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Healthcare Acquisitions and Divestitures During the COVID-19 Pandemic

It seems as though all aspects of our personal and professional lives have been impacted in one way or another by the COVID-19 public health emergency. Healthcare acquisitions and divestitures are no exception. Although the ramifications depend on the specific circumstances of each transaction, we are noticing certain common threads woven among recently closed and currently in progress transactions in the healthcare industry. Here are a few of the questions that often arise as we work with clients to navigate the current business landscape both during and after the COVID epidemic. 

  • Valuations. It’s no secret that numerous businesses are experiencing financial distress. Some of the country’s largest financial institutions are ramping up hiring in their bankruptcy and distressed credit divisions, indicating the players in the best position to know believe that rates of financial distress and delinquencies will continue to rise in the near term. How should the financial performance of the business during the pandemic (which may include recent business interruption, decline in revenue or increase in costs) be taken into consideration when determining the overall value of the business? How should buyers price in the risk created by COVID-induced uncertainty? Most commentators note that the COVID-19 pandemic has shifted deal dynamics in favor of buyers, creating a buyers’ market. How should buyers and sellers change their “deal playbook” and/or negotiation strategy in response to these market forces? 
  • Earnouts. It’s important to each transaction party that it ultimately receives the benefit of its bargain. What is the likelihood that the seller will receive the earnout in whole or in part? Are the earnout targets based upon pre-pandemic figures and economic assumptions? Should more of the purchase price be shifted to the earnout to mitigate risk for the buyer? Can the earnout measurement period be extended in an effort to mitigate the impact to the seller of a potential future short-term economic decline?  
  • Escrow. The parties may be aware of certain contingent liabilities attributable to pandemic-related contractual disputes, litigation or regulatory non-compliance. How much of the purchase price should be placed in escrow given potential COVID-19 related risks identified in diligence?  
  • Employment Law Considerations. It’s been a busy year for employment attorneys and businesses implementing related compliance requirements. Are there potential governmental enforcement actions or employee lawsuits on the horizon for the seller? Has the seller complied with recent employment law changes and cumbersome but crucial workplace health and safety requirements? Have members of the seller’s workforce tested positive for COVID-19? 
  • Litigation and Other Disputes. It is no secret that the public health emergency has resulted in substantial supply chain disruption and payment defaults. If applicable, what is the seller’s likelihood of success under force majeure, termination and other key contractual provisions.  Has the pandemic resulted in current or potential litigation with landlords, vendors, insurers, customers, lenders, employees or others?  
  • Compliance Requirements. The federal government has made it clear that certain recipients of SBA PPP loans and HHS Provider Relief Fund payments will be subject to governmental audit and scrutiny. Has the seller received SBA loans or grants or Provider Relief Funds?  If so, is the seller complying with the related attestation, documentation and forgiveness requirements? Does the seller have the proper Provider Relief Fund policies and procedures in place?  
  • Cybersecurity. Governmental authorities have identified increased cybersecurity risks to businesses during the pandemic. Does the seller have an active and robust data privacy and security program? Has the seller experienced any recent breaches and, if so, were they addressed appropriately?  
  • Purchased Assets and Assumed Contracts. What will happen if the pandemic results in a material adverse change in the seller’s business between the date when the purchase agreement is signed and the date of the closing? What if the business isn’t operating in the ordinary course in accordance with past practice and/or historical financial results?  Is the buyer required to proceed with the closing? Will there be an adjustment to the purchase price? Is the seller in compliance with all of its representations, warranties, covenants and other obligations in the primary transaction agreement(s)? Will the seller be liable for related damages?  
  • Representations and Warranties Insurance. Having comprehensive representation and warranty insurance in place can benefit both parties to the transaction. Will the insurer exclude representation and warranty claims related to the COVID-19 pandemic from the insurance coverage? It may be important for buyers to reach out to several insurers and compare the coverage available.

As the pace of deal activity within the health care space continues to increase, our firm’s attorneys are working daily with clients to further develop and adjust their strategies to respond to changes and uncertainty in today’s environment. Please let us know if we may assist you to brainstorm potential transaction structures and “best practices” to mitigate business and regulatory risk during this time, while maximizing transaction value. We’d be delighted to discuss with you further. For additional information, please contact Kate Hickner at kehickner@bmdllc.com or Kevin Saunders at rksaunders@bmdllc.com. 

Investment Training for the Second and Third Generations

Consider this scenario. Mom and Dad started the business from the ground up. Over the decades it has expanded into a money-making machine. They are able to sell the business and it results in a multimillion-dollar payday for their labors. The excess money has allowed Mom and Dad to invest with various financial advising firms, several fund management groups, and directly with new startups and joint ventures. Their experience has made them savvy investors, with a detailed understanding of how much to invest, when, and where. They cannot justify formation of a full family office with dedicated investors to manage the funds, but Mom and Dad have set up a trust fund for the children to allow these investments to continue to grow over the years. Eventually, Mom and Dad pass. Their children enjoy the fruits of their labors, and, by the time the grandchildren are adults, Mom and Dad's savvy investments are gone.

Provider Relief Funds – Continued Confusion Regarding Reporting Requirements and Lost Revenues

In Fall 2020, HHS issued multiple rounds of guidance and FAQs regarding the reporting requirements for the Provider Relief Funds, the most recently published notice being November 2, 2020 and December 11, 2020. Specifically, the reporting portal for the use of the funds in 2020 was scheduled to open on January 15, 2021. Although there was much speculation as to whether this would occur. And, as of the date of this article, the portal was not opened.

Ohio S.B. 310 Loosens Practice Barrier for Advanced Practice Providers

S.B. 310, signed by Ohio Governor DeWine and effective from December 29, 2020 until May 1, 2021, provides flexibility regarding the regulatorily mandated supervision and collaboration agreements for physician assistants, certified nurse-midwives, clinical nurse specialists and certified nurse practitioners working in a hospital or other health care facility. Originally drafted as a bill to distribute federal COVID funding to local subdivisions, the healthcare related provisions were added to help relieve some of the stresses hospitals and other healthcare facilities are facing during the COVID-19 pandemic.

HHS Issues Opinion Regarding Illegal Attempts by Drug Manufacturers to Deny 340B Discounts under Contract Pharmacy Arrangements

The federal 340B discount drug program is a safety net for many federally qualified health centers, disproportionate share hospitals, and other covered entities. This program allows these providers to obtain discount pricing on drugs which in turn allows the providers to better serve their patient populations and provide their patients with access to vital health care services. Over the years, the 340B program has undergone intense scrutiny, particularly by drug manufacturers who are required by federal law to provide the discounted pricing.

S.B. 263 Protects 340B Covered Entities from Predatory Practices in Ohio

Just before the end of calendar year 2020 and at the end of its two-year legislative session, the Ohio General Assembly passed Senate Bill 263, which prohibits insurance companies and pharmacy benefit managers (“PBMs”) from imposing on 340B Covered Entities discriminatory pricing and other contract terms. This is a win for safety net providers and the people they serve, as 340B savings are crucial to their ability to provide high quality, affordable programs and services to patients.