Explore a complex hospital acquisition case where a $2.4 million Medicare-Medicaid payment dispute arises between the buyer and seller. Gain insights into how the court interpreted the Asset Purchase Agreement (APA) and its impact on the resolution of this M&A deal.
M&A Stories
January 22, 2021
Introduction:
In acquisitions, resolving payments for sales and services that occurred before the deal closes can be complex. This issue depends on the nature of the business being acquired.
The Deal:
This case involves the purchase of two hospitals’ assets. These hospitals relied heavily on payments from Medicare and Medicaid. These payments arrived every two weeks and were calculated based on projected claims for the entire year. These estimates were derived from the seller hospitals’ budget and predictions, subject to adjustments throughout the year.
Interim and final reconciliations were conducted to ensure accurate payments reflecting the true value of claims processed by the seller hospitals. If these reviews showed underpayment, Medicare/Medicaid could adjust future payments or provide a lump sum to correct the discrepancy. If overpayment occurred, the seller hospitals would need to return the excess funds.
About two months before the deal’s closing, the Medicare auditor analyzed payments made to the seller during the first half of 2019. They projected the seller’s expected services for the remainder of the year and determined a $2.4 million lump sum adjustment was owed.
Due to the seller’s bankruptcy filing, payment was delayed until two days after the September 30, 2019 closing date.
The Lawsuit:
After closing, the seller received the $2.4 million adjustment. However, in April 2020, the seller’s final cost report indicated a $2.3 million obligation to Medicare/Medicaid. Under the asset purchase agreement, the buyer was responsible for this overpayment.
The buyer argued that they should receive the $2.4 million lump sum adjustment that the seller obtained from Medicare just after closing.
The dispute led to a Delaware bankruptcy court. The court ruled that the $2.4 million adjustment received by the seller wasn’t a “receivable” (an excluded asset under the asset purchase agreement) but rather a “settlement” asset acquired by the buyer. The court based this decision on the specific language in the asset purchase agreement, which referred to payments and settlements related to specific time periods before the deal closed.
This case is referred to as In Re Hospital Acquisition LLC, Case No. 19-10998 (BLS), United States Bankruptcy Court, D. Delaware, (December 21, 2020).
Comment:
While the language of the APA might be a bit convoluted, the result seems just, as the buyer had to reimburse the overpayment. The court’s reliance on the quoted APA language might not be crystal clear, but it played a role in reaching the decision.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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