Private Equity Transactions in Healthcare: Navigating Stark, AKS, and Other Regulatory and Compliance Challenges

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Private Equity Transactions in Healthcare: Navigating Stark, AKS, and Other Regulatory and Compliance Challenges Negotiating Purchase Price, Restrictive Covenants, Indemnities, Equity Rollovers and More THURSDAY, MAY 12, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: John C. Riddle, Managing Director, Brown Gibbons Lang & Company, Chicago Roger D. Strode, Partner, Foley & Lardner, Chicago The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Private Equity Transactions in Healthcare Roger Strode Foley-Chicago, IL John Riddle Brown Gibbons Lang-Chicago, IL May 12, 2016 Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL

6 Agenda Current Capital Market Conditions Physician Practice Transaction Landscape Practice landscape taxonomy Transaction considerations Deal and tax structuring Corporate practice of medicine Impact of designated health services Impact of legacy tax structures Regulatory and Compliance issues Stark Law and AKS Issues Issues related to billing and coding compliance Common deal terms and indemnities Representations and warranties Caps/baskets/survival periods/insurance 6

7 Transaction Volume Favorable Capital Markets Strong Healthcare Deal Flow As healthcare becomes an ever larger component of the American economy, transactions in the healthcare space continue to increase as a percentage of overall market transaction activity In the fourth quarter, provider services acquisitions increased over 15% from third quarter activity and 29% higher than the fourth quarter of the prior year Scarcity of quality assets to meet demand for acquisitions Transaction Volume and Value (Middle Market) 10,000 7,027 6,935 7,236 7,500 6,104 6,382 5,119 5,000 3,567 2, Transactions Transaction Value $600 $450 $300 $150 $0 Transaction Value Private Capital Availability Remains Robust Aggressive Private Equity Investors Aggressive private equity investors with dry powder Ample financing available for high quality companies Large amount of capital that needs to be deployed in the next six to eighteen months Excess investable capital being drawn down Sources: Capital IQ, Thomson Reuters, Pitchbook 7

8 Total Debt / EBITDA Leverage Markets Holding Increased competition from non-traditional sources, paired with a lack of demand for loans, has created a highly competitive dynamic in the marketplace Issuances directed strictly to leverage buyouts have returned to pre-crisis levels, at 10.4% of total issuance over the last twelve months Leverage Increasing in Deals (Middle Market LBOs) 6.0x 4.8x 5.0x 4.5x 4.2x 4.3x 4.0x 3.3x 3.0x 2.0x 1.0x 5.3x 5.3x Debt multiples for middle market LBOs continue to be stable at 5.3x in 2015, reaching the highest level since 2007 when debt multiples averaged 6.2x 0.0x Middle Market Loan Issuance ($US in billions) 2015 experienced continued momentum from 2014 and favorable leverage ratios remain prevalent Increasing number of loans are coming due in 2016, which will compete for new debt used for M&A and growth initiatives 8

9 Median LTM EV/EBITDA Median NTM EV/EBITDA Median LTM EV/Revenue Median NTM EV/Revenue Valuations Above 5-Year Average Average Enterprise Value to Revenue Average Forward Looking Enterprise Value to Revenue 3.0x 2.5x 2.8x 3.0x 2.5x 2.5x 2.0x 2.0x 1.5x 1.0x 1.4x 1.1x 1.3x 1.5x 1.0x 1.1x 1.0x 1.3x 0.5x 0.5x 0.0x Specialty Physician Group Hospital Management Imaging Services ASCs 0.0x Specialty Physician Group Hospital Management Imaging Services ASCs Average Enterprise Value to EBITDA (Proxy for Cash Flow) 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 12.1x Specialty Physician Group 8.1x 7.4x 10.7x Hospital Management Imaging Services ASCs Average Forward Looking Enterprise Value to EBITDA 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 10.0x Specialty Physician Group 7.3x 6.1x 10.7x Hospital Management Imaging Services ASCs = 5-Year Market Cap Weighted Average 9

10 Historical EV/EBITDA Historical EV/Revenue Valuations Above 5-Year Average Comparable Public Companies Historical Median LTM EV / Revenue 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Specialty Physician Group Hospital Management Imaging Services ASCs Total 5-Year Average Comparable Public Companies Historical Median LTM EV / EBITDA 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Specialty Physician Group Hospital Management Imaging Services ASCs Total 5-Year Average 10

11 Physician Practice Landscape Practice Taxonomy Four sectors with significant activity Facility-based specialties (e.g. anesthesia, radiology, ED, hospitalists) Retail medicine (e.g. dental, dermatology, IVF) Disease-state specialties (e.g. gastro, orthopedics) Primary care strategies 11

12 Physician Practice Landscape Core Drivers of Consolidation Benefits of scale Leverage IT, scheduling, revenue cycle Access and optimize ancillaries Deploy physician extenders and specialize Manage care strategies Capital availability Investors increasingly understand potential in clinical services 12

13 Physician Practice Landscape Core Drivers of Consolidation Secular trends Healthcare reform Employer and payer strategies Physicians increasingly interested in a transaction Desire to establish long-term practice continuity Aging physician base in ownership Capital requirements Wealth diversification 13

14 Transaction Considerations Platform vs. Bolt-Ons Platform attributes Valuation differences Compensation and Value Trading compensation for liquidity Tax considerations Ownership Dynamics Broadly held vs. consolidated ownership 14

15 Transaction Considerations Post Transaction Physician Relationship Employment terms important to get right Maintain culture and clinical operations Ensure ability to continue to recruit and retain new physicians 15

16 Deal and Tax Structuring Corporate Practice of Medicine Most states have some form of corporate practice of medicine Influences structure Generally requires the use of a friendly or captive professional entity Economics captured in Management Company through management fee 16

17 Deal and Tax Structuring Starting Structure MD MD MD MD Assets and Employees Legacy Medical Group 17

18 Deal and Tax Structuring Ending Structure MD MD MD MD Limited Clinical Assets (DHS) Clinical Employees MD Friendly Medical Group MD Rollover Entity Management Company Sponsor Assets and Employees Management Fee Management Services 18

19 Deal and Tax Structuring Corporate Practice of Medicine New York state settlement with Aspen Dental Management Many states have some form of CPOM concept and fee-splitting prohibitions Significant risks can arise when a non-professional vendor is engaged to manage or consult a licensed professional or an entity comprised of licensed professionals. New York State AG alleged that ADMI did not simply provide business support and administrative services but subjected its managed dental practices to extensive undue control 19

20 Deal and Tax Structuring Corporate Practice of Medicine AG determined that Practices were individually owned in name only, and ADMI was acting effectively as a de facto owner Management fee captured a percentage of the practices revenue, ADMI exercised control over bank accounts, advertising and marketing practices, decisions involving patient care and treatment plans, and clinical staff employment matters Significant fine paid and restrictions agreed to by ADMI 20

21 Deal and Tax Structuring Corporate Practice of Medicine Who is really in control of the practice, not just in control of clinical decision making? How are management fees determined? Are they consistent with FMV? Can the manager unilaterally discipline/fire licensed professionals? What do the non-competes look like? What impact does a loosening of control/restrictions and renegotiation of management fees have on purchase price? 21

22 Deal and Tax Structuring Impact of DHS DHS Assets (Lab) (Imaging) (PT) Friendly Medical Group 4. Management Fee 3. Management Services Management Company 1. Bill for DHS 2. Reimbursement Payers Including Medicare 22

23 Deal and Tax Structuring Impact of Designated Health Services Implicates the Stark Law Stark prohibits certain referrals by a physician for socalled designated health services (DHS) including lab and imaging reimbursed by Medicare unless the structure meets an exception Requires a structure that preserves the so-called in office ancillary services exception Failure to meet IOAS exception will make illegal physician referrals for DHS Successfully meeting the IOAS exception obviates the need to meet other exceptions 23

24 Deal and Tax Structuring Legacy Tax Issues Impact of S Corporation Status on Rollover Equity Amelioration of Negative Tax Consequences 24

25 Regulatory and Compliance Issues Impact of AKS and Stark Law FMV payments still a concern Stark Law DHS issues State Law CPOM and Licensure Compliance Issues in Diligence Billing and coding ( up coding and incorrect use of modifiers) Improper billing for physician extender Billing when charting is incomplete 25

26 Hot Diligence Issues Anti-Referral Issues Violations of Physician Anti-Referral laws (Stark) remain a significant concern OIG Fraud Alert (June 2015) Emphasized the need for FMV payments to MDs for bona fide services Problematic arrangements include (i) those above FMV, (ii) compensation that takes into account v/v of referrals, (iii) MDs failing to provide contracted services and (iv) affiliated health care entity paying for physician office staff Shot across the bow to physicians who sometimes believe they won t be targeted for abusive situations 26

27 Regulatory and Compliance Issues Anti-Referral Issues Physician compensation, particularly stacking of compensation that leads to high aggregate compensation amounts Focus on FMV, including the selection of benchmarks and the quality of reports Focus on the accuracy, reliability and completeness of information provided to advisors Questioning of commercial reasonableness of compensation arrangements when reasons for the arrangement are not well documented 27

28 Regulatory and Compliance Issues Anti-Referral Issues North Broward Settlement $69MM settlement for FCA and Stark law violations (including a 5 year CIA) Adventist Settlement $115MM to settle Stark law and Medicare coding claims 28

29 Regulatory and Compliance Issues Anti-Referral Issues Employment Safe Harbor (AKS) is not bullet proof and doesn t give you cover under the Stark Law If you have high compensation relative to MGMA percentiles, have good documentation to support the compensation Watch use of internal reports, related to physician use/referral to ancillaries regulators will use it to connect the dots 29

30 Regulatory and Compliance Issues Finalization of 60-Day Overpayment Rule Statute set the 60-day rule stating that the overpayment must be reported and returned by the later of: the date which is 60 days after the date on which the overpayment was identified, or the date any corresponding cost report is due, if applicable By statute, overpayments retained after the deadline for reporting and returning an overpayment become an obligation under the Federal False Claims Act, subject to treble damages and per claim penalties 30

31 Regulatory and Compliance Issues Finalization of 60-Day Overpayment Rule Does the target have an overpayment policy? What are the target s document retention policies? Evaluate processes for conducting internal investigations Evaluate overpayment training 31

32 Common Deal Terms and Indemnities Due diligence continues to be critical to most deals getting done We are seeing a heavy emphasis on diligence matters Often due to the fact that Friendly PC retains its provider number(s) and NPIs In certain situations, agreements to self disclose prior to closing, or immediately after closing, are common Valuations appear robust Not unusual to see 9-12x (sometimes greater) multiples on TTM EBITDA for platform companies in the private equity space 32

33 Deal Term Updates Escrows of 10%-15% of transaction value not uncommon Seeing some reduction of escrows when R&W insurance is used Beware of carve outs for certain issues, such as health care compliance reps and warranties Sellers should be prepared for a second round of diligence from counsel 33

34 Deal Term Updates Survival Periods (R&W) General: months Fundamental: Unlimited Taxes/Benefits: SOL days Health Care: SOL = days or 3-5 years (depending upon negotiations) Caps Can be lowered through use of R&W insurance (as low as 5% of transaction value in some cases) No cap, generally, on breaches of covenants or breaches of fundamental R&W Higher caps, generally, on breaches of health care R&W Baskets 34