Getting Your Deal Done: Clearing Transaction Hurdles through Strong Diligence Processes

Getting Your Deal Done: Clearing Transaction Hurdles through Strong Diligence Processes National Association for Home Care & Hospice October 3, 2011 Presenters Carol Saul, Partner Arnall Golden Gregory LLP Kim Vaughn, CPA, Chief Financial Officer Community Hospice of Texas, Inc. Hedy Rubinger, Partner Arnall Golden Gregory LLP 3089065v2 1 Health Care Regulatory Due Diligence Carol Saul, J.D., C.H.C. Partner Arnall Golden Gregory LLP Atlanta and Washington, DC 404-873-8694 carol.saul@agg.com 2 1

Healthcare Deals are Different! Threats to future cash flow Potential for successor liability Complex revenue sources and customer relationships Regulation of referral source relationships Importance of regulatory compliance Multiple regulatory oversight bodies Shades of gray: must be able to assess identified risk The human element 3 Healthcare Due Diligence Healthcare Due Diligence involves coordination of lots of moving parts: Corporate Financial/Accounting/Tax Clinical/Operational Health Regulatory Change of Ownership ( CHOW ) Benefits IT Insurance 4 2

The Progression of the Deal: Seller decides to sell Seller s internal due diligence Offering memorandum Buyer (and lenders) identified Initial courtship Confidentiality agreement, calls, visits Offer/LOI Due Diligence Purchase agreement Closing 5 Why Do Due Diligence? Investigating a seller s operations to: Identify risks and problem areas Identify issues to be addressed in the purchase agreement Furnishing buyers and lenders with a level of comfort (or not) Assisting in evaluating a proper price and structure Roadmap for post-closing transition plan and costs 6 3

Seller s Due Diligence Tasks: Conduct a due diligence self-audit 1-2 years prior to sale; fix identified problems Decide what to tell employees, and when Be prepared: organize all key documents Buyer will want to review Don t get defensive: accuracy and truthfulness builds trust 7 Buyer s Health Regulatory Due Diligence Tasks: Review private offering memorandum, management presentation Review Seller s website and other publicly available information Review term sheet or LOI Initial CHOW analysis Agree on scope of review and deliverable Establish timetable and address any budgetary constraints Coordinate the different diligence teams scopes to avoid overlap Consider non-lawyer consultants engagement through legal counsel to maintain legal privilege 8 4

Buyer s Health Regulatory Due Diligence Tasks: (cont d) Develop a customized due diligence request list; avoid overlap with other request lists (sample health regulatory request list provided) Conduct a preliminary due diligence interview with Seller to explain and refine request list and identify management members knowledgeable in areas of focus Understand and abide by any limitations on interviews Review key documents (issue spotting) Conduct management interviews [HR, legal, compliance officer, security officer, privacy officer, reimbursement, sales and marketing] Request and review additional documents 9 Buyer s Health Regulatory Due Diligence Tasks: (cont d) Background checks: LEIE, GSA Report Material Findings in Real Time Coordinate Findings with other team members Respond to regulatory questions from lenders Oversee correction of problems to be fixed prior to closing Review/revise regulatory representations and warranties and indemnification provisions (sample healthcare representations and warranties provided) Be available for last minute surprises CHOW 10 5

Key Health Regulatory Focus Areas for Home Health and Hospice Transactions: Government Touches : audits, investigations Compliance Program Privacy/Security Compliance Referral Source Relationships medical directorships; leases with referral sources Ancillary provider agreements/services under arrangement 11 Key Regulatory Focus for Home Health/Hospice: Payor Agreements Billing and Collection issues: policies on credit balances, treatment of overpayments; third-party billing agreements Private Litigation Marketing practices: blast faxing? sales force compensation? separation of sales and clinical? home care coordinators? marketing materials free, discounted goods or services tracking non-monetary compensation to physicians 12 6

Key Regulatory Focus for Home Health/Hospice: (cont d) Licenses, surveys, accreditations status Exclusion check processes Medicare cap reports (hospice) Policies on therapy caps and therapy functional assessments (home health) Policies on face-to-face assessments and recertifications (hospice) Elder Justice Act policies (hospice) 13 Kim Vaughn, BBA, CPA CFO, Community Hospice of Texas Associate, The Corridor Group NAHC Annual Conference October 2011 14 7

What Buyers Need to Know How Sellers Need to Prepare High Risk and High Opportunity in the Current Home Care and Hospice Environment 15 1. Identify any potential risk under Medicare CoPs and requirements for reimbursement 2. Identify operational strengths and weaknesses to validate the provider s infrastructure capacity to maintain current performance and support growth and development 3. Identify the capacity of key management personnel to perform successfully in their role and meet business and service goals for the investment 16 8

4. Identify any critical success factors for the transition and, as applicable, integration 5. Identify any investment needed or indemnification for past liability that impacts the value of the company and the final purchase price and transaction terms 17 1. Prepare a comprehensive prospectus that contains company-wide data and breakdowns by service line, provider number, and office as applicable 2. Make sure that source documents and back-up detail is organized and readily accessible to the due diligence team virtual data room, email, on-site 3. Identify a key contact person to work with each of the buyer s advisors to ensure a smooth and efficient off-site and on-site review 18 9

4. Be clear on which personnel will be available for interview and to clarify information 5. Do your own due diligence evaluation don t assume you know the state of your agency 6. Don t be afraid to show weakness or problems areas but do be ready to show how you are addressing them 19 1. Planning, communication, and organization 2. Balance buyer s need to know and seller s need to not have daily operations disrupted 3. Balance methodical process and ability to be flexible with timing and schedule 4. Provide context and perspective for buyer to understand results especially those that show potential risk and may cause alarm 5. Remember who the client is avoid sharing findings or suggesting corrective actions with the seller 20 10

1. Off-site review of key information Organizational structure Key statistical information operational and financial Survey and ADR history Comparative benchmarks 2. Clinical record review and claims reconciliation 3. Review of personnel files, contracts, governance documents, policies/procedures, and quality assurance/performance improvement for compliance with CoPs 4. Interviews with key personnel 5. Direct observation of operations from point of referral/intake through discharge, billing and collections 6. Hospice IDT and volunteer, bereavement, and spiritual care programs 21 Sample selected from last 12 months unduplicated census to reflect provider s case mix, service utilization and length of stay and for hospice level of care and location of care Records reviewed for first and most recently completed episode or certification period number based on ADC by provider # CoP compliance and reimbursement requirements OASIS accuracy for Documentation of clinical eligibility criteria for hospice levels of care Reconciliation with corresponding to validate $ in tact or if there is potential overpayment or underpayment billable, not billable or billable with revision Based on results can expand sample in focus areas or past years 22 11

Effectiveness of business development and referral management to maintain census and support growth Capacity of current patient care service delivery model and practices to support quality of care and supervisory oversight Effectiveness of QA and PI program to identify problem areas and implement corrective action plans Utilization of information technology for medical records management, billing, and management reports 23 HR functions recruitment, retention, compliance Coordination between clinical and billing operations Capacity of billing department to submit clean claims and manage accounts receivable Knowledge and skill set of management and staff Organizational culture 24 12

Verbal progress reports Coordination with other business advisors financial, legal, investors Written summary report Strengths, weaknesses, opportunities and risks in leadership, operations, compliance, and business development Comparison of the company to other similar providers Determination of the fixability of any problem areas Recommendations for further investigation, improvements should the transaction proceed, and key considerations for the transition and integration 25 Lack of leadership/management benchstrength Potential for condition or standard level deficiencies under survey Potential for recoupment under federal audit Ineffective operational infrastructure Highly competitive markets 26 13

Position of home care and hospice as integral to the future health care delivery system Develop centers of excellence for market differentiation Follow the rules and don t get into trouble it s easier and less costly to do it right than to fix it later Invest in people Invest in infrastructure 27 Ms. Vaughn is the Chief Financial Officer of Community Hospice of Texas and an Associate with The Corridor Group. She is a certified public accountant with extensive skills in health care financial consulting. Her financial management experience includes over 23 years focused on post-acute health care services with a major emphasis on home care. After three years as an auditor with the international public accounting firm KPMG, Kim joined a multi-billion dollar health care system in North Texas as the Controller of Ambulatory Services. For over 14 years, she provided financial management for a full spectrum of outpatient ancillary services. Her responsibilities included the financial operations of all post-acute services of a large tertiary care hospital that also included home health, home medical equipment, hospice, air ambulance, medical office buildings and a long term acute care facility. Kim has an extensive background in home health and hospice, as well as home medical equipment. She has served on numerous boards of trustee finance committees for ambulatory corporations, home health agencies and hospice operations. Kim s experience also includes in-depth experience in due diligence work for home health and hospice acquisitions and divestitures, having led and participated in many during her career as a home care financial leader and consultant. 28 14

www.corridorgroup.com Consulting Services Mergers & Acquisitions Regulatory Compliance Operations and Financial Analysis Strategic Positioning Leadership Development Transitional Management Executive Search Executive Recruitment Succession Planning Products Policy & Procedure Manuals Quickflips Documentation Guides OASIS Competency Tool QAPI Workbook Survey ToolKit Education CHEX elearning Webinars Administrator Certificate Programs Nuts & Bolts Compliance Training 29 Change of Ownership, Diligence and Structuring Considerations Hedy Rubinger, Esq. Partner Arnall Golden Gregory LLP Atlanta and Washington, DC 404-873-8724 hedy.rubinger@agg.com 30 15

CHOW Issues Can Affect Deal Structure and Timing Licensure and Certificate of Need (CON) Issues State Specific Issues and Obstacles The 36-Month Rule Medicare CHOW Rules 31 Licensure and CON Issues Deal Structure Can Impact Licensure and CON Timing Change of Ownership v. Change of Control Consolidation of existing providers / Addition of Practice Locations Compliance with conditions of participation in structuring creative transactions Examples: Employing key personnel Patients/Surveys 32 16

Licensure and CON Issues Multi-Site Licensure Issues Proximity of locations Limitations on the number of inpatient units per license Scope of CON Radius or county limitations Size of operation 33 State Specific Issues and Obstacles State-by-state determination of CHOW v. Change of Control State examples of CHOW Definitions: California: A change of ownership shall be deemed to have occurred where, among other things, when compared with the information contained in the last approved license application of the licensee, there has occurred a transfer of 50 percent or more of the issued stock of a corporate licensee, a transfer of 50 percent or more of the assets of the licensee, a change in partners or partnership interests of 50 percent or greater in terms of capital or share of profits, or a relinquishment by the licensee of the management of the agency. 22 CCR 74667. Georgia: A license issued under this article is not assignable or transferable and is subject to suspension or revocation at any time for failure to comply with this article. O.G.G.A. 31-7-151. 34 17

State Specific Issues and Obstacles Ability to add new provider to existing Medicaid number Delays in application processing Licensure State Survey for Medicare Medicaid 35 Navigating the 36-Month Rule The 36-Month Rule Applies to HHA Transactions 42 C.F.R. 424.550(b)(1) Goal is to prevent the flipping of HHA provider agreements and to ensure that purchasers satisfy the Medicare Conditions of Participation Revisions since initial introduction CMS issued a transmittal that was subsequently rescinded Final Rule went into effect on January 1, 2011 CMS maintains that it will continue to monitor the rule 36 18

Navigating the 36-Month Rule If there is a change in majority ownership within 36 months of initial Medicare enrollment, or within 36 months following a change in majority ownership, the provider agreement and Medicare billing privileges do not convey to the new owner. The prospective owner must: Enroll in the Medicare program as a new provider; and Obtain a State survey or an accreditation from an approved accreditation organization 37 Navigating the 36-Month Rule What Constitutes a Change in Majority Ownership? An individual or organization acquires more than a 50 percent direct ownership interest Including asset sale, stock transfer, merger, or consolidation CMS will look to the cumulative effect of transactions within the applicable 36 month period 38 19

Navigating the 36-Month Rule Exceptions to the rule: The existing HHA has submitted two consecutive years of full cost reports following initial enrollment in Medicare or within 36 months after the HHA s most recent change in majority ownership Low utilization or no utilization cost reports do not qualify for the exception The HHA s parent company is undergoing an internal corporate restructuring, such as a merger or consolidation The owners of the existing HHA are changing the HHA s existing business structure, such as from a corporation to a limited liability company, and the owners remain the same An individual owner of the HHA dies 39 Navigating the 36-Month Rule Implications for HHA Transactions Analyze implications prior to entering into any transaction Structuring your organization Consider adding holding companies Address short and long-term goals for the company from the outset of the transaction Include warranties regarding changes of majority ownership in the deal documents Make closing date contingent on the occurrence of an exception If necessary, build in time for new enrollment and certification 40 20

Medicare CHOW Rules What constitutes a CHOW for purposes of Medicare? Partnership: The removal, addition, or substitution of a partner, unless the partners expressly agree otherwise, as permitted by applicable state law. Unincorporated sole proprietorship: Transfer of title and property to another party. Corporation: The merger of the provider corporation into another corporation, or the consolidation of two or more corporations, resulting in the creation of a new corporation. Transfer of corporate stock or the merger of another corporation into the provider corporation does not constitute a CHOW. Leasing: The lease of all or part of a provider facility 42 C.F.R. 489.18 41 Medicare CHOW Rules In a CHOW, the seller/former owner s provider number typically remains intact and is transferred to the new owner The purchaser must be willing to accept terms and conditions of the provider agreement Purchaser must accept responsibility for all liabilities of the current owner Automatic assignment unless specifically rejected If the Tax Identification Number changes, it is typically treated as a CHOW A CHOW generally occurs when the assets of the company are sold 42 21

Medicare CHOW Rules A CHOW must be reported within 30 days of the effective date of the change A change of information must be reported within 90 days of the change 42 C.F.R. 424.516(e) State Certification must submit certification materials and prepare for potential compliance survey After reviewing submission, FI will provide notice of its recommendation to CMS regarding enrollment After receiving recommendation, CMS will provide tie-in notice indicating new provider is enrolled and may begin billing The MAC will continue to pay the seller until it receives the tiein notice from the CMS regional office 43 Medicare CHOW Rules Creative structures can streamline the process Change in control v. CHOW Acquisitions by existing providers offer potential structures that avoid the CHOW process Consolidation Merger Addition of Practice Locations Must review state licensure proximity requirements and other licensure limitations Capitalization Requirements for HHAs Applies to new enrollment and CHOWs (if a new provider number is issued) 44 22

Medicare CHOW Rules Recent Enrollment Initiatives Under PPACA Overhaul of CMS-855A enrollment form Expanded Ownership Interest and/or Managerial Control Information Section 5 (organizations) and Section 6 (individuals) Disclosure of lenders, trusts, holding companies Organizational structure diagram Identification of management entity Individual owners titles and birth places Percentage of ownership Identification of holding companies Confirmation of LLC disregarded entity status Permission for MAC to request documents not listed on the 855 45 Medicare CHOW Rules Provider Screening Screening is based on Three Risk Levels: Limited, Moderate and High Effective Dates: March 23, 2011 for newly enrolling providers and those providers required to validate their enrollment between March 23, 2011 and March 23, 2012 March 23, 2012 for all other currently enrolled providers 46 23

Medicare CHOW Rules LIMITED RISK CATEGORY includes: Skilled nursing facilities Hospitals Physician or non-physician practitioners SCREENING REQUIREMENTS: Verification that a provider meets all applicable Federal regulations or State requirements for the provider type Verification that a provider meets all applicable licensure requirements Database checks (pre and post-enrollment) to ensure a provider continues to meet enrollment criteria 47 Medicare CHOW Rules MODERATE RISK CATEGORY includes: Currently enrolled HHAs Hospice providers Community mental health centers Currently enrolled DMEPOSs SCREENING REQUIREMENTS: All screening tools applicable to the limited category Unscheduled and unannounced pre and/or post-enrollment site visits 48 24

Medicare CHOW Rules HIGH RISK CATEGORY INCLUDES: Newly enrolling HHAs Newly enrolling DMEPOSs SCREENING REQUIREMENTS: All screening tools applicable to the limited and moderate risk categories Criminal background check and submission of fingerprints by all owners, authorized officials, delegated officials and managing employees 49 Medicare CHOW Rules Fees For Institutional Providers $500 in 2010 increases each year based on the consumer price index Fee required for CHOWs HHS may waive the fee in cases of hardship Funds will be used for program integrity efforts, including the costs of conducting the screening 50 25

CHOW Issues Can Affect Deal Structure and Timing Anticipate licensure and certificate of need (CON) issues Become familiar with the 36-Month Rule Consider the Medicare CHOW rules in structuring and executing your deal 51 QUESTIONS? 52 26