Investment in the healthcare industry requires careful consideration, as it involves numerous distinct areas of the law. Venable's Private Equity Investment in Healthcare webinar series explores the unique issues and timely developments that shape deals within the industry.
In the fourth webinar in this series, partner Todd Gustin recently moderated a discussion between partner Ari Markenson and associate Evelynn Bui on how licensure and provider change of ownership issues factor into transactions.
The Role of Licenses and Permits in Healthcare Transactions
As healthcare is one of the most highly regulated industries in the country, any transaction in that space will likely involve licenses or permits. What licenses and permits do you need, and how do you get them? How do you transfer or renew them? To answer these questions, it may help to distinguish between a primary and a secondary license or permit when entering a transaction.
- A primary license or permit is essential for business operations. If you do not get the permit or license transferred or renewed pre-closing, then the business cannot continue to operate as it did before. For example, a transaction relating to a pharmacy would require not only a license to operate the pharmacy but also a controlled substances license.
- A secondary license or permit is also very important, but within the structuring of the transaction there is more flexibility regarding the closing conditions. If you get the license or permit renewed within so many days post-closing, the business can continue to operate. Examples may include a food establishment permit for the kitchen of a nursing home, or an elevator operating license or permit for the building itself.
Due Diligence Considerations for Buyers and Sellers
If a buyer is acquiring a provider that has changed hands frequently over time, it is likely that somewhere in the permitting process someone either incorrectly disclosed or forgot to disclose information to a regulator. As a result, it is possible that when the buyer submits a change of ownership application, the regulator will inform them that according to their records the company they are seeking to buy is not owned by the company they are seeking to buy it from.
To avoid regulatory issues that can slow down a deal, a basic step is to check the regulator's website and see if there is information related to the ownership of the target company and its licenses and permits. The buyer must ensure the regulator has the most up-to-date information and that it matches the information the buyer received from the seller.
The seller needs to be certain that the buyer will be able to secure approval for all licenses and permits. Some states require a track record to open certain businesses, like substance abuse treatment facilities. If a buyer lacks that experience, they will not be approved for the required licenses.
The seller must disclose to the buyer all information regarding which employees hold which permits and licenses. Before deciding on the structure of a deal (asset or equity deal), it is vital to know where the permits are and the rules around transferring them.
Structuring Transactions
Many different business issues inform how to structure a deal, and each has its pros and cons.
Asset Deals
- Pro: An asset deal helps the buyer avoid liabilities
- Con: The buyer must essentially apply for all new licenses, which means going through the entire regulatory approval process, which takes much more time and money and requires a lot more paperwork
Equity Deals
- Pro: To the regulators, this is essentially a change of information rather than a change of ownership, making it a much quicker way to close a deal; no approvals are needed, just post-closing notifications to the regulators about the change in equity holders
- Con: Proper due diligence is crucial to avoid potential liabilities
It is important for buyers to determine whether any potential liability that they want to avoid will make enough of a difference to justify going through the lengthy approval process inherent in asset deals.
Closing Considerations
Before a deal closes, it is critical for both parties to plan for the transition period between the signing of transaction documents and granting of approvals. No buyer wants a seller to essentially walk away and abandon business operations before they can officially take ownership.
A buyer seeking a loan will need to explain to its lender the process and timeline for the deal, so a closing condition must be more specific than saying that whenever the license approval comes through, the deal will close.
For many application processes, the regulator is required to act upon an application within a specified number of days after they determine the application to be complete. Most submissions are not considered complete, since the regulator often has questions. In some states those questions must be answered within a specific time frame, or the application will be invalidated. Some states have no required time frame, which can lead to long delays for a seller if a buyer takes its time in responding to regulators.
Transparency and Disclosure Requirements
Regulators typically require buyers to disclose information on anyone who will own 5 percent or more of a business as part of an approval process. Certain licensure rules do not require the disclosure of passive entities that do not control or manage the business.
In many states, those who own 5 percent or more of the business must follow strict procedures that they should know upfront to prevent them from backing out later. In some states, they must physically show up at a police station to be fingerprinted and share private information. Some funds are diversified in a way to prevent anyone from holding 5 percent or more ownership to avoid such disclosure.
Increased Scrutiny
State regulators are progressively scrutinizing healthcare transactions because of public concern about the quality of care and how it would be impacted by the consolidation of healthcare entities. Regulators consider whether it will be a material transaction or whether there will be a material change. The answer differs by state.
A few examples:
- California's material change definition includes transactions with or without a financial threshold
- New York defines it as a merger with a healthcare entity or an acquisition of one or more healthcare entities
- Oregon says that if one party has $25 million or more in revenue, and the other party has at least $10 million, it will be regulated
Many state regulators are focused more on how a transaction would affect the healthcare system from an antitrust perspective, as opposed to focusing on the type of provider or business involved. However, if a transaction deals with a hospital or hospital group, state regulators will be involved.
Some states have a lengthy approval process, while others have post-closing notice requirements. Businesses might try to avoid deals in highly regulated states, but even a notice requirement can trigger a regulatory investigation, as every state's attorney general has some type of antitrust competition authority.
As the regulatory landscape is constantly changing, navigating healthcare transactions requires legal counsel who thoroughly understands the nuances of the healthcare industry. If you have questions about how licensure and provider change of ownership issues may impact your investments, contact our attorneys.
We will be back in January with a webinar about financial services transactions that relate specifically to healthcare providers and financial services regulatory compliance issues for healthcare services providers. If you are a healthcare investment professional and would like to join the session scheduled for January 22, please email Ari Markenson at ajmarkenson@Venable.com.