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Strategic Restructuring for the Future | Not Just an Org Chart: Corporate and Regulatory Considerations for Hospice Transactions

 

Published:

October 26, 2022
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Related Industry:

Healthcare

Related Service:

Hospice & Palliative Care
 
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Hospices are increasingly looking to buy, consolidate or merge to achieve administrative efficiencies and expand growth opportunities. Transactions between hospices present unique regulatory challenges that shape corporate and transactional structures, and often require looking beyond the client’s organizational charts. Join Husch Blackwell’s Meg PekarskeAdam Royal and Erin Burns as they discuss key considerations and strategies in hospice transactions.

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This transcript was auto-generated using Adobe Premiere Pro.

00:00:05:00 - 00:04:09:12
Meg Pekarske
Hello and welcome to Hospice Insights: The Law and Beyond, where we connect you to what matters in the ever changing world of hospice and palliative care. Hospice Insights: Strategic Restructuring for the Future series. Not just an Org Chart: Corporate and Regulatory Considerations for Hospice Transactions. Hospices are increasingly looking to buy, consolidate or merge to achieve administrative efficiencies and expand growth opportunities. Transactions between hospices present unique regulatory challenges that shape corporate and transactional structures and often require looking beyond the client's organizational charts. Join me, Meg Pekarske, in conversation with Adam Royal and Erin Burns, where we discuss key considerations and strategies in hospice transactions. Erin, Adam and, Adam, I will not call you Andrew for this entire podcast. So for those of you, you know, listeners, you know that Andrew Brenton is on our team and this is Adam Royal who has been on other podcasts. But I'm glad that you're here today to join us. And obviously, Erin, you're a regular. So let me just sort of start out by saying, you know, why are we having this this podcast on this topic? I mean, we've been doing a ton of work in this area, which is why we created this whole strategic restructuring series where we didn't just talk about transactions, we talked about creating network models and pursuing upstream opportunities. And this one is focused on merging with another hospice or buying another hospice. And I think this is probably going to be one of many. And Adam, we're so grateful for you to have joined our team because you have a ton of experience in corporate transactions, which you've been really able to elevate our team. And obviously here at Husch, we have a lot of other corporate lawyers that support us. But you're really committed to the hospice space and have been leading all of our hospice transactions. And I think that we could have like a four hour podcast on this. So we're going to give the sort of high notes and expect that we'll probably drill down on some of the concepts we talked about today and in later episodes. But I think when did it start and when did our work start and why do we have so much work in this area? Obviously people are preparing for Medicare Advantage. They're, you know, preparing for what could be pretty consequential rate decreases. People are looking to create administrative efficiencies and they're looking to diversify their business and all these other things. So I think especially in the nonprofit sector, there has been renewed interest. I mean, I used to have these conversations 15 years ago and they pretty much stopped after the first meeting because people would say, well, but I've been around for 35 years and I want to maintain my independence. And I think those conversations are changing because I think folks are understanding anything that the new landscape may value different things than what are their current strengths. And there could be real benefits of coming under one umbrella or merging together. And so with that in the backdrop, and obviously we do, you know, traditional buying and selling of hospices, too, but in the nonprofit sector, these are usually structured as substitution models most often. But let's sort of talk. Adam, before we get into deep in the regulatory issues, like can you just say what is a member substitution and why is that a thing in nonprofits?

00:04:10:03 - 00:04:56:18
Adam Royal
Yeah. So a member substitution is essentially the nonprofit version of what you would call a stock purchase or share purchase in the for-profit sector. And essentially you're buying the membership interests or ownership interests, as you would call them, in the for-profit sector of the nonprofit. And so when you're trying to merge two nonprofits together, so to speak, one way of doing that other than an actual merger would be the member substitution where one of the nonprofits becomes the sole member of the other nonprofit. And then you have them kind of affiliated together.

00:04:57:15 - 00:06:16:03
Meg Pekarske
Got it. And, you know, you and I are working on one project right now where we're looking at should we do a member substitution model where, you know, the member substitutions by one of the existing entities. So there's one entity at the end of the day, or do we want to take this opportunity to create a parent subsidiary model which might position them better for service diversity action, geographic service diversification probably, you know, from a business standpoint, a more sophisticated model in terms of managing risk, managing assets like real estate assets and whatnot. And so I think any time we work on these projects, Adam there isn't one way to do something, right.? You and I were just having a conversation before this where we said, you know, as a regulatory lawyer, the law sort of dictates what you must do. And there's a lot of gray that I can play in. But for you, on the corporate side, of things, it's really tell me what you want to do and we'll find a way to do that. There aren't that many sort of stop signs in terms of how you want to structure things.

00:06:16:04 - 00:07:11:09
Adam Royal
Right, there are so many options from the corporate side of things, but not so many from the regulatory side of things. And that's kind of what makes these transactions interesting is you have to balance those two perspectives and see what corporate structure is optimal or perhaps the only possible structure from a regulatory perspective. And so going back to the member substitution idea that can pan out any number of ways. Like you mentioned, you could have a member existing nonprofit become the member of another existing nonprofit, or you can put another parent company on the top and have three entities and couple that with dissolving an entity or letting to continue to exist. And so that's where the regulatory considerations come into play.

00:07:11:17 - 00:09:01:01
Meg Pekarske
No, exactly. And I think that when you've seen one member substitution, you've seen one member substitution. And Mike Millward, who was on the podcast talking about the California Hospice Network, it was through their governance structure about trying to be very horizontal and how they were managed. But again, the corporate methodology for doing it still was a no substitution and there is a new entity sort of on top who's the sole member of all of the other hospices, but through your governance, which is, you know, where a lot of the fleshing out of, well, how is this really going to work and who makes decisions and all of that stuff, there can be a lot of flexibilities there. And so those are really important conversations. But, you know, one thing is, you know, we always say the sky's the limit. You can do whatever you want. One of the questions you really need to think about sort of simultaneously is the regulatory considerations and that sort of talk about IPUs in a second. But CHOI/CHOW, so fancy words for a change of ownership and change of information. These are the documents you file with CMS. And this is actually not an intuitive area of the law. And, Erin, you have a lot of experience and you've worked on some very large transactions and sort of tell us you know, some of the interesting points and when something a CHOW versus a CHOI. And what are some of the complications there?

00:09:01:13 - 00:12:26:19
Erin Burns
Yeah, and I'll just say to you, it's been great having Adam join the team because these hospice transactions are you know, more complicated than just your average business deal. We have gotten involved in deals where the corporate side of things, you know, is handled by a different firm. And we're happy to do that. But sometimes they're ten steps ahead and they have not even thought about the regulatory considerations, which can really put some time constraints on your deal and could impact timing of closing and things like that. Whether you need a management services agreement there's a lot of consideration. So it's great to have both the corporate side and the regulatory side in-house. Yeah. So this is one of the biggest factors that you have to determine when you're doing a transaction, as is your transaction from a Medicare perspective, a CHOI or a CHOW. So a change of information or a change of ownership. A lot of deals these days, as Adam said, is like an asset purchase or you know, like a member substitution. Those are generally considered changes of information and from a Medicare perspective. So and a trial is typically when your tax I.D., the agency that's being purchased, if their tax ID is changing, you know, really a new owner is stepping in and kind of getting rid of the old owner, changing things about the provider that's often a CHOW or a change of ownership. There's two kind of considerations from a Medicare perspective on what you're doing to not just you know, once you classify it is timing and also assumption of liability. So with a CHOI, you're often going to have a less lengthy processing time. You're not there's no need to kind of switch over a tax side or switch over a PTAN to a new provider. You're essentially stepping into the shoes of the existing provider, and you can continue to operate as it was with a change of ownership. There's more kind of steps involved from the Medicare side. You need approval and you'll get a tie-in notice, once that approval has gone through from CMS, then it's not until you get that tie-in notice, which can take many months that you're the new hospice or the buyer is now officially kind of the owner in Medicare's eyes of the the hospice that's being bought. Then you also have to consider the other kind of licenses and certifications that hospices have. And again, I think corporate the corporate side can lose track of these things. And they're important. Not just your Medicare number obviously is important, but Medicaid, your state license is super important. And each state typically has their own definition of what a change of information is or what a change of ownership is. And so just because Medicare defines it as a choice and you're like, great, we're going to be able to kind of breeze through this. The state may be different and the state may require advance notice, whereas Medicare doesn't. So there's a lot of considerations that need to go in on the front end and should be kind of done simultaneously as you're structuring your transaction.

00:12:27:06 - 00:12:58:15
Meg Pekarske
And again, let me say again, not intuitive, these things are not intuitive and very complex. And if you do these things incorrectly, which we've been on the back end of, these really parade of horribles go on and on. Like people who thought they merged into one provider. No. Actually did. And so then they had massive cap liability and one of their numbers and all the stuff. So, you know...

00:12:58:21 - 00:14:02:14
Erin Burns
I think it's interesting too from a corporate perspective, they talk about like mergers, acquisitions. Those have different meanings to Medicare and so if you look at say the 855A enrollment application, they list out what those mean and each one is different. So when for example, you're talking about a merger from a corporate perspective, it may not be actually a merger from a Medicare perspective or you may not be able to merge even though you can merge from a corporate side. There CMS Region 5 believes that hospices cannot merge. There's only limited providers that can merge. So you may be required to do a change of ownership or a choice filing. So, yeah, not intuitive. A lot of work behind the scenes to kind of figure out what needs to be done. Oftentimes reaching out to regulators on an anonymous basis to kind of, as you say, Meg sometimes grease the skids to make sure that what we're doing is going to be approved.

00:14:02:15 - 00:17:45:03
Meg Pekarske
I think we can't emphasize enough that doing this regulatory stuff in the beginning instead of taking something from the corporate side and then we come on the regulatory side and be like, oh, yeah, now that doesn't work. Or, you know, or there's these other considerations and there could be cons, do you still want to go with that? Like, for example, we worked on something where because a lot of the nonprofit work we're doing, there are hospices that might already be there in the same service area, and so they might not need to provide our numbers. And so it's like, I want to reject this provider number, but if they have an IPU, that can become very difficult because the certification is tied to that provider. No. And but, you know, when you're assuming a Medicare provider number, you're assuming all of their liabilities going back from the beginning of time. Right? And through the corporate documents, you can try to manage that risk. But when you assume that provider number, it is yours and you can get indemnification, but from a you know, the government's perspective, you are inheriting every problem they ever had and potential repayments and all of these other things. And so, you know, if you could reject that number, it's like, well, yeah, why not? Or but sometimes it's not possible or you know, but you can also do is just terminate that number as opposed to rejected and all of that stuff. But I think you and I, Erin and I have worked on very complicated slide decks to explain different options, which it doesn't mean there's only one way to do it. It's really comes down to the pro con of this. And it's like you said you wanted this, but maybe this pathway isn't the best way to achieve that because there's some downside there. So we keep calling Adam our unicorn because he's going to be this merger of the hospice regulatory and the hospice corporate stuff together because Adam is beating up all of our deal work on the hospice side, which is just fantastic and really helpful. And so that's a for whatever reason, because most nonprofits will say, I'm not that worried about liability of this other. I've done my due diligence. Like I'm not that concerned. Maybe. Right. Maybe they say that. Well, right. We would caution them like, have you been listening to all of like this retroactive, you know, repayment, you know, audit liability, all this other stuff. But Y is protecting yourself against liability. Now, here, it's a little bit different, right? In the nonprofit world, like that entity may go away Like, in all practical purposes, it's yours. There is no pot of money to go after. Like if it's a private transaction, you can go after the prior owners for this. But when it's nonprofits, there is no one really to go back to. So I think diligence is really important because in the nonprofit world, I mean, guess who can unravel this and that? I've seen that happen. But you know, that's not something that's usually going to happen. So risk allegation is, you know, practically speaking, not the same as you would do it in a for-profit transaction.

00:17:46:04 - 00:18:27:05
Adam Royal
Yeah. Yeah, exactly. And then I think also one of the peculiarities of hospice is the additional risk of audits and how you should address that and the purchase agreement and throughout the transaction because as we've seen this group working on audits, what's an actual problem and what an auditor might perceive as a problem that could result in an overpayment that the hospice then has to deal with in some capacity can come up a lot and that can come up whether or not there's sort of some kind of issue in fact, compared to what an auditor finds.

00:18:28:05 - 00:18:45:15
Erin Burns
And we could do a podcast on diligence or a whole series on why diligence is so important and disclosure schedules, but it goes to protecting the owner or the the buyer from that future liability.

00:18:46:17 - 00:19:37:20
Meg Pekarske
Yeah, well, and because ultimately, if you assume that provider number and they audit for something prior to you taking over the business, you're still going to get the demand letter, they're still going to, you know, recoup this overpayment from your cashflow now. And, you know, all of those things you can go, you know, chase the, the other owner for this amount but which I think, you know, in, in for profit transactions, obviously, you have a lot of terms around in identification and you know, you might escrow certain funds for a period of time to deal with, you know, potential liabilities and whatnot. I don't know, you know, what you wanna get at there, Adam?

00:19:38:14 - 00:20:57:06
Adam Royal
Yeah. So that's that's one option is to escrow some funds from the purchase to deal with potential liabilities post closing and another sort of more practical approach that we've seen that sort of particular to the audit risk is including and the indemnification provisions of the purchase agreement that the Indemnified Party, rather than the indemnifying party, gets to control the defense and in certain situations, chief among them, an audit. And the reason that's important for the purchaser is audits can have significant cashflow consequences depending on how you respond to the demand letter. So whether you make a voluntary repayment or allow recoupment or request extended repayment schedules, those are all things within the purview of whoever is controlling that defense. And so for us, dealing with hospices as a purchaser, we'd like to see the purchaser being able to control that defense, which is not something you would typically see as a default position in most transaction documents.

00:20:57:20 - 00:24:12:09
Meg Pekarske
But if I'm selling, I want to control the defense because it's my money you're playing with and I want to choose my lawyers. And because we're, you know, we're representing a number of hospices and audits where they have already sold the company. But we're essentially taking up the defense and whatnot. But because, again, you know, the buyer is going to say, well, you owe this money, and you say, okay, well, that I want to say and what we concede on what we appeal, you know, all those different types of things. And so, again, in the nonprofit context, those issues are not as prominent, but I think they need to be thought about just in a different way or more. Do you feel comfortable moving forward in this transaction? Because, you know, there isn't likely unless if there's a giant foundation at the end of the day that's going to continue on after the hospice is sold. You know, there aren't really going to be resources to go back to. So I think getting very comfortable from a diligence standpoint. And I think as we close up here and talking about structure, you know, a parent subsidiary model are most of the nonprofits we work with, even very large nonprofits. They are single entities that they run all of their business lines out of one legal entity. They might have a separate foundation. But I think as we look as an industry to expand beyond a single service kind of organization into I'm going to do supportive care, I'm going to do case management I'm going to do palliative care, I'm going to do adult daycare, I'm going to do child daycare, I'm going to do a whole bunch of different things. Suddenly your risk profile starts looking different. These are very distinct kinds of businesses. You might be owning more real estate. And so, Adam, you and I are working on a project right now where, you know, adding a parent and creating subsidiaries does add a layer of complexity. And you need to do the cost benefit analysis. But I think if you have a dream of growing their business into a continuum of, let's say, geriatric advanced care, you know, advanced illness that you might want to think about how you integrate if you're doing no substitutions, how you're integrating them into your corporate structure, because the time to do that is sort of when you're in the transaction, not like, oh, we did this transaction and now we want to do it three years later. It sort of makes sense to do it if you're coming together and merging or thinking of merging is do you really envision creating other service lines or bringing another entity into the fold and doing another number substitution and whatnot, so...

00:24:12:09 - 00:24:38:21
Adam Royal
Yeah, it's kind of a chance to forecast what the goals are or for the client. And like you said, the efficiencies of a parent model are really realized when when you do start diversifying service lines and that's when it makes sense to have more subsidiaries and those efficiencies, you can kind of achieve those at that stage.

00:24:39:04 - 00:27:33:23
Meg Pekarske
And I think the role of lawyers here is to ask good questions. I think a role of any good lawyer is always to ask good questions and be curious and get our clients to think about what is it that you want to do because anything might be possible and is to talk about guiding questions. What are your goals? What do you want to look like? You know, what's your dream here? Because then if we ask good questions, that will sort of funnel down how this might be structured. Because I think a wrong way to do it is to say everyone else is doing a parent subsidiary model. I'm going to do that. But like, why do I want to run two hospices and a single service area if I never want to expand or do anything different? Why do I want to have three entities doing something that one could do like? And you're right. And your goal is administrative efficiency. Well, that doesn't add up, right? But if the dream is 57 years, there might we might bring someone else into the fold. And we want to expand geographically and go across state lines. And blah blah blah, you know, like and it sounds like we're doing therapy here, but like what is your dream? What do you want your life to be like? And, you know, what is your vision for your organization? And, you know, I've been doing board retreats to sort of be part of these conversations, the strategic planning, not just about, you know, mergers and stuff, but just about the landscape and starting to think big. And I think that hospices need to change to stay alive. And there is no one size fits all. But I think that we need to be asking ourselves new and different questions, and we need to dream big. We need to get out of our silo of, well, I'm just a hospice that cares for terminally ill people. With the six month prognosis or life. No, I help manage and improve the quality of life with people with advanced illness. And I can provide case management and I can do symptom management and I can manage costs and I can, you know, do all these different things and sort of and that's what's fun about this work that I really enjoy. And I know you do Adam as well know. And of course, you love CHOI/CHOW. So, I don't want to leave you out, Erin, but you know that you are helping. I think every time we work on these projects, there is a dream, there is a vision, and it's fine to help people build their future, which is I think for not-for-profit health care in particular, with the transactions we're working on, I think we're really helping to create thriving organizations for the future. And it's it's fun to be part of that.

00:27:34:13 - 00:27:45:11
Adam Royal
Exactly. Yeah, it is. Yeah, it's fun to work on the transactions. And I've definitely enjoyed working on them with this team, kind of seeing the regulatory side of things as well.

00:27:45:12 - 00:28:00:08
Erin Burns
While I don't love running deals like Adam does, I do love the regulatory side of it and the CHOI/CHOW. But yeah, I agree. Helping hospices kind of position themselves well into the future is rewarding well, awesome.

00:28:00:08 - 00:30:01:17
Meg Pekarske
I think we'll bring the gang back together here for another episode because we could drill down on about 100 different topics that we just briefly touched on. But I think in closing, thinking about these ideas, the corporate and regulatory side together and not in isolation and at the same time and because I think it's ultimately because we're all about efficiency, right? Like it's going to be a lot more efficient to have that tension that can exist between corporate and what's permitted from a regulatory standpoint sort of out at the outset. And not that we need to be militant about the regulatory things, but you don't want to go down so far a pathway and have done all this drafting and then suddenly, oh, wait, you know, someone has an IPU and now this sort of throws things, you know, up in the air. And we had a client that got us involved very early in a transaction. And, you know, we're able to map it and achieve the objective before they got too far down a path of drafting. So I think the you know, there can be a lot of value to add. There so, terrific. Well, this is a lot of fun and it's fun to do this work with both of you. And I think we're doing good things in the world. So yay, team. So and thanks for listening. And remember to follow us on your favorite podcast resource and leave a comment. That would be terrific. And we really appreciate you listening. Well, that's it for today's episode of Hospice Insights: The Law and Beyond. Thank you for joining the conversation. To subscribe to our podcast, visit our website at HuschBlackwell.com or sign up wherever you get your podcast. Till next time, may the wind be at your back.

Professionals:

Adam L. Royal

Associate

Erin E. Burns

Senior Associate