The focus that the COVID-19 pandemic has brought to nursing homes and similar facilities over the past year has created both an opportunity and a challenge for Home Health Agencies (HHAs) across the country. Home care has never been more desirable, and the continuing arc of the age wave demonstrates that the demand for these services is unlikely to decline in the future. On the other hand, competition for qualified personnel, declining reimbursements and the rising costs of doing business are increasingly forcing HHAs to question whether they have the resources and the will to compete in a highly regulated environment. which promotes integration with health systems, larger HHAs. or other specialist suppliers in order to survive and prosper.
In this, the first of four quarterly newsletters that Pullman & Comley will publish on this changing and vitally important aspect of the healthcare delivery system, we focus on the types of transactions that help HHA owners to achieve their goals, whether it’s time to grow or not. size and service area or maximize the profit potential of a strategic sale. We also take a look at some of the common issues HHA owners should understand and be prepared for when evaluating these alternatives.
Form of transaction
The structure of the transaction will be dictated by a number of factors, including the objectives of the parties, the responsibilities of the HHA seller, tax matters, timing and other considerations.1
Purchase of assets
The most common type of business combination is the purchase of assets. One company (the buyer) purchases certain assets and assumes certain liabilities from another company (the seller). Buyers often prefer this structure because they can usually avoid assuming most of the seller’s liabilities and simply walk away with the assets they have chosen. The seller will remain with the selling entity and regardless of the remaining assets and liabilities. In our experience, this type of transaction is often the only way that a for-profit entity can use to acquire a non-profit supplier.
Although asset transactions are in many ways the simplest type of transaction to undertake, parties will often need to spend a great deal of time and energy in obtaining approvals from regulatory authorities, insurance companies and contractors. third party to accomplish things such as licensing, favorable payer. supply agreements and arrangements to the purchaser. Whether you are looking to acquire or be acquired, taking an inventory of these issues months in advance is essential to identify potential business partners and avoid the issues that typically prevent or prolong these transactions.
Purchase of shares or membership
Another common form of transaction is the purchase of shares (or for limited liability companies, membership fees). In these transactions, the buyer buys all of the equity of the target company from the owner. Many buyers like to do this because it often minimizes the number of approvals and assignments that must be obtained from regulators, contractors, etc., as the target still exists as an entity. Sellers may also prefer this structure as they typically don’t end up with assets or liabilities that need to be dealt with after closing.
However, the due diligence aspects of these transactions (which will be discussed in a future episode of this newsletter) can be daunting, as the buyer is literally putting themselves in the seller’s shoes and therefore exposed to all potential liability related to the sale. how the seller has operated the business in the past. Some of the common techniques used to mitigate these risks are withholdings on parts of the purchase price and complex indemnification agreements that continue to hold the seller ultimately responsible for limitation periods or specific periods. These types of transactions can often be based on voluntary pre-sale disclosures to regulators and third party payers. As a result, the watchword for buyers is to identify potential problems early, while sellers should try to rectify these problems before they even enter the market.
Merger or consolidation
In a merger, an entity merges with and into another entity in accordance with the requirements of state law. The merging company disappears as a separate entity, but its rights and liabilities (like the equity purchases above) are usually inherited by the merged company. Many states, including Connecticut, New York and Massachusetts, also allow consolidations, in which two entities merge into a newly formed entity which is the surviving company. There is a similar drawback to a merger as to a share purchase, in that the surviving company inherits the liabilities of the company that merged with it.
In the merger scenario, a common way in which acquirers may seek to at least isolate the seller’s responsibilities (beyond the methods already discussed) is to engage in so-called “triangular mergers” where The acquirer creates a wholly-owned subsidiary (often a shell company), which in turn merges with the selling entity, so that the acquirer is the sole owner of the remaining equity in the subsidiary. There are also reverse triangular mergers which are the same as a triangular merger except that the subsidiary created by the acquirer merges into the selling entity. This leaves the selling entity as the surviving entity, which remains as a subsidiary of the acquirer. Reverse triangular mergers are used when it is important to maintain the identity and existence of the selling entity.
Substitution of members
In some states, including Connecticut, nonprofit or “non-equity” entities may have members. One option in such a state is for a nonprofit organization to acquire another nonprofit organization with the buyer becoming the sole member of the seller, making the seller essentially an affiliate of the buyer. This mainly involves modifying the seller’s corporate documents to provide that he can have members and set out the rights of the buyer / sole member in the seller’s articles of association. The effect of a limb substitution is similar to that of a stock purchase. Unless the seller is part of another non-profit organization or a separate charitable foundation is established for the purpose of receiving the proceeds of the sale, no purchase price is generally paid in transactions. member substitution because the seller has no shareholders to accept payment.
Considerations relating to the CARES Act
No discussion of initiating a sale or acquisition transaction in the current environment would be complete without considering the status of the benefits of the CARES (Coronavirus Aid, Relief, and Economic Security) Act program received by any of the parties to the transaction. Accordingly, the requirements of any Provider Relief Fund payment or any Expedited Advance Payment (AAP) received from Medicare should be reviewed to ensure that compliance is maintained with the appropriate HHS and CMS rules. It is possible that an HHA participating in the transaction may have issues accounting for the use of the Provider Relief Fund payments it has received or may have to reimburse CMS for the AAP overpayments, which could affect any analysis. financial transaction and create liability for the buyer or surviving entity of a merger. Additionally, as with all entities that are beneficiaries of a Paycheck Protection Program (PPP) loan under the CARES Act, the change in ownership of an HHA that is a PPP borrower requires the consent of the lender and possibly the Small Business Administration which guarantees PPP Loans if their PPP loan has not yet been canceled. Depending on the form of the transaction, the buyer may take responsibility for the lender. In this case, the buyer should ensure that the seller has kept proper records regarding their PPP loan.
In summary, the factors that stimulate the growth and consolidation of HHAs are likely to continue. As will be discussed in future bulletins, the complexity of HHA operations and regulation also warrants additional and careful business planning before proceeding with a transaction. Knowing the type of transaction alternatives available to buyers and sellers in this space is just the start.
1Note that tax issues that must be considered in any transaction are beyond the scope of this article.[View source.]