Avoiding the Pitfalls in Purchasing SNFs

Some daunting challenges for nursing homes have made this a buyer’s market, but a poorly crafted purchase agreement can only add to the difficulties

Wendy L. Rubas, Esq.,
John M. Callahan, Esq.

The nursing home field is in a period of transition and is facing many challenges, both financial and legal. This environment has caused many nursing home chains to put facilities on the market, sometimes at fire-sale prices. To the savvy buyer, this can be a mecca of opportunity. But the risks inherent in purchasing a nursing home should not be understated.

Acquiring a long-term care facility is like navigating a minefield: There are known risks, unknown liabilities, and always the uneasy feeling that unforeseen dangers are lurking. At a time when regulatory scrutiny of long-term care facilities, as well as the imposition of major fines and penalties, have increased, the purchaser of a long-term care facility should heed the ancient adage caveat emptor-“let the buyer beware.”

Entities that are considering the purchase of a nursing home often feel ill-equipped to anticipate the many consequences and considerations involved with a change of ownership. With a thoughtful plan for tackling the key legal considerations involved, a purchaser can overcome these uncertainties and help to ensure that its newly purchased Cadillac is not, in fact, an Edsel in disguise.

A sound purchasing plan has three key steps. First, the purchaser should conduct critical due diligence of the facility in an effort to learn as much as possible about its existing and potential liabilities. Second, the purchaser should carefully negotiate purchase and sale agreements to anticipate and allocate liabilities. Third, purchasers should understand and plan to make the multiple regulatory filings that occur as part of a change of ownership in this field. What follows is a general overview of each of these critical steps.

Step One: Careful, Thorough Due Diligence
When a nursing home is being sold at a bargain price, or is part of a major divestment, the purchaser may experience intense pressure to avoid or at least curtail due diligence. Usually this pressure comes in the form of a demand to “close the deal quickly.” Certainly due diligence is not the most glamorous aspect of a purchase. Purchasers of nursing homes, though, have a particular interest in proceeding carefully and resisting these pressures.

As with any commercial acquisition, the purchasing parties will want to conduct a full financial review of the target facility’s books and ledgers to assess for any accounting irregularities. An important part of this process will be a review of contracts and arrangements with other healthcare providers, including pharmacy companies and therapy companies. The terms of these arrangements must be reviewed for potential kickback or other illegal provisions. These terms can not only overstate the value of the facility, but can lead to serious civil and criminal liabilities.

In addition to performing a financial checkup, the purchaser must examine the facility’s compliance history, which involves reviewing past surveys (including statements of deficiencies and plans of correction) and other compliance activity. The purchaser will often find an array of violations. In many cases, these violations may be outstanding and the facility may be still operating under a plan of correction. In the most extreme cases, the facility could be at risk of losing its provider number.

Another key area of due diligence is to assess the insurance claims history of the facility. The number and types of claims filed, as well as the amounts paid on them, can provide insight into the risks associated with operating the facility. More importantly, the purchaser will want to assess if there were lapses in coverage, especially since many nursing homes are experiencing trouble obtaining and maintaining liability coverage.

Step Two: Skillful Drafting of Purchase Agreement
Once potential liabilities and similar issues are identified, the purchaser must ensure that the purchase agreements are drafted to insulate the purchaser from these liabilities. Legal counsel can work with the purchaser to craft “representations and warranties” in the purchase agreement. For example, a seller usually “represents and warrants” that it has operated the facility in compliance with the law, that it has not received notice of any government investigations, and that its financial statements accurately reflect the results of the facility’s operations. From the purchaser’s standpoint, the “covenants” made by the seller and contained in the purchase agreement also are critical because they address the seller’s future conduct, requiring the seller not to take actions to hurt the facility (such as by operating competing facilities in the same geographic market or disparaging the facility).

The most critical element of the purchase and sale agreement, especially for a forced or quick sale or for the sale of a facility with compliance problems, is the allocation of liabilities. The purchaser will want to draft contract terms that require the seller to maintain responsibility for liabilities that relate to events occurring before the sale date (even if they do not become apparent until after that date). The seller of a facility with compliance problems will usually want to negotiate the allocation of liability, especially when the purchase price is low. Another consideration is whether the seller will remain financially solvent after the sale. The allocation of liabilities is cold comfort if the seller goes belly up after the transaction and cannot meet the obligations of the agreement.

Step Three: Regulatory Filings
The regulatory aspect of a change of ownership is an often overlooked element that can have great impact on the timing of the transaction and on the liabilities of the purchaser. Each of the multiple entities that regulate a long-term care facility-from the state licensing body to the Medicare and Medicaid programs-has its own regulatory requirements for a change of ownership. In many cases, a regulatory body requires the parties to complete an application. In some cases, the new owner must gain regulatory permission to take possession of the facility prior to consummating the purchase. Therefore, in connection with any change of ownership, the purchaser should develop a plan to provide notice and seek permission of each of the regulatory bodies requiring it.

Many purchasers have learned about the importance of regulatory approvals the hard way, after failing to follow procedures that are required by law. Late and untimely filings can have the unfortunate consequences of delayed closing dates and lost revenue. When the parties ignore the filings altogether, they may face a surprise at the time of the facility’s next survey, when the state licensure body or Medicare surveyors discover that the filings were not made. This can result in the government taking immediate action to revoke the facility’s license or Medicare provider number, or imposing substantial fines and penalties.

It takes at least 30 days for most regulatory bodies to process a change of ownership. The bulk of the burden of making the filings falls on the purchaser, who is assuming responsibility for continued operation of the facility. The purchaser should start well before the proposed purchase date to develop a comprehensive list of all filings that must be made and the timelines for their filing and approval. The due diligence process is also critical here, since much of the information needed to complete regulatory filings will be obtained from the seller during the purchaser’s due diligence investigation.

Once the information is gathered, project approval can be approached in phases. The first phase of the purchase project should be devoted to completing the critical applications that require the most time to process. These include, typically, the facility license, Medicare and Medicaid provider numbers, and Federal Communications Commission approvals for radiowave transmitters. If a certificate of need is required, this time-consuming approval should be addressed first and will drive the timetable for closing the transaction.

After these most important regulatory filings are made, the second phase of the project can begin. This phase includes other regulatory approvals, such as CLIA (Clinical Laboratory Improvement Amendments) certificates, attorney general registrations, statements from peer review organizations, vehicle licenses, and medical waste permits.

With careful attention to the legal and regulatory processes involved, a potential buyer of a nursing home can escape the feeling of tiptoeing through a mine-field and instead enjoy a cakewalk. Long-term care is challenging enough already. Why add to your difficulties with a purchase agreement you’ll come to regret?

Wendy L. Rubas, Esq., and John M. Callahan, Esq., are attorneys with the firm of McDermott, Will & Emery in Chicago. Rubas’ practice focuses on regulatory and reimbursement assistance for healthcare clients, with a special focus on long-term care facilities, and Callahan’s practice focuses on healthcare industry transactions, including restructurings, mergers, acquisitions, affiliations, joint ventures, and divestitures. For further information, phone (312) 984-2119 or e-mail wrubas@mwe.com. To comment on this arti-cle, please send e-mail to rubas0703@nursinghomesmagazine.com.

Topics: Articles , Facility management , Finance