Risk is No Game in the Urgent Care Market

Risky BusinessThe process of purchasing or selling a center can be one of the most profitable moves for both parties involved in the transaction. However, experts say that although profit can be had, risks and negative exposure can be a costly fix after the ink has dried on a buyer’s contract. The Ambulatory M&A Advisor takes a deeper look at the potential risks involved for center successors, how to prepare for such risks, and on the selling side, how to check your center to prevent being a risky investment in a transaction.

Exposure Explained: The Factors of Risk

Michael F. Schaff, chair of the Corporate and Healthcare Departments of law firm Wilentz, Goldman & Spitzer says that as the acquirer of an urgent care center or ambulatory surgical center, there is always the potential risk of liabilities based on the structure of the transaction.

“If structured as an ownership interest acquisition, an acquirer would be liable for all known, unknown and contingent liabilities of the center,” Schaff says.

Schaff continued adding that the risks can even bleed into the center’s future success if the provider ID of the center is acquired. In those circumstance, Schaff says, that the acquirer could be potentially liable for overpayments, fraud, or any regulatory violations and taxes from past years. He gives a brief example of one of the many situations in which a buyer can take on an issue through the existing problems of a center.

Carey Kalmowitz, founding shareholder at The Health Law Partners PC, expresses that the most significant area of potential exposure for a successor, in the case of these types of acquisitions, generally is undisclosed Medicare liability. Kalmowitz says risks in the area of Medicare can traverse the spectrum of being something that might be readily corrected, fixed to something that, in the case of systematic and substantial fraud, can profoundly alter the character and viability of the business on a ‘going forward’ basis.

Kalmowitz says that once a UCC or ASC is acquired, the buyer has, in effect, “stepped into the shoes” of that entity for several purposes, including Medicare participation.

“You can thus be subject to a myriad of exposures, risk areas that the seller accrued during its time of conduct with the business. You can have something relatively benign as in a case in which there were minor coding or billing issues, so there are inadvertent billing errors that potentially would require that claims be refunded. Or it could be something more profound with potential criminal exposure if you had systematic knowing submission of false claims that then would trigger False Claims Act liability,” Kalmowitz says.

Damaris L. Medina, healthcare attorney with Michelman & Robinson, LLP who is heavily involved in the urgent care industry says that some usual risks she sees aside from any inherited coding or billing exposure, are improper valuation of the center, low or short-term contracts with payers, non- assignable contracts, referral sources discounting a relationship with a center after a sale and saturation in the desired area.

“If your center is in a desirable area and a hospital or a free-standing ED opening is in the works nearby, that is going to have a big effect on your patient volume,” She says. “You need to make sure that competition is not on the horizon and that if it is, you are informed and have the opportunity to adequately weigh the affects of any competition prior to the sale.”

Risk Prevention and Mitigation

Kalmowitz, who co-chairs the Transactional and Compliance Practice Group, of The Health Law Partners PC, says that a purchaser will never fully insulate itself from risk. However, through the process of thorough, muscular due diligence, a potential acquirer is markedly better poised to identify its significant risk areas, Kalmowitz says.

“You can’t remediate a problem, even in advance; to the extent you don’t identify it. So, essentially…it is imperative to ensure that the appropriate tools are devoted to [the due diligence process]; this can go a long way in the risk-mitigation realm,” Kalmowitz says.

Schaff agrees that careful performance of due diligence starts with asking the right questions prior to a transaction and an acquirer cannot be too careful and should spend the appropriate time in order to take proper precautions in order to avoid any potential risks involved in a transaction.

Schaff says the process of risk prevention is all a matter of disclosure and includes a multitude of due diligence searches.

“You’re going to have to do many types of potential liability searches and possibly may need to notify the divisions of taxation in the state or the county, or the city, depending on the state(s) involved,” Schaff says.

He adds that even with the performance of in-depth due diligence, that, at the end of the day, potential liabilities may still fall between the cracks in the transaction. In order to best prepare for the worst, Schaff says a general step is to have the current owners make and stand behind appropriate representations and warranties, and including indemnifications should unexpected risks turn to liability.

“For example, you’re not aware of a lawsuit, or even if one has not been filed yet, and you acquire the center and six months later the center is sued. You’d want to make sure that the prior owners are responsible for any past issues,” Schaff says.

In regards to the proper questions to ask prior to the closing of a deal, Schaff says the company needs to be carefully reviewed in a number of categories.

“Typically when you represent an acquirer of a center, you require the Sellers to make a lot of representations and warranties about their employees, their benefit plans, law suits, contracts, environmental and healthcare regulatory matters (including that all prior billings complied with law), just to name a few. Bottom line, you need to know if there is any potential liability there,” Schaff says.

“You would need to know what you are buying and what potential exposure there is, ether pending or even threatened.”

Schaff recommends that the acquirer protect itself from past billing irregularities by appropriate representations, warranties and indemnifications. He says he would recommend to his clients that they use a billing expert to examine the past billing files to make sure that billings are compliant with law. He says with this process in effect, if any billing issues arise at a later date for prior services, they can remain the responsibility of the previous owner through an indemnification.

“Invest the resources in connection with the due diligence process so that you don’t have a CEO and the Board of Directors recognizing at some point, after the ink has already dried on the agreement, that they have this exposure,” Kalmowitz adds.

In addition to thorough due diligence, contractual protections, which can be incorporated in to the transaction documents, are another important tool to reduce exposure. Kalmowitz states that the strength of certain reps and warranties contained in the contractual documents helps to secure the protection needed in case of unexpected exposure.

When structuring the deal terms, Kalmowitz adds, “You can escrow some of the purchase price, so that you essentially have some pool of funds that can be tapped in the event that there are post-closing liabilities.” “We have also seen some instances, where it’s appropriate, to have the seller retain a minimal amount of ownership in the entity with a view towards promoting a greater degree of disclosure.”

With this retention of ownership, Kalmowitz expresses that to an extent, in the case of post-closing exposure, the prior owner of the business is still tied to the risk.

“That’s just one vehicle that we have used in order to incent the seller to be as forthcoming with its disclosures as possible,” he says.

Medina says one thing to consider in contracts is to include a legal fees provision. Medina describes this by saying that if the seller fails to comply with any requirements of the deal and a lawsuit must be filed, the party that prevails will have to pay all legal fees of the other party.

In addition, Medina says there can be a mediation or arbitration clause within the contract that says mediation is required if anything goes wrong with the transaction, prior to the filing of a lawsuit. This would force the parties to enter into private mediation and try to resolve the problem before moving on to the step of a lawsuit. According to Medina, when an enforceable arbitration clause is in a contract, parties cannot file a lawsuit in court and must arbitrate the issue.

“A lot of people feel that arbitration is the more cost-effective way of going through litigation…it’s a way to contain costs if there is a problem,” Medina says.

According to Kalmowitz, after a transaction is consummated, from a Medicare perspective, the argument that the violative conduct occurred pre-closing will be unavailing.

“You (the new owner) have their liability and, as a result, you really cannot take the position: ‘Yes, we are technically at fault because now we have stepped into their shoes, but it really wasn’t our conduct,’” Kalmowitz says, emphasizing the importance of taking the proper steps to mitigate the risks of a purchase in advance.

Medina adds that one way to check up on a potential seller in advance is to perform a background check.

“See if they have ever been sued before, if there are any lawsuits that they have been involved in, if they have been involved in any bankruptcies…that will pretty much tell you if the current owner has been a successful business person,” Medina says. “If any of these issues pop up during a background search, they may be red flags. It will tell you that maybe there are some things that may affect the value or viability of the center that you’re not seeing on the surface. It may cause you to increase your due diligence efforts and dig deeper.”

Is my Urgent Care Center a Risk for Potential Buyers?

One of the primary reasons you want to understand the risks in your center is because a buyer will usually be looking for credits on your purchase price through the due diligence process, Medina says.

“It’s kind of like selling a house. You want to make sure that your house is in order before you put it out on the market,” she says.

Medina adds that sellers want to make sure that the center is organized and operating in compliance with all pertinent regulations.

“The healthcare industry is extremely regulated, and ambulatory clinics, retail clinics and urgent care centers exist within a complex regulatory structure that places restrictions on all sorts of issues including who can own them, how they can be operated, what they can call themselves, how they can advertise, and with whom, and under what terms they can contract,” Medina says. Medina further explains that as an example there are laws on a state by state basis that regulate the corporate practice of medicine.

“If a health care business hasn’t been structured appropriately from the outset, that’s definitely something that may come out in the sales process and something that might be a deal breaker because of how expensive it will be to get legal team to unwind the deal and restructure it appropriately to put it into compliance,” she says.

Medina goes on to say that another aspect to double check is that all health care and managed care contracts are up to date. She says that both sellers and buyers should check that the center’s contracts with payers have assignment clauses so that the seller can easily transfer any contracts to the new owner and avoid a disruption to the business after the sale.

She also says that both the buyer and seller must consider how to make physicians and the staff aware of the transaction.

“The timing and form of the notification of an impending sale to staff and physicians really depends on the center. There are some places where staff and physicians tend to be very loyal to the current owner and won’t necessarily want to stay in a center once that center is sold. Physician and staff turn-over may decrease the value of the center because of the expense the new owner will have to face with things like recruiting, hiring and training new staff, credentialing new physicians, etc,” Medina says.

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