Using Transitional Services Agreements in Urgent Care M&A Transactions
Urgent Care M&A Transactions don’t happen overnight. Selling an urgent care center takes weeks, months and maybe even years of planning and preparation. A seller may be wanting to exit the market as fast as possible, and buyers want to take over as fast as possible so they can start earning revenue. A transitional services agreement (TSA), also known as an operations transfer agreement (OTA), can help speed up the transition from the old owners to the new ones.
Buyers often run into problems during this transitional period. If they have to wait for the seller to sort out their old contracts, for Medicare to issue them new provider numbers and for the state to approve the transaction, they may end up losing money.
“It’s a cash flow issue for the buyers,” Douglas Grimm, attorney and healthcare chair at Stradley Ronon, says. “They can provide services, but they can’t get reimbursed for anything until they have their provider numbers.”
Grimm says that just because a deal closes, and both parties show up and sign papers, that doesn’t mean that everything automatically switches over.
“Buyers need to worry about flipping employees over, Medicare and Medicaid numbers being issued or flipped over and any other services that require licensure and that the licensure be changed effective on a certain date,” Grimm says.
“Ultimately, the buyer wants to maintain the status quo and value of their investment for some period of time while they integrate their own back office operations and vendors for the facility into its umbrella,” Ron Lebow, healthcare attorney at Michelman & Robinson, LLP, says. “The parties will need to have some sort of transitional period for this, and that period of time is governed by a variety of factors, including how long it takes to terminate any outside vendor agreements and transition claims from one tax ID to another.”
TSAs allow buyers to transition over to ownership at a faster rate.
“Buyers can potentially even start generating cash flow upon execution of the agreements instead of waiting to jump in the day of the license transfer,” Lebow says. “Having a TSA allows you to protect your investment over that interim time frame between agreement signature and state recognition of the transfer, and reduces upfront operating costs the day you take over the center’s operating certificate.”
“A TSA can help close deals faster because the seller can provide collections on accounts receivable, submit bills on the buyer’s behalf under the old provider number, and help the transition process,” Amber Walsh, partner at McGuireWoods LLP, says.
Since buyers can’t perform any provider services without their newly issued Medicare number or the state’s approval, they can negotiate with the sellers to have some of the old providers remain on board for a little while.
“What will typically happen is that the deal will close, and the old providers will continue to provide services under the old provider number, even though the buyer now owns the operation,” Grimm says. “While the buyer is waiting for their Medicare number, the TSA can say that the old providers will continue to provide services until the buyer gets their own provider number.”
However, there is some risk involved.
“If the buyer and the seller are going to have a TSA arrangement that involves utilizing the seller’s provider number during the interim period, there is no one right solution,” Walsh says. “There’s inevitably going to be some risk involved with that. In many circumstances it can be low risk, but it needs to be vetted out with the contract you have in place, with your Medicare carrier and whatever your state’s license rules are. All of the legal ramifications need to be carefully considered.”
Even though a deal may close on a certain date, the buyer may not be able to fully take over and start providing and earning income from services. Lebow says that the government and state can retroactively hand over ownership. However, in some cases, depending on who controls the facilities in the interim period, it may not be a good idea to make the deal retroactive.
“The day the buyer is effectively the owner, is the day they’re liable for all regulatory compliance,” Lebow says. “Buyers may want to wait to make that date the day the government gives you the go-ahead because they don’t want to be liable for something the seller did or omitted to do that they weren’t able to direct or audit.”
Lebow says that if the buyer’s name is on the record as the owner the date the act took place, they’re now liable.
“Be cognizant of the effect the effective date of the deal will have,” Lebow says. “This does not, mean, however, that the buyer cannot exact some oversight until that date occurs.”
In addition, buyers and sellers can draft TSAs that will allow the buyer to come in as a management company before the state approves a deal. However, they have to be structured very carefully.
“These types of TSAs are very carefully governed by state and federal law,” Lebow warns. “You have to contractually structure the relationship between the buyer and the seller, who has not been approved as an operator or owner, and justify them having this contingency period during which they’re earning revenue and running the center, even though their name is not on the certificate and the state hasn’t blessed the deal, provided that the current operator remains involved and responsible to the government.”
Lebow says there are a couple of ways buyers can do this.
“The buyers may take over the lease or equipment and non-professional assets right away if the state allows for it, cancel old contracts and run new ones through their own vendors and collect the difference and receive payment of a management and rental fee,” Lebow says. “They may also have a lockbox account and be able to exercise control over interim budgeting, compensation and distributions.”
Sellers may want to carefully evaluate how these interim deals affect their own take-home pay during the period between signature and operating certificate hand-over, as well as how any deficit still owed to the buyer management company is satisfied. Lebow says that while the buyer may want it offset from the purchase price, the seller will want the debt to carryover at the time of license transfer.
The key to keeping things legal is to make sure that any management fees are paid at fair market value (FMV) and, structure the fee types legally based on law – i.e., whether it has to be a flat fee set in advance, costs plus a percentage mark-up or a combination of both.
“Ultimately, it has to be legitimate business relationship where services are rendered, and the amount paid to the management company is fair market value,” Lebow says. “In this case, FMV is the amount that the seller would give to a third party company that’s not buying their center.”
Lebow says that it falls upon healthcare transaction attorneys to very carefully structure how the buyer can essentially become intimately involved in oversight of the facility. He suggests consulting with a healthcare transaction lawyer and healthcare accountant that can contest to whether or not the fees for the services provided, equipment used or space rented are at FMV.
“If the TSA is not structured right, all parties involved can be fined by the government,” Lebow says. “In addition, all parties may be subject to payor audits, and if it’s horribly constructed, it may result in criminal charges as well.”
While TSAs are a helpful tool to quickly transition buyers over to ownership, there can be some drawbacks.
“Buyers and sellers can run into problems with TSAs if they’re using them as a long term solution instead of a short term one,” Geoffrey Cockrell, partner at McGuireWoods LLP, says. “It’s easy to get comfortable with a set up when it’s not the long term solution. If you wait too long, you can get into trouble.”
Walsh says that buyers should also look to see if indemnification is appropriate in a TSA.
“How badly does the buyer need transitioning services, and how willing is the seller to provide those services under certain terms?” Walsh asks. “That’s a negotiating standpoint. The buyers may want to have some sort of indemnity agreement that if the services that the seller provides aren’t performed up to standard, the buyer will be indemnified for the losses.”
“You want to have certain protections in place to ensure that you’re the one who now manages the center so you can protect the value of your potential investment,” Lebow says.
Not every deal requires a TSA, but it is an option to help smooth over the transition of ownership from the buyer to the seller.
“The sale of a center is like a big puzzle; you can’t just pick up the whole thing and move it in one fell swoop,” Grimm says. “Some pieces can be moved at the same time, but not all of it can be moved at once. It’s going to take several steps, and transitional services agreements kind of glue everything together and addresses the period of time between when the deal closes and when the buyer has all of the paperwork and documentation needed to operate by themselves.
“TSAs are used to solve any problems with generating the speed of the transaction,” Cockrell says. “While everyone may think of them as ministerial, deals can take time to button up, and people don’t always have an appetite to build the timing of the transaction around those administrative processes. Given the speed of which transactions move, TSAs could be a necessary step.”