Healthcare Mergers and Acquisitions Explained

In the healthcare industry, mergers and acquisitions (M&A) is a complex and multifaceted process that includes not only financial and strategic considerations but also compliance with governing authorities. In this article, we will examine the numerous permissions required from these governing authorities in order to execute a healthcare M&A successfully. We will examine how the Hart-Scott-Rodino Antitrust Improvements Act grants the Department of Justice (DOJ) and Federal Trade Commission (FTC) jurisdiction over healthcare mergers and acquisitions that may impact commerce. We will analyze the potential impact of state antitrust laws on healthcare mergers and acquisitions. Then examine the federal and state tax considerations that must be taken into account, and investigate the employment considerations that must be considered in these transactions.

State & Federal Approvals for Healthcare Mergers and Acquisitions

The Hart-Scott-Rodino Antitrust Improvements Act grants the Department of Justice (DOJ) and Federal Trade Commission (FTC) jurisdiction over mergers and acquisitions (M&A) that may impact commerce. Transactions with potential anticompetitive effects are examined by the DOJ and FTC for approval. The DOJ and FTC regulate multibillion-dollar transactions aimed at consolidating the market, which frequently occurs in healthcare M&A deals. The DOJ evaluates the proposed deal to determine if it would “substantially lessen competition” if executed.

The Department of Justice (DOJ) reviewed the CVS Health Corporation’s proposed acquisition of Aetna Inc and Cigna Corporation’s acquisition of Express Scripts Holding Company as two recent healthcare M&A deals and deemed them to “substantially lessen competition” and permitted them to proceed. However, the CVS-Aetna deal was approved on the condition that Aetna’s Medicare prescription drug business be divested.

When considering a healthcare M&A transaction, it is important to take into account the various state antitrust laws that may affect the deal. Each state has its own unique laws that may prevent the completion of the transaction. As seen in the CVS-Aetna deal, even though the DOJ has approved the deal, several states including California, Florida, Hawaii, Mississippi, and Washington have joined the U.S. DOJ Antitrust Division in a civil suit to prevent the transaction on the grounds that it would eliminate competition. Therefore, it is crucial to conduct a comprehensive review of all state laws that may impact the deal in order to avoid any potential regulatory roadblocks.

tax issues in Healthcare Mergers and Acquisitions

Federal and state taxes have an effect on healthcare organizations, and the current tax climate can be complex and have both good and negative implications on healthcare M&A transactions. During a healthcare transaction, full tax due diligence must be undertaken to ensure optimal tax season preparedness.

In addition, the repeal of the individual mandate under the Affordable Care Act will likely result in a considerable increase in the number of uninsured individuals, which may have a detrimental impact on healthcare institutions that treat a greater number of uninsured patients.

Moreover, the implementation of the Tax Cuts and Jobs Act (TCJA) would likely result in a decline in taxable gifts, which might have a detrimental impact on healthcare institutions that rely on charitable donations. Notably, the TCJA increases the federal charitable contribution deduction to 60% of income, which may encourage high-net-worth individuals to give more to charity.

The final provision allows state governments to collect a “provider tax” on healthcare institutions equal to no more than 25 percent of the state’s Medicaid expenditures. It is vital to examine the tax legislation of each state to which the in question healthcare facility is subject.

Employment Consideration for Healthcare M&A

The Workers Adjustment and Retraining Notification Act (WARN) compels firms to provide advance notice of business closings or mass layoffs to its employees. Employers who violate this law are responsible to all affected workers. Infractions of the WARN Act are punishable by paying the employee’s highest three-year average income, providing medical benefits, and suffering civil fines. These penalties accrue daily during the duration of the infringement, in addition to wage payments to all affected employees.

Large as it is, the healthcare industry is not immune to layoffs and branch closures. To mitigate risks, conduct thorough due diligence before any closures or layoffs to identify potential WARN-triggering situations and ensure prompt and accurate reporting of any WARN duties. The healthcare industry employs a big number of people, and healthcare organizations can face severe penalties that can have a negative impact on their bottom line and put the agreement in danger.

Immigration and the immigration status of healthcare professionals is other job issue that requires caution. According to the U.S. Bureau of Labor Statistics, foreign-born workers make up 5.2% of the healthcare workforce. Including immigrant employment in healthcare support roles such as hospital maintenance (8.4%) and personal care (4.3%), this number rises.

Employment-related concerns extend to both approved and undocumented immigrants. In order to be eligible for employment, physicians, nurses, and other staff members who are foreign-born are often required to possess certain work visas. Noncompliance with visa requirements can result in punishment and the loss of talent. Employment of unauthorized immigrants in the healthcare profession is the reason for worry and may breach several laws than immigration law.

Employment classification must be accurate in healthcare transactions to ensure accurate tax obligations. Organizations may incorrectly classify undocumented workers as independent contractors rather than employees, under the assumption that they work long hours for a lower wage. Misclassification of employees can lead to higher tax liabilities or penalties, as well as legal complications under prospective wage and hour legislation. To prevent these unpleasant penalties, healthcare M&A transactions require extensive employee due diligence.

intellectual property considerations in Healthcare M&A

Intellectual property (IP) due diligence is the process of evaluating the correctness and completeness of a target company’s IP. M&A deals in the healthcare industry require substantial intellectual property evaluation and verification. Concerns about healthcare intellectual property include 1) patents on chemical compounds for pharmaceuticals, 2) trademarks on brand-name drugs, and 3) trade secret protection and patient privacy rights. [12]

The value of intellectual property primarily motivates pharmaceutical businesses and biotechnologies. The objective of IP due diligence is to detect fraud, and copyright violations, and verify the correct filing of IP ownership rights. If concerns with the target company’s intellectual property are discovered, the acquisition may be canceled. [13]

In healthcare transactions, individuals must consider the transfer of IP rights. The type of transaction determines how the post-transaction transfer of IP rights will occur. In asset transactions, it may not be necessary to specify the transfer of intellectual property in the purchase agreement. The sale of a business presumes the transfer of rights.

In a Stock sale, the acquiring entity retains IP ownership rights. However, all IP rights must be registered whenever ownership changes. Any delay in the recording process may result in lost royalties. [14]

hospital liability and malpractice suits

Conducting legal and insurance due diligence is part of the M&A due diligence process. The legal due diligence will reveal the target’s past malpractice lawsuits, as well as any pending or potential future litigation. In 2017, medical malpractice payouts totaled to $3.9 billion, per the National Practitioner Data Bank[15]. [16] Every state mandates that medical establishments have proper malpractice insurance. The standard coverage level varies by state and may reach $3,000,000 per year.

The purpose of insurance due diligence is to examine the target’s current insurance to confirm adequate coverage. High litigation payouts may increase hospitals’ insurance premiums, which may dramatically devalue the target and jeopardize the transaction. Regardless of the outcome, malpractice lawsuits can have a major impact on a hospital’s bottom line. The physician-patient relationship is the bedrock of the healthcare industry. Reports of carelessness or other misconduct may influence a patient’s reluctance to seek medical assistance from a hospital [17]

Legal and Insurance Due Diligence in Healthcare M&A

Additionally, malpractice may increase the entire cost of healthcare. Commonly, malpractice lawsuits end in multimillion-dollar settlements. The expense of which is borne by the consumer. After a lawsuit, liability insurance prices can skyrocket, which may prompt a physician to look for new jurisdictions in which to practice. Additionally, defensive medicine will be a worry as doctors prescribe unnecessary medical tests to avoid malpractice charges. All of these aspects are taken into account during the due diligence phase of an 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