In this blog post, we delve into the complexities of selling a healthcare business, particularly focusing on a recent M&A legal dispute involving Medicare and Medicaid receivables. Discover how a Montana-based home health and hospice provider clashed with a large Alabama-based healthcare giant over the reconciliation of pre-closing receivables. We explore the legal intricacies, the court’s ruling, and how better planning might have prevented the conflict. This case study offers valuable insights for anyone involved in healthcare mergers and acquisitions, shedding light on the potential pitfalls and strategic considerations in managing regulatory compliance and financial agreements.
M&A Stories
June 16, 2024
Selling a healthcare business presents unique challenges, particularly when it comes to receivables. A significant portion of a seller’s revenue often derives from Medicare and Medicaid, and due to the complex billing rules and high volume, there can be substantial delays between when services are provided, billed, and reimbursed.
This issue was at the heart of a recent M&A dispute involving a large, publicly traded, Alabama-based provider of integrated health services acquiring a Montana-based provider of home health and hospice care services.
The size disparity between the buyer and seller was notable. The buyer operates 138 hospitals, 241 home health locations, and 82 hospices across 39 states and Puerto Rico, ranking as the fourth-largest home health provider in the nation. The seller ran nine home health and 11 hospice locations across Montana, Alaska, Colorado, Idaho, Washington, and Wyoming.
A key part of the acquisition agreement addressed the collection of Medicare and Medicaid receivables for services provided in billing cycles ending before and overlapping the closing date. According to the agreement, the seller would collect these receivables and immediately transfer them to the buyer, who would then allocate the seller’s share.
Post-closing, the buyer informed the seller that it was withholding $556,000 of the seller’s share of receivables, citing violations of Medicare and Medicaid regulations by the seller in billing for services before the closing. The seller objected, arguing that these billings were collected before the closing and were not part of the reconciliation. Instead, the seller claimed the buyer was making an indemnification claim for breaches of representations and warranties related to regulatory compliance. Under the indemnification provision, the buyer could only claim 50% of its damages, leading the seller to demand $325,000, factoring in the 50% indemnification cap and prejudgment interest.
The buyer refused, leading to a suit in New Haven, Connecticut federal district court. The seller sought a prejudgment remedy, aiming to secure $325,000 of the buyer’s assets in case it won the lawsuit.
The court ordered the attachment, agreeing with the seller that the dispute concerned receivables collected before the closing, not uncollected receivables at the closing.
Reflecting on the case, it’s clear that the seller might have avoided this conflict by arranging to collect receivables post-closing and placing them in escrow. This would have obviated the need for a prejudgment attachment, as the funds would have been secured in escrow.
Case Reference: Frontier Home Health And Hospice, LLC v. Eh Health Home Health Of The Northwest, Civil Case No. 3:23-CV-01215 (JCH), United States District Court, D. Connecticut, (May 8, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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