Revenue Cycle Impact on Healthcare M&A Transactions: Medicare Provider Agreement Assumption Choices Can Drive Transaction Structure

The past year in healthcare transactions has been one of the more interesting of my career, with the complete shutdown of certain industry segments for a period due to the COVID-19 public health emergency, modified business climate and reopenings, government stimulus payments through the CARES Act, Payroll Protection Program and Accelerated Payment Programs, ongoing tax changes (including potential for higher capital gain tax rates), high enterprise valuations and low borrowing costs. We view 2021 as an active market for acquisitions, including in healthcare. We note that increasingly we are seeing buying side activity from venture capital or private equity funds, where pro forma post-closing cash flow considerations are critical drivers of decisions.

This Salem & Green Transaction Series will examine some of the key regulatory issues in change of control transactions, the first of which is, the acquisition target’s cash flow upon the change of control.

The transaction structure and the purchaser’s risk tolerance will effectively determine whether the provider’s revenue stream is continuous immediately after the closing. An equity purchase will, in most instances, keep a provider’s revenue stream intact, although the purchase will still typically require the approval of the Medicare program, state Medicaid programs and, in some instances, contracted private health plans1. Equity purchases are in most cases reported as post-closing filings that are subject to approval of the agencies (with stiff potential consequences for failure to timely report or inaccurate reporting of the purchase such as a revocation of a Medicare or Medicaid enrollment and a reenrollment ban)2.

For example, an equity purchaser of a medical device company could experience the immediate financial benefits of the acquisition target’s Medicare and Medicaid enrollment and the company could keep billing each payor immediately after the closing while various applications or consents have been filed and are pending approval.

In an asset transaction, it is possible, in some instances, to keep this same kind of seamless revenue stream from Medicare and, in some cases, Medicaid, depending upon the state and provider type. For Medicare, certain provider types, such as surgery centers and home health agencies, may use a process called “change of ownership” and elect to continue billing under the Seller’s Medicare certification so long as the purchaser elects to receive assignment of the Seller’s Medicare provider agreement, which means that the Seller obtains successor liability from government liabilities related to Medicare3. In California, a similar process is available under the Medicaid program for different provider types, such as medical groups, clinical laboratories and unlicensed imaging centers4.

In addition, a purchaser in an asset acquisition of a provider that has the Medicare change of ownership available to it may nonetheless choose not to use it by rejecting the Seller’s Medicare provider agreement. Doing so avoids successor liability but the provider must be willing to experience what could be an extended period of time when the provider is ineligible to be paid by Medicare for any services delivered to Medicare beneficiaries.

Choosing between these options will be depend on provider type, purchaser access to financing, seller and purchaser risk tolerance, acquisition target payor mix and provider type. With careful planning, the purchaser can reasonably predict the revenue cycle difference of competing merger and acquisition transaction structures and select the option that best balances the competing factors.

Salem & Green provides regulatory counsel and local counsel services for transactional lawyers at other firms, and also provides full transaction counsel services, including the regulatory component for clients in need of such services.


142 C.F.R. 424.516.
242 C.F.R. 424.535.
342 C.F.R. 489.18.
4https://www.dhcs.ca.gov/provgovpart/Pages/PurchaseandSaleofMedi-CalEnrolledBusiness FAQs.aspx.

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