Let’s Make a Deal!
There has never been any shortage of factors that add or decrease value to a home health agency. I am asked all the time if a home health agency is still a good investment. Watching my 401 (through a microscope), it occurs to me that most home health agencies are a better investment than anything related to the markets. The tricky part in making a deal lies in the fact that the number of unknowns has increased considerably with health care reform and regulatory scrutiny.
When any healthcare facility transfers ownership, there are three options.
- The buyer assumes the provider agreement of the seller. This transaction can be done without any interruption in billing. There is no change in the provider number or license and the new owner completes paperwork in order for the change in ownership to be recognized by Medicare.
- Stock (or any organization that issues units or shares) is transferred from one party to another. An LLC for instance may have only have one member. If the member sells his interest in the LLC to another person, there has been no change of ownership because the LLC still owns the agency.
- The buyer buys the operations of an agency (license only) and has to reapply to become certified by Medicare. Nothing is billable until the last day of a successful certification survey. After that day passes, it may be another 3 months until claims can be dropped.
This used to be simple and I always steered clients to option 1. Option 2 is much easier but the buyer assumes all of the liability of the LLC, not just the Medicare history. Option 3 has never been attractive because the certification process is long and complicated and very expensive.
Things have changed, folks. A couple of weeks ago I was asked to help out an agency who had 30 claims requested by the Zone Contractor in 2009. The dates of service went back as far as 2006. In 2012 they received a letter stating that they owed CMS 1.96M. Oops. If that agency had been sold during those three years, the new owner would be responsible for the overpayment. Of course it will be appealed but lawyers and consultants need to be paid, too. And there is no guarantee that the appeals will be successful.
While a prospective buyer can query Medicare to determine if there are any outstanding liabilities, they cannot be assured that the agency will not be subjected to scrutiny that hasn’t occurred yet for claims submitted prior to the purchase. That ups the risk factor for option 1 considerably. In Louisiana alone, there are 128 ZPIC investigations and they are not public information.
Indemnity clauses address potential liabilities that have not been revealed at the time of sale but I have never seen any agreements that held the buyer harmless for the amount even approaching some of the ZPIC overpayments we have seen over the last year.
Effective last year, both option 1 and option 2 have a restriction on selling the agency within 36 months after the agency was certified or last changed ownership or until after 2 cost reports are filed. Buying late in the year and filing cost reports early can reduce the amount of time to closer to 24 months. That means that if the agency begins to tank and the only sane course of action is to sell out, the option may not be available. This restriction applies to stock transfers only when a majority of the stock is moved.
The third option – the expensive one is undoubtedly the safest. The agency, because it is licensed must be fully functional. That means a lease, an administrator/DON, patients (2), and all the other expenses that go along with an agency. Upon purchase, the agency must apply for accreditation through an accrediting body such as JCAHO or CHAP. This takes time and is an additional significant expense. It is becoming more attractive every day because this option offers something that the other two options do not – a squeaky clean provider number.
So a lot of people are steering clear of health care in general these days. That should mean that the demand for agencies is lower in general. Consider the agencies who are under scrutiny from a Zone contractor and are not expected to do well. One option is to simply procure another provider number while awaiting results. When the results and extrapolations are complete, the agency negotiates a settlement, files bankruptcy and runs its operations out of the new agency. By the way, this doesn’t mean the agency escapes the Medicare debt – they merely get to prolong their agony.
What that means for potential sellers is that there is a lot of desperate buyers out there. So while people who have never been in the industry are staying away for now, there are others who are facing certain demise who will pay more than an agency is worth to ensure their future business. How do you calculate these factors into the price?
You ready to make a deal? Call us. We’ll make sure you understand the pros and cons of each option and recommend a physician who can medicate you throughout the process.