As with any transaction, a healthcare deal typically starts with a Letter of Intent (“LOI”) or Term Sheet to outline the base agreements on the business deal. The LOI or Term Sheet should include not only the purchase price (or range), purchase price adjustments, payment terms, closing conditions, confidentiality, exclusivity, and other common items, but also the transaction structure – for example, asset sale, stock/membership interest sale, merger, joint venture, affiliation, etc.

Transaction structure considerations are particularly important in healthcare deals considering the heavy regulation and complex nature of the industry. Asset sale structures may be preferable in some cases (e.g., to limit successor liability) but may not be an option in other cases (e.g., where there is a need to retain the Seller’s tax ID number for purposes of federal and state license/certification; Medicare provider agreements; and managed care arrangements).

Some states also have Corporate Practice of Medicine laws, which prohibit business corporations from practicing medicine or employing physicians to provide medical services, which may necessitate setting up a multifaceted management-type acquisition model.

Joint ventures may be optimal where two institutions want to team up create something new and separate, whereas mergers make sense to combine two entities into one functioning unit.

Affiliations, on the other hand, are sometimes used in healthcare deals as a flexible form of obtaining efficiencies but maintaining independence of ownership and management. Be careful, however, as loose affiliations can create antitrust risk.

Creative methods and a combination of structures are often crucial in healthcare deals. All involved professionals should be consulted on the structure prior to proceeding with negotiations to ensure all issues are effectively addressed and resolved.

Similar to due diligence, healthcare acquisition agreements involve unique or particularly important provisions in light of industry considerations and the unique nature of the parties involved. Some important considerations for drafting the purchase agreement terms are reflected in the following chart:

Agreement Term    Drafting Considerations
Assets and Liabilities
  • List acquired assets and assumed obligations, and specifically designate assets and liabilities to be excluded from the sale.
Purchase Price
  • Consider Anti-Kickback, Stark, and tax laws that may require the purchase price to be fair market value or satisfy another standard, or that prohibit consideration of volume or value of referrals.
  • An independent valuation opinion is critical considering the potential for close analysis of the purchase price.
Representations and Warranties
  • Representations and warranties regarding compliance should be comprehensive to identify issues and appropriately allocate risk among the parties.
  • Should properly allocate risk for liabilities and obligations among the parties.
  • Address buyer’s obligation to maintain certain levels of service and other commitments to the community.
  • Often imposes restrictions on how the seller can use the proceeds to protect buyer’s investment.
  • Address ongoing governance issues such as community representation on the board.
  • Address obligation to obtain required regulatory consents and other third party approvals.
  • Address allocation of compensation for patients admitted prior to closing but discharged after closing.
  • Address transfer of employees and ongoing benefit plan considerations.
Earnouts, Escrows, and Holdbacks
  • While common in ordinary transactions, these terms may be prohibited by or problematic under Anti-Kickback and Stark laws (e.g., Stark prohibits earnouts in hospital purchases of physician practices). However, escrows are becoming more common in situations where a self-disclosure of Stark issues is pending.
Patient Privacy and Records
  • Address confidentiality and privacy of records and transfer of the same from Seller’s location to Buyer’s location, if needed, as well as preservation and access to records post-closing.