A Physician Owners First Steps to a Start Up HCB

ChallengeA healthcare business start-up can be a physician owner’s first steps towards building the next urgent care or ASC empire.  However, it should be duly noted that an empire cannot be built in a day and upon good intentions alone.  In the healthcare world there are several regulatory and financial planning steps that need to be taken into account when making the move to create a healthcare start up.

Robert Slavkin, partner with the Florida branch of Akerman LLP explains that regulatory issues  could be anything from the healthcare practitioner’s license being valid in the state, checking  the national practitioner database history to see if they have ever been reported for malpractice, as well as wanting to check with the state licensing agencies regarding what permits need to be had, if there are specific licenses or certifications that need to be addressed.

“As you move through the process and are starting up a new business, there is HIPAA and all of the requirements  regarding data and data transmission.  In addition to that, because you have HIPAA requirements you  need to have a HIPAA compliance program and a compliance program generally, especially if you are going to be dealing with Medicare and Medicaid,” Slavkin says.

Cindy Amedee, partner with Taylor Porter echoes Slavkin on the point that state law licensing requirements must be satisfied.  According to Amedee, usually the state agency in charge of licensing will need to know the type of health care entity seeking licensure, whether it is outpatient or inpatient, where it is located, whether it shares space with other businesses, the types of services that will be offered, whether invasive procedures will be performed, and other logistical information.

“Depending upon the type of health care services provided, the physical space may have to meet certain criteria.  So it’s important for the new business owner to have this information early in the process,” Amedee says.

During the start up phase, Amedee says state law will also govern the retention of medical records, HIPAA policies and procedures must be drafted and adopted by the practice,  all staff must be trained on these policies and procedures.

“A physician should understand Stark Law.  Generally, Stark Law prohibits the self-referral of patients to an entity in which the referring physician or an immediate family member has an ownership, investment or structure compensation arrangement, if the services for which the patient is referred falls into one of several categories of services.  There are exceptions to this prohibition, and the new physician should familiarize himself with the rules,” Amedee says.

“All health care entities should be familiar with the Anti-Kickback Statute.  The AKS is a criminal statute that prohibits the exchange (or offer to exchange), of anything of value, in an effort to induce/reward the referral of patients whose treatment will be paid for by federal health care programs.  It establishes penalties for individuals and entities on both sides of the prohibited transaction.”

Everett Wilson, partner with Akerman LLP say one of the biggest issues is really the business model.  Unlike other types of businesses that are consumer driven and one simply creates and markets a product, in healthcare things are a little bit different.  Because of the way that healthcare services originate – through a referral from a physician, payor, other third party – an essential element of the transaction is to determine whether those referral relationships can reasonably be expected to continue.

Wilson adds that the ability to control the model in order to receive payment for services is equally an important thought.

“All of this has to be considered during the process of starting up a business and it needs to be started as early as possible; it is a long undertaking, because there is a lot of regulatory framework that needs to be taken into account from the beginning,” Slavkin says.

As far as examining the financial needs of building a business from the ground-up, Alan Ayers, Vice President, Strategic Initiatives with Practice Velocity, LLC says the first step in creating a budget for a new business is always about estimating revenues.  Ayers stresses that the operating model (which determines expenses) should support the anticipated volume.

“Understanding volumes up front is key because an operation built anticipating 100 patients per day will look very different in terms of facility, capabilities and staffing than one anticipating 25 patients per day,” he says.

Ayers adds that patient volume will determine the scale for fixed expenses such as the size of facility, type and quantity of equipment needed, and number of staff/staff positions required.

“Building an operation with capacity to support 100 patients per day when only 25 patients are expected would result in unnecessarily high overhead that could keep the center from ever being profitable,” Ayers says.

Where to Turn

If the issue is one of healthcare, Wilson says business owners need to identify a healthcare specialist both legally and financially.

“Hiring an attorney like this is particularly helpful if they have experience in your line of business.  If you are going to start an ASC, seek a healthcare attorney that has experience in ASC issues, etc.  The reason for that is because with regulations and reimbursements, they are so intertwined with regulations specific for that industry, that you want someone who has the insight and has dealt with those issues before,” Wilson says.

Amedee says a prospective healthcare lawyer should be able to assist with the structure of the deal, state licensing, analysis of healthcare regulatory and compliance issues that may be implicated in the transaction, and other business issues that must be analyzed.

“Look for a lawyer who practices mainly or exclusively in the health care area with expertise in mergers, acquisitions, business start ups, and heath care federal and state compliance and regulatory expertise,” Amedee says.

What if You are a First Time Buyer?

Wilson says that if the business owner is a first time buyer starting a business, the first thing on the buy side is strategic.  Wilson says buyers have to make sure that the purchase you are making is in line with whatever your goals are.

“That is a precursor to everything.  You want to make sure that that acquisition fits what you are doing and is it’s not just another portfolio company. Assuming that is already off the table, the next thing to look for is how long the company has been in business…. then come financial issues.

“Am I overpaying?  How am I structuring the deal as far as financing and whether I am getting outside financing or seller financing.  Once you have addressed these issues comes due diligence,” Wilson says.

“You are going to do your financial due diligence like any other business, but you want to look at the referral sources, and address the quality of where those referrals are coming from. Once you have got that, from a due diligence standpoint, you will want to look at the management team.”

Amedee says first time buyers should have a list of representations and warranties it expects the seller to make in the acquisition/merger agreement, as well as an indemnity clause that obligates the seller to reimburse the buyer for any damage the buyer incurs that was actually caused by the seller.  That is not enough, however–the buyer needs to do its due diligence.

“Some suggested due diligence items include investigating the business being acquired, as well as all employees that will be retained, to be sure they are not excluded from federal or state health care programs; conduct an independent valuation of the business to be sure the price is fair market value, search court records to see if there is any pending litigation,” Amedee says.

“If purchasing or merging hospitals, consider whether keeping the hospital’s Medicare provider number is in the buyer’s best interest.  The Medicare provider number represents the hospital’s payor contract with Medicare, and all liabilities associated with the number will transfer to the purchasing entity.  Check with the state health department to see if there are licensing infractions that have not been cured.  The foregoing is only an example of some of the necessary due diligence.  Depending upon the type of health care entity being acquired/merged, the history of the entity, and the buyer’s preliminary findings, additional due diligence will be warranted.”

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

 

 

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