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  1. What federal and state Governing bodies approvals are needed in a Healthcare M &A
  1. What federal and state Governing bodies approvals are needed in a Healthcare M &A

Under the Under the Hart-Scott-Rodino Antitrust Improvements Act, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have jurisdiction over M&A activity of a certain size which may affect commerce.[1] Transactions which may trigger an anticompetitive effect are reviewed by the (DOJ) and the (FTC) for approval. Healthcare M&A transactions regularly consist of multibillion-dollar deals and are formed with the purpose of consolidating the market and are regulated by the DOJ and FTC.

When reviewing a potential transaction, the DOJ analyzes the proposed deal to determine if the transaction would “substantially lessen competition”[2] if allowed to be executed. Two recent Healthcare M&A transactions which were subject to DOJ review were CVS Health Corporations desired purchase of Aetna Inc. and Cigna Corps take over Express Scripts Holding Company.  Both cases were held to the “substantially lessen competition” and allowed to proceed. However, the CVS-Aetna deal was approved on the condition that Aetna’s Medicare prescription drug business be divested from the deal.

State Antitrust laws must also be considered when entering into a healthcare M&A transaction. States have their own state-specific antitrust laws which may prevent a transaction from being completed. This holds true with the CVS-Aetna deal. Although the DOJ has approved, the States of California, Florida, Hawaii, Mississippi, and Washington have joined the U.S. DOJ Antitrust Division in a civil suit to prevent the transaction on the ground that it would eliminate competition.[3]  The states’ ability to regulate and prevent the execution of healthcare transaction make it necessary to complete high-level reviews of all the states laws which may affect the deal.

  • What Federal and State tax issues must be considered in Healthcare M&A

Healthcare facilities are subject to both Federal and state taxes. The current tax climate makes taxation uncertain which may have some positive and negative effects on M&A transaction in the Healthcare space. Tax due diligence in a health care transaction must be extremely thorough in order to best be prepared for the upcoming tax season.

The repeal of the Affordable Care Act’s individual mandate[4] (the requirement that all citizens have health or pay a fine) is projected to increase the number of uninsured individuals substantially. The increase of insured individuals may negatively affect the finances of healthcare facilities treating more uninsured patients.

According to the Tax Policy Center, the implementation of the Tax Cuts and Jobs Act (TCJA) would result in fewer taxable donation which will be given.[5] Charitable donations are provided by individuals looking to offset their taxable income. The TCJA doubles the standard deductions and limits state and local deductions to $10,000.[6] As a result, less charitable donation will be given. Negatively affecting the finances of healthcare facilities which rely on charitable donations. 

However, the TCJA also increases the charitable contribution deduction to 60% of income at the federal level. This might induce high net worth individuals to donate more to charity as they claim more of their donation as charitable donations.

State governments are allowed to impose a “provider tax” on health care facilities with a limited assessment of up to a quarter of the state’s Medicaid Expenses. It is important to review the tax laws of every state in which the target healthcare facility is subject to.

  • What employment considerations must be made in Healthcare M&A

( I sent this to you already but then I added a footnote so I added in this second round)

The Workers Adjustment and Retraining Notification Act (WARN), provides that employers must give advance notice to its employees prior to any closing or mass layoffs.[7] An employer who violates this act are liable to each employee affected by the violation.[8] Penalties for violating the WARN Act include the average highest wages earned by the employee for the past 3 years, the payout of medical benefits, and civil penalties.  With exception of medical benefits, all of these penalties accrue each day of the violation period, with wage payouts to all the employees affected by the violation.[9]  

The health care industry is massive but not untouched by layoffs and branch closings. Due Diligence must be done to expose any WARN triggering event prior to closing and if so, were all the WARN requirements filed promptly and accurately. As one of the biggest industries in the country, the healthcare industry employs a great number of employees. Thus, Healthcare organizations can incur massive amounts of accumulated penalties which affect the bottom line and put the deal in jeopardy.

Another employment concern which requires due diligence is immigration and the immigration status of those employed in the healthcare industry. According to the U.S. Bureau of Labor Statistics foreign-born workers comprised 5.2% of the healthcare labor force.[10]  That amount rises even higher when you include immigration employment in healthcare supportive roles such as hospital maintenance (8.4%) and Personal care (4.3%).[11]

 Employment concerns include documented and undocumented immigrants. Immigrant doctors, nurses and other employees presumably require specific work Visas as a condition to their employment eligibility.  Visa requirements need to be maintained to prevent the risk of penalties and loss of talent. Undocumented immigrants working in the healthcare sector are cause for concern and can be a violation of laws in and outside of immigration. Proper employment classification is necessary for a healthcare transaction because it directly affects tax liabilities. Presumptively undocumented workers are likely to be classified as independent contractors instead of employees even when they work long hours and for less pay. Employee misclassification can result in higher tax burdens or penalties, as well as, legal liabilities with respect to potential wage and hour laws. Therefore, healthcare M&A transaction involve extensive employment due diligence to prevent these unwanted penalties.

  • What intellectual property considerations must be made in Healthcare M&A

Intellectual property (IP) due diligence is the process by which the IP of a target company is analyzed for accuracy and completeness. Healthcare M&A transactions require extensive intellectual property validation and verification.  Healthcare intellectual property concerns consists of 1) patents on chemical compounds for pharmaceuticals, 2) trademarks on brand name drugs, and 3) trade secret protected and privacy rights in patient list.[12]

Healthcare sector participants such as pharmaceutical companies and bio technologies are driven primarily on the value of their IP. The purpose of IP due diligence is to uncover fraud, copy right infringements, and verify proper filing of ownerships rights in IP. If any issues with the target company’s IP are uncovered, then the deal may be terminated.[13]

When engaged in Healthcare transactions, considerations must be given to how the rights of IP transfer. The struture of a deal may dictate how IP rights are transferred post transaction. In asset deals it may not be required to indicate the transfer of the IP in the purchase agreement.  The transfer of rights is presumed when the business is sold.

In a Stock sale, the IP ownership rights remain with the acquired company. However, All IP rights must be recorded when there is change in ownerships. Any delay in recording may result in the loss of royalties. [14]

  • How is hospital liability and malpractice suites accounted for in a Healthcare M&A

Part of the due diligence process is in M&A is to conduct a legal and insurance due diligence. The legal due diligence will uncover the targets history of malpractice lawsuits and current or potential future litigation. According to the National Practitioner Data Bank[15] medical malpractice payouts amounted to $3.9BN in 2017.[16]  All states require healthcare facilities to carry adequate malpractice insurance. The standard amount of coverage varies by state and may be up to $3M per year.  Insurance due diligence is designed to analyze the targets current insurance to verify adequate coverage. High litigation payout will increase the hospitals insurance premiums, which may significantly devalue the target and put the deal in jeopardy. Malpractice lawsuits can have a substantial effect on a hospitals bottom line regardless of the outcome.  The doctor-patient relationship is the cornerstone of the healthcare market. News of news negligence or other suites may make patients reluctant to seek medical help from that facility.[17]  Malpractice may also drive the overall cost of healthcare up. Malpractice suits commonly result in million-dollar settlements. The cost of which is transferred on to the consumer.  Liability insurance premiums can sky rocket after a lawsuit which may result in a doctor seeking new jurisdictions of which they can work.  Also, defensive medicine will be a concern of doctors prescribing unneeded medical test in order to protect themselves from malpractice claims. [18] All of these factors are considerations made during the due diligence process in a M&A transaction.


[1] 15 USC 18, Acquisition by one corporation of stock of another

[2] 15 USC 18, Acquisition by one corporation of stock of another

[3] https://www.justice.gov/opa/press-release/file/1099831/download

[4] https://www.irs.gov/affordable-care-act/individuals-and-families/aca-individual-shared-responsibility-provision-exemptions

[5] https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

[6] IRS Publication 5302, https://www.irs.gov/pub/irs-pdf/p5307.pdf

[7] 29 U.S. Code § 2102 – Notice required before plant closings and mass layoffs

[8] 29 U.S. Code § 2104(a)

[9] 29 U.S. Code § 2102(a)3

[10] https://www.bls.gov/opub/ted/2016/foreign-born-more-likely-than-native-born-to-work-in-service-occupations.htm

[11] https://www.bls.gov/opub/ted/2016/foreign-born-more-likely-than-native-born-to-work-in-service-occupations.htm

[12] http://sbca.net/intellectual-property-health-law/

[13] https://www.nutter.com/ip-law-bulletin/5-must-ask-ip-due-diligence-questions-in-corporate-transactions

[14] https://www.wipo.int/export/sites/www/sme/en/documents/pdf/mergers.pdf

[15] https://www.npdb.hrsa.gov

[16] https://www.capson.com/medical-malpractice-insurance-by-state

[17] https://online.tamucc.edu/articles/malpractice-and-its-effects-on-the-healthcare-industry.aspx

[18] https://online.tamucc.edu/articles/malpractice-and-its-effects-on-the-healthcare-industry.aspx

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