Purchase Of HME Company: A Primer

(August 2013)

Most acquisitions are “asset” acquisitions although I am seeing an increase in “stock” acquisitions. Assume that John Smith owns XYZ Medical Equipment, Inc. (“XYZ”). Assume that Smith desires to sell XYZ to Mary Jones, individually, or to a legal entity (e.g., ABC Medical Equipment, Inc. (“ABC”)) owned by Jones.

Asset Purchase

In an asset purchase, XYZ is the seller. It will sell its “hard” assets (items that can be “touched and felt”) to ABC. Hard assets include inventory, computers, delivery vans, etc. XYZ will also transfer its patient files to ABC. Patient files are classified as “intangible” assets.

Assume that ABC will take over XYZ’s physical location on Main Street and will hire some of XYZ’s employees.

ABC does not “inherit” any of XYZ’s liabilities unless ABC specifically decides to assume a particular liability (e.g., copier lease). That is the “up side.” The “down side” is that XYZ cannot transfer its PTAN, Medicaid provider number, accreditation, and state licenses to ABC nor (as a general rule) can XYZ transfer contracts to ABC. Specifically:

XYZ’s Part B supplier number cannot be transferred to ABC. Before it can apply for a Part B supplier number, ABC will need to secure accreditation for the Main Street location, will need to obtain a surety bond for the Main Street location, and (if the state has DME licensure requirements) secure state DME licensure. Assume that at closing, ABC has secured accreditation, a surety bond and state DME licensure (if required), then at closing, ABC can submit an 855S to the National Supplier Clearinghouse (“NSC”). Between closing and until ABC receives its supplier number, ABC will be able to accumulate the DME Medicare claims and send them through all at once when the supplier number is issued to ABC.

If ABC intends to bill state Medicaid, then ABC will need to obtain its own Medicaid provider number. It is unlikely that the state will allow ABC to bill Medicaid under XYZ’s provider number until ABC obtains its own provider number. Let’s say that ABC secures its Medicaid provider number 60 days after closing. It is likely that the state will allow ABC to accumulate the Medicaid claims between closing and the date it receives its Medicaid provider number and then send all of the claims through at once upon receipt of the provider number.

Let’s talk about PBM contracts, HMO contracts, managed care contracts, and other types of commercial insurance contracts. Normally, these cannot be assigned by XYZ to ABC without the payor’s consent. If it is important for ABC to obtain specific XYZ third party contracts, then before closing occurs, ABC needs to talk to the payors and determine if (at closing) they will either (i) approve the assignment of the contract from XYZ to ABC or (ii) issue a new contract to ABC.

Stock Purchase

In a stock purchase, Smith is the seller. He sells his “stock” in XYZ to either Jones, individually, or to ABC. For purposes of this article, assume that Jones (individually) will purchase the stock. Essentially, this means that Smith hands his stock certificate over to Jones. XYZ remains an ongoing entity. It should retain its accreditation (this will need to be confirmed with the accrediting organization). XYZ retains its surety bond, Part B supplier number, Medicaid provider number, state licensure, and (normally) its thirty party contracts (managed care, HMO, commercial insurance). The only difference is that Smith is “out” as the owner of XYZ and Jones is “in” as the owner of XYZ.

Instead of applying for new numbers and licenses, etc., XYZ will file change of ownership (“CHOW”) notifications with the various governmental agencies. There will be no “break in billing.” In other words, XYZ will not have to accumulate Medicare and Medicaid claims and send them through all at once sometime in the future.

As previously mentioned, the accreditation should remain intact. However, this will need to be verified with the accrediting organization.

The third party payor contracts will likely remain in place with XYZ after closing. Some of the contracts will likely require that XYZ submit a CHOW to the third party payor that informs the payor of the change in ownership.

Whatever debts and known liabilities that XYZ had before closing will remain with XYZ after closing.

Let’s talk about unknown liabilities. Whatever unknown liabilities (“skeletons in the closet”) that XYZ had at closing will remain with XYZ after closing. For example, if XYZ was submitting false claims before closing, then it may be a target of a government investigation after closing. Liability for any “fraud” committed by XYZ before closing should not flow upstream to Jones, individually. However, pre-closing fraud may diminish the value of XYZ, meaning that Jones may have paid too much for XYZ. If XYZ commits fraud after closing, then liability for the fraud may be imposed “upstream” on Jones.

Step To Consummate Acquisition

Jones/ABC and XYZ need to sign a Mutual Nondisclosure Agreement. This states that XYZ will disclose confidential information to Jones/ABC and that Jones/ABC will keep the information confidential.

XYZ will give to Jones/ABC its bank statements, tax returns, financial statements, etc. so that Jones/ABC can determine the financial condition of XYZ. Based on the information provided by XYZ, Jones and XYZ will agree on a purchase price.

Jones/ABC and XYZ will sign a letter of intent. This will be about four pages long. It will be detailed and will set out the “terms of the deal.” However, the LOI will not be binding.

Jones/ABC will conduct “due diligence.” There are three types of due diligence. The first type is “financial” due diligence. This is where Jones/ABC and Jones’ CPA review the financials of XYZ and make sure that they are comfortable with the financial condition of XYZ. The second type is “corporate” due diligence. This is where the law firm for Jones/ABC confirms that (i) XYZ is a corporation “in good standing;” (ii) XYZ’s minute book is up-to-date; (iii) there are no liens against XYZ’s assets; (iv) etc. The third type is “regulatory” due diligence. This is where Jones/ABC and her law firm (i) confirm that XYZ has an active/unencumbered Medicare Part B supplier number, Medicaid provider number and state licensure; (ii) confirm that XYZ is fully accredited; (iii) confirm that XYZ has an active surety bond; (iv) confirm that XYZ has all other required permits, numbers, certificates, etc.; (v) review patient files to determine if they are proper and complete; and (vi) determine if there is any pending or threatened litigation, government investigations, or third party payor audits.

Assuming that Jones/ABC is satisfied with the results of the due diligence, then “closing” will occur. It is at closing that Smith hands over to Jones/ABC the “keys to the store.” It is at closing that Jones/ABC pays all or a portion of the purchase price to Smith/XYZ. Prior to this time, Jones and Smith will have determined if this is an asset purchase or a stock purchase. If this is an asset purchase, then ABC will have been created…..and ABC will be the purchaser. If this is a stock purchase, then Jones (individually) will likely be the purchaser. Prior to and after closing, Jones will need to take those steps (discussed above) regarding obtaining new numbers/licenses, etc. (asset purchase) or filing CHOWs (stock purchase). If I am representing the purchaser, then my preference will be for about 75% of the purchase price to be paid at closing, with the balance to be paid sometime after closing. This way, there will be a pool of money for the purchaser to offset against in the event that the purchaser discovers (after closing) that Smith/XYZ has breached the “reps and warranties” contained in the Asset Purchase Agreement (or Stock Purchase Agreement).

This monograph is not intended to be legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only. The law pertaining to this monograph may have changed following the date of the monograph. The reader should consult his or her own attorney for legal advice concerning the contents of this monograph. Except where noted, attorneys are not certified by the Texas Board of Legal Specialization.

Prepared by:

Health Care Group
Brown & Fortunato
P.O. Box 9418
Amarillo, Texas 79105-9418
(806) 345-6300
(806) 345-6363 (fax)
www.bf-law.com

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