The merger and acquisition process can be very complicated and difficult for hospital executives to navigate. Creating a request for proposal and letter of intent, assessing potential partners, negotiating transaction terms and finalizing the deal can become overwhelming. When a proposed transaction undergoes extended state and regulatory reviews, as some healthcare M&A deals have recently, running a thorough and standardized process is even more critical. While some hospitals may have internal transaction and legal teams, it is still beneficial for executives to understand key legal issues that arise within mergers and acquisitions. Here are four important areas with legal implications for hospitals to cover during a transaction process.
1. Capital resources. It is important for hospitals to know about any capital resources and expertise the potential partner is bringing to the deal. "A selling hospital is often starved for capital, and it may not have made recent investments in equipment, technology or electronic health records. A hospital needs to make sure its potential partner can bring those things to its community," says Brian Browder, partner at Waller Lansden Dortch & Davis law firm in Nashville, Tenn.
Along with capital resources, each hospital needs to understand the revenue cycle and financial health of the other, especially since the deal may be motivated by financial challenges, says Thomas Jeffry, a partner in the healthcare and life science practice groups of Arent Fox. "Everyone needs to understand and, more importantly, have a dialogue for a business plan about what assets are going to be transferred or acquired," says Mr. Jeffry. In addition, both parties need to address future capital that will be needed to turn the distressed facility around. "Many times with distressed acute-care facilities, they have not updated the operating room in ten years. There may be antiquated equipment and the hospital cannot attract the surgeons it needs. The acquiring hospital needs to know," says Mr. Jeffry.
2. Tax exemption. Capital resources and revenue cycle are not the only financial elements hospitals should consider. "Increasingly, investor-owned companies and tax-exempt hospitals and health systems are forming innovative partnerships for the delivery of healthcare services. It's critical that these partnerships be carefully structured to protect the exempt status of the not-for-profit participants," says Mr. Browder.
3. Regulatory compliance. From a legal and business standpoint, it is imperative to have a good understanding of a potential partner's past compliance with healthcare laws and regulations. "Even the best-intentioned hospitals can inadvertently violate the complex healthcare regulatory regime. Any issues with compliance can have a significant impact on the hospital's reimbursement going forward which impacts the M&A process," says Mr. Browder.
4. Attorney General expectations. When an Attorney General reviews a transaction, it is hard to predict what exactly they will focus on. However, hospitals should try to get a sense of how the Attorney General would evaluate a potential acquirer or partner. "Each state is different, so the hospital needs to have an idea of what the conditions may be and to have a sense of that upfront," says Mr. Jeffry. "Depending on the organization, there may be an in-house legal and internal acquisition team. They would be well-versed in regulatory reviews and would have a check list of processes and procedures. If the hospital does not have the internal teams, they can bring in consultants. Regardless, the preparation for review should be standardized and thorough."
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1. Capital resources. It is important for hospitals to know about any capital resources and expertise the potential partner is bringing to the deal. "A selling hospital is often starved for capital, and it may not have made recent investments in equipment, technology or electronic health records. A hospital needs to make sure its potential partner can bring those things to its community," says Brian Browder, partner at Waller Lansden Dortch & Davis law firm in Nashville, Tenn.
Along with capital resources, each hospital needs to understand the revenue cycle and financial health of the other, especially since the deal may be motivated by financial challenges, says Thomas Jeffry, a partner in the healthcare and life science practice groups of Arent Fox. "Everyone needs to understand and, more importantly, have a dialogue for a business plan about what assets are going to be transferred or acquired," says Mr. Jeffry. In addition, both parties need to address future capital that will be needed to turn the distressed facility around. "Many times with distressed acute-care facilities, they have not updated the operating room in ten years. There may be antiquated equipment and the hospital cannot attract the surgeons it needs. The acquiring hospital needs to know," says Mr. Jeffry.
2. Tax exemption. Capital resources and revenue cycle are not the only financial elements hospitals should consider. "Increasingly, investor-owned companies and tax-exempt hospitals and health systems are forming innovative partnerships for the delivery of healthcare services. It's critical that these partnerships be carefully structured to protect the exempt status of the not-for-profit participants," says Mr. Browder.
3. Regulatory compliance. From a legal and business standpoint, it is imperative to have a good understanding of a potential partner's past compliance with healthcare laws and regulations. "Even the best-intentioned hospitals can inadvertently violate the complex healthcare regulatory regime. Any issues with compliance can have a significant impact on the hospital's reimbursement going forward which impacts the M&A process," says Mr. Browder.
4. Attorney General expectations. When an Attorney General reviews a transaction, it is hard to predict what exactly they will focus on. However, hospitals should try to get a sense of how the Attorney General would evaluate a potential acquirer or partner. "Each state is different, so the hospital needs to have an idea of what the conditions may be and to have a sense of that upfront," says Mr. Jeffry. "Depending on the organization, there may be an in-house legal and internal acquisition team. They would be well-versed in regulatory reviews and would have a check list of processes and procedures. If the hospital does not have the internal teams, they can bring in consultants. Regardless, the preparation for review should be standardized and thorough."
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