. Usually, the initial deliberations might not involve the legal teams from either side. So, a brief discussion on the lead-up to selecting the right structure is worthwhile before focusing on potential integration structures.


I. Business Development Teams and Due Diligence


Business development teams are commonly involved in identifying prospective providers or products for Buyers to partner with or purchase to broaden their service scope. Initial conversations with a potential Seller, covering various issues, sometimes without legal counsel's knowledge, form part of this identification process. These conversations might range from purely business matters to topics that could later be influenced by legal due diligence, particularly the purchase price determination. The process remains the same even if the discussions are initiated by a brokerage firm engaged by a provider wishing to be acquired or by a potential seller/target itself.


After Buyers and Sellers have engaged in these discussions and decided to proceed, they then undertake due diligence. This entails an extensive review of the Seller’s business, assets, and known and contingent liabilities, often by a “core” in-house business team. The results from this in-house due diligence will be useful and should be considered by legal counsel and accountants, and as the deal continues to progress, should be used by these agents as a reference as they are faced with their own due diligence.


While a Seller might also conduct due diligence on the Buyer, it's usually limited to specific concerns that the Seller might have. Due diligence serves the purpose of ensuring that the Buyer understands the Seller’s operations, the state of the assets or business it is acquiring, and any potential liabilities associated with the acquisition. In health care transactions, certain key health care due-diligence areas include Medicare and Medicaid billing and cost-reporting issues; federal and state government investigations; health care accreditation and licensure; Health Insurance Portability and Accountability Act (HIPAA) compliance; contracts with providers and payors; tax-exempt issues; bond financing; Food and Drug Administration (FDA) compliance; National Institutes of Health (NIH) and grant compliance; contractual relationships; and joint ventures with physicians. As a health care subject matter expert (SME), due diligence means understanding, highlighting, and mitigating–to the extent possible–any material risks relating to these areas.


II. Non-Disclosure Agreements and Disclosure of Protected Health Information


As business development teams develop their discussions and proposals with a potential Seller, due diligence, including sensitive financial, accounts receivable, and sometimes patient information, is required. Although not always requested by a potential Seller, a savvy Seller will usually ask for a confidentiality or non-disclosure agreement (NDA) before sharing any sensitive financial information with a potential Buyer.


In general, HIPAA states that a covered entity may disclose minimally necessary protected health information (PHI) for certain “Health Care Operations” that include the health care transactions discussed in this Article. [1] However, there are also specific restrictions. So, careful consideration of any use or disclosure of PHI by a Seller must be cautiously evaluated before the disclosure based on the relevant facts. Keep in mind that under HIPAA, a lawyer is considered a business associate, so putting into place a business associate agreement is best. If you’re curious to learn more about business associates or HIPAA generally, refer to previous articles on the topic found in our digest.


NDAs not only account for HIPAA and state law obligations but also cover sensitive financial, business operations, group practice, and other non-public information. Key terms in an NDA include what information is confidential and for how long. Also, if this contract paves the way for merger or acquisition talks, it often includes a 'no-shop' clause. This clause stops the Seller from discussing the sale with other parties for a set time. This is helpful for the Buyer, especially if they worry that the Seller is offering the business to many potential Buyers. In line with best practices, it’s advisable to sign an NDA before any information is exchanged to ensure that neither party can disclose the information learned during the negotiation and due diligence process.


III. Letters of Intent/Term Sheets


During or after due diligence, a Buyer who has determined that a transaction with the potential Seller is beneficial may, although not always, generate a letter of intent (LOI) outlining the basic terms of the deal. Typically, the LOI includes the basic understanding of the terms of the proposed acquisition, like the purchase price, the targeted closing date, the structure of the transaction, retention of employees or key employees, selling shareholder employment, tax consequences to the parties, summary of representations and warranties to be included, confidentiality terms, and the no-shop/exclusivity period. While many of the provisions of the LOI are often explicitly described as “non-binding” on the parties, certain terms should be binding, such as a no-shop/exclusivity period provision during the negotiation period, the term of the LOI, and the confidentiality provisions (if not in the LOI, then as referenced in the NDA).



Key Aspects When Structuring Transactions


I. Aim of the Venture


Before the first brick is laid in the construction of a deal, everyone involved (including the parties’ lawyers, accountants, and consultants) should understand the purpose of the venture. Going over the purpose of the venture before structuring the transaction and drafting documents in accordance with such structure is not only key to efficiency but also to reaching alignment down the road. The parties need to know the venture's goals and gauge if they can realistically be met. Every new venture comes with an element of risk–or several. If the likelihood of reaching the venture's goals cannot be determined, it might be smart to have an early discussion about what will happen if those goals aren't met. We'll discuss this further.


II. Operational Matters


Understanding the operational matters of the client are as critical as the purpose of a transaction. For instance, if one party wants a particular method of Medicare service billing after closing the deal, it's crucial to structure the deal to meet their operational billing needs. Or maybe, the client wishes to employ physicians as part of the transaction. In that case, the deal has to be designed to avoid violating laws like the prohibition on corporate practice of medicine or Medicare billing limitations. So, having a comprehensive discussion about the key operational issues and goals the parties want to achieve through the transaction, and identifying any potential legal issues early on, is of paramount importance.


III. Legal Concerns


The legal landscape of health care is complex, and a wide range of legal issues impact the kind of transactions available to parties, as well as the details of structuring these transactions. Sometimes, the health care providers' desired transactions may not be feasible due to legal limitations. The laws around fraud and abuse and tax-exemption sometimes make such transactions outright illegal or highly risky and susceptible to government scrutiny. For example, many hospitals and physicians want to set up a joint venture to share imaging centers or clinical labs, but these arrangements often run into legal roadblocks due to the Stark law and the Anti-Kickback Statute. As a result, the parties may need to choose a different structure or abandon the transaction altogether due to these legal barriers.


Because health care transactions are so heavily regulated, the parties should be mindful of potential legal issues from the get-go. Planning the transaction structure early on helps to avoid having to restructure or even dismantle the transaction later because of legal violations. It's not unheard of for providers to plan a transaction and agree on specifics, only to find later that the deal is illegal and can't be restructured to meet existing laws and regulations. So, having the legal team in on the initial discussions and negotiations to ensure compliance with laws is a smart move.



Structure of Health Care Transactions


As previously mentioned, before any arrangement can be formed between providers and/or payors, they must first agree on the essential structure of the transaction. Health care transactions between parties can be formed in a variety of ways, largely depending on the objectives of the involved parties, which do not always match. The following aims to outline different types of transactional structures and the key factors that steer each one.


I. Mergers & Acquisitions


An acquisition occurs when one entity (known as the Buyer) buys all or part of another entity (referred to as the Seller or the Target Company). Acquisitions generally take one of three fundamental forms: the stock transaction, the asset transaction, and the merger. Typically, Sellers favor having a Buyer purchase the stock of the entity to be acquired, while Buyers often prefer to procure only those assets they deem necessary and desirable, leaving behind any undesired liabilities. Keep in mind, there are many factors and considerations that can influence this pivotal decision.


II. Stock Transactions and Member Substitutions


In a stock (or Limited Liability Company unit) transaction, the Buyer purchases some or all of the stock or units of the Seller, the revenue from the sale of the stock–after liabilities are extinguished–is then distributed to the selling owners of the Seller.


Nonprofit entities, rather than having shareholders, have members. In nonprofit transactions, this is referred to as a member substitution arrangement. [2] Unlike shareholders, members do not own a part of the health care entity. Instead, they protect the nonprofit and its charitable assets for the community. When the members sell the entity's "membership," the proceeds, after all liabilities are cleared, would typically be donated to another nonprofit, tax-exempt entity in accordance with the selling organization's rules or state law requirements. Notably, most hospitals are nonprofits (501(c)(3) Organizations), whereas most long-term care facilities are for-profit entities.


Regardless of whether we’re talking about a stock sale or a member substitution, the Buyer becomes the new member or shareholder of the target company in such transactions. So, for example, if Company A is the Buyer, they now control and have become the shareholder or member of X Health Care organization. As its sole shareholder or member, Company A usually has the ability to appoint all board of trustees or directors, who subsequently elect all of the officers of X Health Care Organization to control its day-to-day operations.


Alternatively, the transaction could be accomplished through a merger where X Health Care Organization merges into Company A (or the other way around), with one of them as the surviving entity. Unlike a stock deal or member substitution, after the closing of a merger or asset acquisition, only one entity typically.


III. Asset Transactions


In asset transactions, the Buyer acquires some or all of the Seller's assets. Health care transactions are often structured as asset deals because the Buyer does not want to assume the Seller’s Medicare and Medicaid billing agreements/provider numbers and wants to avoid potential liability for the Seller's prior billing acts. Even in such cases though, certain courts have ruled that the Buyer might still be responsible for the Seller's prior billing liabilities. [3]


IV. Joint Ventures


Sometimes health care entities prefer strategic alignment short of a merger or an acquisition. In these instances, a joint venture may be established, an arrangement where the parties agree to collaborate for a specific purpose. Joint ventures may focus on a single service or a variety of services, venturing into a new geographical area, or many other reasons. Joint ventures are usually established by a written contract or by creating a new entity jointly owned by the parties.


According to the Internal Revenue Service (IRS), “[a] joint venture is created when two or more persons enter into an arrangement to invest in a project and the parties share the control, benefits, and risks of the project.” [4] Unlike an acquisition or a merger, the parties to a joint venture remain independent entities. In some stances, joint ventures are an ice breaker–the first step toward further integration.


The recent trend in health care joint ventures is to structure them as limited liability companies (LLCs). This allows the LLC member to avoid liability for the LLC's debts beyond the amount paid for the member's units. It also allows the LLC to be treated as a pass-through entity for tax purposes, avoiding double taxation. However, the formation of joint ventures is challenging due to regulations such as the Anti-Kickback Statute and the Stark laws. To ensure that the arrangement does not violate these laws, some providers have sought Advisory Opinions from the Office of the Inspector General (OIG) of the Department of Health and Human Services (DHHS).


Despite the regulatory complexities, there are numerous compelling reasons for health care providers to engage in joint ventures. One of the key drivers is the sharing of resources and expertise. For instance, two hospitals might collaborate to build and manage an Ambulatory Surgery Center (ASC). Here, one hospital could fund most of the project, while the other hospital brings to the table its wealth of experience in running ASCs. They may also decide to jointly operate the ASC if there's only a need for one in the community. This approach avoids redundancy in facilities and services, and reduces expenditure on equipment. Moreover, a joint venture allows for the distribution of risks across a larger group, especially in ventures with high uncertainties.


In recent times, there has been a marked growth in joint ventures centered on co-management operations. These ventures aim to enhance the efficiency of specific service lines within a hospital, including areas such as cardiology, general surgery, and oncology.


A typical co-management arrangement involves the creation of a separate management entity, jointly owned by the hospital and the physicians. This entity then enters into an agreement with the hospital to manage the relevant service line. In terms of remuneration, co-management ventures offer two components: a fixed fee, which should reflect the fair market value for the physicians' time and effort spent on developing, managing, and overseeing the service line; and an incentive fee, again based on fair market value, but determined by meeting certain predefined quality metrics. These metrics should be objective, verifiable, and trackable. This type of joint venture is appealing to both parties. Physicians stand to earn increased compensation, within fair market value limits. On the other hand, hospitals benefit from direct physician involvement, improved operational efficiencies, and enhanced service lines. And possibly most importantly, this arrangement fosters the integration and alignment of physicians' and hospitals' goals in delivering high-quality patient care.


Unlike mergers and acquisitions, joint ventures can either be time-bound, as per a joint-venture agreement, or indefinite. While some joint ventures are perpetual, it's common for joint ventures to have a duration of three to five years. These often include provisions allowing one party to terminate the venture under specific circumstances, like a breach of terms by the other party. In terms of structure, the parties may choose to form a separate corporate entity to hold the assets or decide against it. In the latter case, the parties agree via a contract to share the expenses and profits of the venture. Regardless of the chosen structure, the relationship and obligations of each party are outlined in a comprehensive shareholder, operating, or venture agreement.


V. Affiliations


Affiliations typically require the least amount of integration among corporate transactions. An affiliation can be created between two or more parties to accomplish whatever they desire, and it's usually formalized in an agreement executed by the parties. Unlike a joint venture, the activities may be more informal. Affiliation arrangements have been used by health care entities to create loose networks for potential further integration, and they are often used when parties are not prepared to merge, sell, or buy whether for financial reasons or timing.


One common type of affiliation agreement is between a hospital or an integrated delivery system (detailed below) and an educational institution. These agreements provide a framework for students from the educational institution to receive training at the hospital. Usually, these contracts don't include any payment clauses. Rather, they focus on aspects like insurance, indemnification, and outlining the parties' responsibilities.



Health Care Corporate Structures


I. Integrated Delivery Systems


Integrated delivery systems (IDSs) began forming in the 1980s and 1990s and have continually evolved throughout the 21st century. Some have grown, especially considering the ACA's implementation and the formation of Accountable Care Organizations (ACOs). However, certain health care systems have diminished, often due to unprofitable expansion, straying from core services, or lack of understanding of how to operate specific entities, such as health maintenance organizations or long-term care facilities. IDSs comprise various health care providers integrated as part of one corporate structure or system, with no specific organizational model. The structure depends on tax, liability, financial, and other business considerations.


IDSs aim to establish a full-service health care entity, providing one-stop shopping for patients, with potential benefits such as coordinated care, shared medical records, and time efficiencies. Moreover, an IDS can negotiate more favorable contracts with managed-care payors, withstand financial challenges, and resist increased competition due to larger capital reserves. This consolidation trend in the health care industry has almost extinguished standalone hospital entities in urban areas, making IDSs the norm. However, there are several legal issues that should be carefully considered when structuring and operating an IDS including antitrust, fraud and abuse, tax, and others.


1. Antitrust


When forming an IDS, antitrust laws must be reviewed to ensure compliance with both federal and state antitrust regulations. This includes a review under Section 2 of the Sherman Act, focusing on monopoly and market-power issues, and possible premerger notifications such as a Hart-Scott-Rodino pre-merger notification to the FTC and DOJ, as per Section 7 of the Clayton Act.


The Federal Trade Commission and the Department of Justice’s Antitrust Division have proposed significant amendments to the Hart-Scott-Rodino Antitrust Improvements Act's merger review process. The proposed amendments, expected to come into effect possibly by year-end, would be the first significant changes to the HSR Act's filings since the late 1970s. However, the specific timeline remains uncertain. The FTC is welcoming public comments on these proposed changes until August 28, 2023.


If accepted, the changes will make filing procedures more costly and lengthy, potentially quadrupling the completion time from an average of 37 to 144 hours per filing, according to the FTC. The revisions propose a more detailed filing process that aligns better with global standards, requiring extensive disclosure of information about the organizations, officers, directors, boards, shareholders, and other stakeholders potentially influencing the merger.


The changes also necessitate English translations for all foreign-language documents. The process is expected to become fully digital, with more comprehensive information requirements. Preliminary agreements or letters of intent will no longer be sufficient; parties must include a term sheet or draft definitive agreement illustrating the deal's scope and confirming the transaction is more than a speculative notion.


2. Fraud and Abuse (Anti-Kickback Statute & Stark Law)


Potential Anti-Kickback Statute violations must be considered when structuring an IDS, especially if physicians or physician groups are involved. The Statute prohibits the knowing and willful solicitation, offer, payment, or acceptance of any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash, or in kind for (1) referring an individual for a service or item covered by a federal health care program; or (2) purchasing, leasing, ordering, arranging for, or recommending the purchase, lease, or order of any good, facility, service, or item reimbursable under a federal health care program. Safe harbors of the Anti-Kickback Statute should be reviewed to ensure the IDS structure falls within an applicable safe harbor.


The Ethics in Patient Referrals Act of 1989 (the Stark Law) prohibits a physician from referring Medicare patients for designated health services (DHS) to an entity with which the physician (or an immediate family member) has a financial relationship. If an IDS has a financial arrangement with a physician who refers patients to the hospital, the arrangement must satisfy a Stark exception.


3. Tax


Various tax laws must be reviewed when structuring an IDS. For instance, if a tax-exempt hospital creates an IDS with for-profit entities, it must ensure its tax-exempt status is not compromised by engaging in private inurement or private benefit.


4. Other Legal Issues


Numerous other legal issues, such as corporate practice of medicine statutes, reimbursement regulations, state certificate of need (CON) issues, and others, can influence the structuring of an IDS. Each IDS formation and transaction is unique, and various federal and state laws need to be reviewed during the structuring phase to ensure compliance.


Additionally, on February 15, 2023, the Centers for Medicare and Medicaid Services (CMS) published a proposed rule requiring nursing homes enrolled in Medicare or Medicaid to disclose and submit certain ownership, managerial, and other information to CMS and state Medicaid agencies. This proposed rule aims to promote nursing home safety, transparency, accountability, and quality. It applies to nursing home ownership reporting with a focus on private equity and real estate investment trust (REIT) ownership.


In summary, each IDS formation and transaction is unique, involving various legal issues that could shape its structure. To ensure compliance with all relevant federal and state laws, these regulations, along with others based on specific details, should be reviewed during the structuring phase of the transaction.


II. Physician/Hospital Organizations


Physician/hospital organizations (PHOs) are collaborative structures, usually consisting of physicians and a hospital, formed to provide a comprehensive range of medical services to managed-care payors, third-party administrators, and employers. PHOs can be structured as for-profit corporations, partnerships, or limited liability companies, with ownership typically excluding specialists. This is because, unlike primary care physicians, specialists do not manage patient care in the same broad fashion.


PHOs can provide an all-in-one solution to managed care plans, enabling them to secure tertiary-care services, primary care services, and specialty-physician services through a single contract. Despite this, the popularity of PHOs has declined with many large hospitals favoring a physician-employment model that allows them to negotiate rates on behalf of all their employees without the need for a PHO.


The establishment of a PHO entails careful consideration of a number of legal matters. These include ensuring that tax-exempt hospitals receive an appropriate return on their investments in the PHO, scrutinizing the structure of the PHO for compliance with the Stark Law and the Anti-Kickback Statute, and assessing potential antitrust implications. It is also important to consider corporate practice of medicine issues, billing and collection issues, and, in the case of direct contracting with employers, compliance with state insurance laws.


III. Independent Practice Associations


Independent Practice Associations (IPAs) are similar to PHOs, typically comprising a group of unaffiliated physicians who join together for managed-care contracting and administrative efficiency purposes. IPAs can take various forms, including corporations, partnerships, or limited liability companies, and can be composed of a few to several hundred doctors.


IPAs provide Managed Care Organizations (MCOs) with the convenience of securing the services of multiple physicians through a single contract. However, the collective bargaining power of an IPA may enable it to negotiate better terms, such as higher reimbursement rates or expanded definitions of covered services. Some IPAs also offer administrative services to their members, including marketing services, billing and collection services, and the provision of supplies and equipment.


Physicians may choose to join an IPA for the advantages of association, such as greater bargaining power, without fully integrating their practices. However, the formation of an IPA necessitates careful attention to antitrust laws to avoid accusations of price fixing. For example, if enough shared risk and integration exist among members of an IPA, it may be viewed as pro-competitive rather than anti-competitive, thus not violating antitrust laws.


IV. Professional Corporations


A Professional Corporation (P.C.) is a state-recognized entity that allows professionals of similar or different specialties to provide services jointly. A P.C. facilitates greater integration compared to an IPA. Each physician could be a shareholder in addition to being an employee. However, nonprofessionals are generally prohibited from owning shares in a P.C.


P.C.s do not usually encounter antitrust issues as the physicians are part of a single organization, eliminating the potential for internal price-fixing conspiracies. Still, if a P.C. accumulates a significant number of physician shareholders in a community, it may be seen as a monopoly. P.C.s must also ensure all shareholders are legally allowed to be shareholders under state laws. When forming a P.C., it's important to review the distribution of profits and salaries under the Stark Law and the Anti-Kickback Statute. Remember, violations may occur if compensation is based on referrals.


V. Management-Services Organizations


A Management-Services Organization (MSO) is an entity that provides various administrative and management services to medical providers. These services range from billing and collection to staff support and office space. Many hospitals and IDSs establish MSOs to strengthen bonds with their physicians and medical staff. The services of an MSO can extend to other health care facilities, such as clinics and nursing homes. In some cases, the contractual relationship between an MSO and a physician can pave the way for further integration between the parties.


MSOs are usually owned by the IDS, a hospital, or a group of physicians. If jointly owned, ownership investments must be proportionate to avoid potential legal and tax issues. For example, a disproportionate ownership interest might lead to violations of the Anti-Kickback Statute, Stark Law, and even tax issues if a charitable entity is involved. So, like other arrangements, legal issues such as those relating to health care fraud and abuse need to be reviewed. For example, to fit within the Anti-Kickback Statute's safe harbor, an MSO contract must meet specific criteria. If not, the arrangement isn't necessarily illegal but could be subject to scrutiny.



Types of Health Care Contracts


Contracts in health care–like contracts anywhere–serve as a written embodiment of the understanding and formal agreement between parties and they detail all aspects of the arrangement. They not only define terms but also set the procedure for dispute resolution. It's important to remember, however, that using form agreements or documents from previous transactions can be risky. Every arrangement is unique, so a form might not cover essential terms such as indemnification provisions. Thus, when using a form document, each party should thoroughly review all terms to ensure they're suitable for the specific transaction.


Negotiating an agreement can be time-consuming, and sometimes certain agreed-upon points can be overlooked and not included in the contract. So, each party should carefully review the agreement to ensure all key points are clearly and unambiguously incorporated.


I. Employment and Independent Contractor Agreements


In structuring transactions, it's common to include the hiring of a professional or some other type of contractual relationship. For example, if an IDS purchases a physician’s practice, the IDS will typically employ the physician or establish an independent contractor relationship unless the physician plans to retire or relocate. A key difference between employing a physician and contracting them as an independent contractor is the level of control exerted by the employer. In employment, the employer typically exercises control over its employees, while independent contractors work under their own direction with minimal supervision. This distinction only chips at the tip of the iceberg though.


In general, key contract elements to consider include the agreement's section addressing the parties' status. This should clearly state whether the relationship is employment or independent contractor, as misclassification can lead to severe tax penalties. Also significant is the non-compete clause or restrictive covenant, which usually prevents a health care provider from providing services within a specified timeframe and geographical area during and after the agreement. The enforceability of these clauses varies by jurisdiction, and there are ongoing developments to consider on this end. Further, compensation terms also often play a vital role in such agreements.


In addition to the key provisions, there are several legal considerations to bear in mind, such as restrictions in some states on the corporate practice of medicine, liability concerns, and the implications of the Stark Law and the Anti-Kickback Statute. Therefore, it's crucial to understand the legal landscape before deciding on the structure of the agreement.


II. Physician Recruitment Agreements


Physician recruitment agreements form a common framework in health care, primarily involving physicians, IDS, hospitals, or physician practice groups. They're vital for recruiting, relocating, or retaining physicians in specific communities post-residency. Hospitals, having the resources, often leverage these agreements to recruit primary care physicians or specialists. In return, the recruited physicians may receive financial incentives such as signing bonuses, relocation expenses, malpractice insurance, or guaranteed compensation for a specified period. However, these agreements also include provisions for the physicians to repay these incentives should they leave the community prematurely.


The complexities of physician recruitment agreements necessitate a review of certain legal issues. The physician is likely to refer patients to the hospital or IDS, so the recruitment agreement must align with the fraud and abuse laws to ensure it falls within a recognized compensation exception. These laws also need to ensure no mandatory referral requirements are tied to the benefits. The practitioner-recruitment safe harbor, applicable in health professional shortage areas, provides protection but doesn't apply if the recruitment isn't in such an area.


For tax-exempt entities involved in the recruitment, the remuneration offered to the physician should be examined to ensure it doesn't constitute a private inurement or an excess benefit, which could incur IRS intermediate sanctions. The compensation offered must be reasonable and not linked to referrals. It should represent the fair market value equivalent of relocating the physician to the community. The valuation should factor in the benefit gained from the physician's relocation, even when no services are provided, to ensure that the agreement complies with the relevant laws.


III. Management and Service Agreements


With increasing consolidation and integration of health care providers, various management and service agreements have emerged. In instances where a hospital purchases a physician's practice but doesn't employ the physician, they may create a service agreement for the physician to offer professional medical services to the hospital's practice. Some physicians prefer such agreements as it enables them to focus on medical practice while a third party handles administrative services. These agreements cover a range of services, from providing all nonprofessional administrative services to specific services such as billing and collections. A clear delineation of services and the associated payment terms forms the key part of these contracts. Hold-harmless provisions are also important, allowing one party to be held harmless for the acts of the other party and its employees.


To structure these agreements, it's important to review antitrust laws, especially when managed-care contracting services are involved. Fraud and abuse laws must also be reviewed alongside tax laws if the entity is tax-exempt. Some Medicare and Medicaid rules and regulations could also impact the contractual arrangements, so these should be taken into account when defining the structure of the contract.


IV. Merger and Acquisition Agreements


In merger agreements, identifying the surviving corporation forms a key provision. The agreement will dictate the surviving entity, governance documents, and officers. While one corporation is selected as the surviving entity, it doesn't automatically mean that all its operations remain intact. Officers' identity, operational issues, and redundancies need to be negotiated and incorporated into the agreement.


In acquisitions, whether the buyer is purchasing the stock or assets of the target company should be clearly defined in the agreement. If the target company is a non-profit entity, member substitution transactions often occur since no stock purchase is involved. The purchase price, payment terms, liabilities, and potential anticipated liabilities also form essential parts of these agreements.


Another critical provision is the acquisition of the seller's Medicare billing provider agreement and number. This acquisition comes with the liability for all prior inappropriate or false claims made by the seller. Therefore, many deals opt to avoid assuming the Medicare billing agreement and number.


Representations and warranties form another key aspect of acquisition agreements. They provide descriptions of each party's company, assets, employees, filings, etc. If a representation proves false post-transaction, the Buyer can seek damages as permitted by the indemnification provisions.


Beyond the contractual terms, legal issues affecting mergers and acquisitions must also be addressed. Antitrust laws, premerger notice or approval requirements, securities laws, tax issues, fraud and abuse laws, and Medicare reimbursement laws and regulations could all be applicable depending on the specific structure and nature of the transaction. This underscores the need for thorough reviews at both federal and state levels given the fact-specific nature of mergers and acquisitions.


V. Affiliation Agreements


Affiliation agreements serve as a crucial tool for creating bonds between parties in the health care sector. These agreements are often utilized by hospitals, either with other hospitals or physician groups, as an intermediate transitional step when they are not ready for mergers, sales, or acquisitions. In this way, affiliation agreements provide an opportunity for organizations to associate and explore potential future integration options without any immediate commitment.


Unlike merger and acquisition agreements, affiliation agreements usually lack specific clauses triggering further integration, such as a requirement for a merger or acquisition at a specified future date. This lack of firm commitment often results in such agreements being overlooked. However, setting an expiration date for the affiliation, perhaps stipulating that the affiliation only exists for a limited period (e.g., two years), can motivate parties to initiate negotiations for mergers, acquisitions, or other next-step arrangements.


Given their unique nature, affiliation agreements do not typically follow standard terms or forms. Nevertheless, all affiliation agreements should outline the purpose of the affiliation, clearly documenting the objectives that the parties hope to achieve through this arrangement.


Like all contracts in the health care sector, affiliation agreements can touch upon various legal issues depending on the specifics of the affiliation. For instance, if the affiliation is aimed at negotiating managed-care contracts with managed-care payors, the affiliation must be evaluated under antitrust laws. This is to ensure that the affiliation doesn't constitute a conspiracy between competitors, which would render sharing pricing information and jointly negotiating fees illegal.


Other laws may also apply to the affiliation arrangement based on its specific terms. Fraud and abuse laws may be implicated if the affiliation involves any form of financial relationship or exchange of remuneration. Tax laws will also be relevant if any of the affiliated entities are tax-exempt. Additionally, any impact on Medicare and Medicaid rules and regulations should also be considered as part of the agreement's legal review. In any case, the specifics of the affiliation will dictate the range of laws and regulations that may apply. So, it’s crucial for health care entities to engage with legal counsel during the drafting and implementation of such agreements to ensure compliance with all applicable laws and regulations.



Unwinding Transactions & Termination of Agreements


Unwinding transactions refers to the process of reversing a transaction when it does not meet the parties' expectations or intentions. Even though all parties enter a new venture with optimism, the fact remains that not all transactions will be successful. Hence, considering potential issues that could occur if the transaction doesn't materialize as intended, at the time of structuring the deal, could save time, money, and unwanted disputes in the future.


Termination of agreements is a critical aspect often overlooked during the formation and execution of merger or acquisition agreements. Discussing and outlining potential termination, exit, repayment, and post-termination conditions can save both parties from future disputes and potential litigation. While some transactions may be irreversible, such as mergers, others like member substitutions can be undone if necessary. Transactions involving the acquisition of an entity, such as through a merger, stock transaction, or asset transaction, are typically irreversible after closing. Conversely, non-acquisition agreements, like affiliations, joint ventures, or service agreements, can usually be easily terminated if the governing documents allow for termination under various circumstances.


I. Termination Provisions


Termination provisions are important to include in any agreement. They provide legal means to end an arrangement when things do not proceed as planned. If all parties agree to terminate, the process is usually straightforward. However, complications can arise when only one party wishes to terminate.


Termination provisions often include a repurchase right for the terminating party under specific conditions and terms in the agreement. In some non-acquisition agreements, termination provisions for breach of material terms or certain other specified occurrences are found. In some cases, parties can terminate the agreement for convenience, which requires careful consideration due to potential time and money already invested in the venture.


II. Rights to Repurchase; Repurchase Obligations


Repurchase provisions may be included in some transactions. They provide a party with the right to buy back assets they sold or contributed to a venture under certain conditions or if the parties mutually agree to end the relationship. Repurchase provisions can either impose a compulsory obligation on the party that originally sold or contributed the asset at the time of termination, or provide a discretionary right for a terminating party who contributed or sold assets to the venture.


It's crucial that the agreement specifies whether it is a compulsory obligation or a discretionary right. The agreement may also specify the type of event that would trigger repurchase rights or obligations and lay out the terms of the repurchase, such as purchase price or valuation methodology, the timing of the transaction, and post-transactional issues.


III. Bankruptcy


In a typical contractual service arrangement, one party can terminate the relationship if the other party files for bankruptcy or receivership. This might also trigger a contractual right for one party to buy back the business or assets originally sold. For example, if a P.C. that purchased the assets of a physician's practice files for bankruptcy, the physician may have the opportunity to terminate the agreement and repurchase the assets from the P.C. through their employment agreement. However, if the contract doesn't allow termination under such circumstances, the parties might find themselves stuck in a relationship with a party undergoing bankruptcy proceedings or receivership.


IV. Indemnification


An indemnification provision is a clause that offers a form of protection in the event of false representation. It permits a Buyer, who relied on a misrepresented fact by a Seller, to seek compensation for any resultant damages. However, the scope and duration of these provisions can vary. They typically have a survival clause or time limit and may also cap the indemnification amount.


In the case of mergers or member substitutions, where the Seller entity no longer exists or becomes part of the Buyer, an alternative party, such as a foundation or a third party, may guarantee the representations and indemnify the Buyer.


V. Confidentiality & Ownership of Records


Confidentiality and ownership of records provisions emphasize that certain parties should maintain the confidentiality of all records, including business and medical records, even after the termination or expiration of the agreement. These provisions are particularly vital in professional service contracts.


It's advisable to have clear provisions that determine who owns medical records after termination or expiration and require parties to maintain the confidentiality of those records. State laws and HIPAA federal privacy restrictions may impose additional requirements.


VI. Non-Compete and Non-Interference Clauses


Non-compete and non-interference clauses help prevent a party from offering similar services or operating in the same marketplace for a specific period after the agreement terminates. These clauses typically contain geographic and time limitations. Not all states, however, uphold the legality of non-compete clauses for physicians and other medical professionals. Some states consider these provisions illegal and unenforceable.


In addition to non-compete clauses, non-diversion and non-solicitation clauses prohibit a party from contacting the other party's employees, clients, or patients after the agreement's expiration or termination. These are typically less controversial than non-compete clauses, but they are still important in certain industries.


These provisions represent some of the important post-termination issues that should be included in an agreement. Other post-termination provisions such as billing, collection post-closing, arbitration, and final payment issues, among others, may also be significant based on the specific situation, facts, parties, and their goals.



The Climate of Health Care Transactions


The current climate of health care transactions and contracting continues to evolve amidst a flurry of mergers and acquisitions. Over the past three decades, health care organizations and providers have been actively engaged in a merger and acquisition mania. This trend is ongoing as health care providers continue to adapt to new challenges.


Despite the enduring integration frenzy, not all transactions have been successful. Various factors have led to the unwinding of these transactions, which have occurred through bankruptcy, repurchase arrangements, or sales to third parties. This has opened up new opportunities in the realm of corporate transactional work.


In this climate, hospitals and other institutional providers persistently seek effective ways to affiliate with physicians and other types of health care providers or suppliers. They are constantly exploring joint ventures and service arrangements, and strive to create meaningful alliances. The drive behind these affiliations often stems from the desire to be part of a larger health care system, which offers several advantages.


Being part of a larger health care system typically provides survival benefits. It ensures an adequate number of physicians on staff, capital for improvements and acquisitions, and a full range of services that keep loyal patients from straying to competitors for other services. Many physicians prefer to focus on practicing medicine and want to distance themselves from the growing regulatory complexity associated with Medicare, Medicaid, and the ACA. Over the past 30 years, we've seen health care providers enter into these affiliations, divest from them, and then re-enter similar arrangements in a perpetual cycle of physician integration.


The current climate remains favorable for further integration and affiliations. It seems likely that these collaborations will continue in the future, particularly considering the uncertain impacts of federal health care reform. Health care providers are continuously navigating this dynamic landscape, seeking beneficial partnerships and exploring new avenues for providing patient care.








 

[1] 45 C.F.R. §§ 164.501 & .502.

[2] Gerald R. Peters, Healthcare Integration: A Legal Manual for Constructing Integrated Organizations 68 (1995); see also Bruce John Shih, Healthcare Transactions: A Guide to Mergers, Acquisitions & Integration (1998).

[3] See, e.g., United States v. Vernon Home Health, Inc., 21 F.3d 693 (5th Cir. 1994); Delta Health Grp., Inc. v. U.S. Dep’t of Health & Human Servs., 459 F.Supp.2d 1207, 1210 (N.D. Fla. 2006). [4] Mary Jo Salins et al., Whole Hospital Joint Ventures, 1999 CPE Text for Exempt Organizations, 2, available at https://www.irs.gov/pub/irs-tege/eotopica99.pdf (last visited December 6, 2017). “The Tax Court has defined a joint venture as ‘a special combination of two or more persons where in some specific venture a profit is jointly sought without any actual partnership or corporate designation.’” Id. (quoting Sierra Club v. Comm’r, 103 T.C. 307, 322 (1994), rev’d, 86 F.3d 1526 (9th Cir. 1996)).

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