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:
|Assets and Liabilities
|Representations and Warranties
|Earnouts, Escrows, and Holdbacks
|Patient Privacy and Records