Navigating Healthcare Mergers and Acquisitions: Key Legal Considerations

Healthcare mergers and acquisitions (M&A) are increasingly common as healthcare provider groups consolidate and new investors enter the market. If you are a provider or practice owner considering a sale or acquisition, it’s essential to understand the legal and regulatory landscape, as M&A transactions present unique considerations. This article provides an overview of key legal issues, from deal structure to compliance pitfalls, that providers should keep in mind when navigating a healthcare M&A deal.

Choosing the Right Transaction Structure: Asset vs. Equity Deals

A key decision in any healthcare M&A is whether to structure the deal as an asset purchase or an equity purchase, each with different legal and practical implications.

Asset Purchase Deals:

In an asset deal, the buyer selects specific assets to acquire and may assume certain liabilities. This structure is popular with buyers because it helps avoid inheriting unwanted liabilities, such as lawsuits or debt. However, it often requires more administrative work, including new licenses, Medicare/Medicaid enrollments, and consents to assign contracts like leases or payer agreements. It can also delay operations if those approvals take time.

Key Advantage: Asset purchases come with tax advantages to buyers, who can often “step up” the tax basis of assets for depreciation benefits.

Equity Purchase Deals:

In an equity deal, the buyer acquires the legal entity that owns the practice. This approach typically involves fewer operational disruptions as existing contracts, licenses, and payer agreements remain in place. Sellers often prefer this structure for its simplicity and potential tax advantages. However, buyers must conduct thorough due diligence, as they inherit all liabilities, including any past compliance issues.

Practical Tip: In some states, laws restricting the corporate practice of medicine may limit how deals are structured, especially where buyers not licensed to practice are involved. In those cases, asset deals paired with management arrangements are often used to remain compliant. Be sure to weigh both business and regulatory considerations when choosing a structure.

Key Federal Healthcare Laws Impacting M&A Transactions

Healthcare M&A deals must comply with federal regulations designed to prevent fraud, protect patient privacy, and ensure fair market practices. Several key laws may be triggered in the process:

• Anti-Kickback Statute (AKS): AKS prohibits payments for referrals involving federal healthcare programs. Regulators are concerned that part of the purchase price, especially contingent earn-outs, could be disguised as referral payments. To avoid violations, the deal must reflect fair market value for the business and not be tied to past or future referrals. Valuation support and careful structuring of earn-outs are essential.
• Stark Law: This law prohibits physicians from referring Medicare patients to entities they have a financial relationship with unless an exception applies. If selling physicians remain on post-closing, their compensation must fit within Stark’s employment or isolated transaction exceptions. Payments should not vary based on referrals. While the federal Stark Law only applies to physicians, several states, including Florida, have laws that apply similar standards to other healthcare providers.
• HIPAA and Patient Privacy: The transfer of patient records requires strict adherence to HIPAA. After closing, the buyer must ensure all records are properly maintained and secure. Depending on state law, patient notice of the transaction may be advisable or required.

Other Federal Requirements: Depending on the services offered, additional filings may be needed. CLIA certificates, DEA registrations, or provider-based billing rules may apply.
In all cases, legal counsel should assess which laws apply and ensure compliance is built into the deal from the start.

State Law Considerations: Licensing, Ownership Restrictions, and Non-Competes

State laws play a major role in healthcare M&A and can significantly impact how a deal is structured and executed.

• Licensing and Approvals: Many states require notice or approval before transferring ownership of licensed facilities. Even unlicensed practices may need updates to registrations, Medicaid enrollments, or permits.
• Corporate Practice of Medicine (CPOM): Many states prohibit non-licensed individuals from owning or controlling medical, dental, optometric, or mental health practices. Where CPOM laws apply, deals often use workarounds like the “friendly PC” model, where a management company acquires non-clinical assets and contracts with a provider-owned entity.
• Non-Compete Agreements: Most states allow reasonable non-competes in the sale of a business to protect the buyer’s investment. Typically, these span 2–5 years and are limited by geography. However, some states limit or ban physician (and sometimes other healthcare provider) non-competes altogether, especially post-employment restrictions. This area is evolving, with a trend in some jurisdictions toward tightening restrictions.

Healthcare-Specific Due Diligence Considerations

Due diligence in a healthcare transaction involves more than reviewing financials – it requires careful analysis of compliance, licensing, contracts, and liability risks. Key areas include:

• Compliance Audits: Review past audits, billing practices, and government investigations. Billing audits can uncover issues like upcoding or overpayments. Problems may reduce valuation or require insurance.
• Licenses and Credentialing: Verify provider and facility licenses, accreditations, and up-to-date payer enrollments.
• Contracts and Referral Agreements: Review for compliance with AKS and Stark. Ensure fair market value and commercial reasonableness in arrangements with referral sources.
• Liability History: Investigate malpractice claims, lawsuits, or pending disputes. Confirm appropriate insurance coverage and tail policies as needed.
• Financial and Corporate Records: Review financial statements, tax filings, and payer mix. Sellers should prepare organized records and be ready for valuation discussions.

Sellers should also evaluate the buyer’s financial capability and post-close integration plan, particularly if the deal involves rollover equity.

Successor Liability and Regulatory Filings

One reason buyers often prefer asset deals is to avoid successor liability – being held responsible for the seller’s past obligations. While asset sales generally shield the buyer from prior debts or legal issues unless expressly assumed, certain liabilities can still carry over.

• Successor Liability Risks: If the buyer continues the seller’s Medicare provider agreement, they may become liable for overpayments or penalties tied to that number. Other risks include unpaid taxes, employee claims, or courts applying “de facto merger” theories if the buyer simply continues the same business under a new name. To manage this risk, buyers typically negotiate strong representations, warranties, and indemnification rights, often backed by escrows or insurance. Sellers should be prepared to stand behind their compliance history.
• Regulatory Filings: Healthcare transactions often require multiple pre- and post-closing filings with government agencies. Some states require prior approval for ownership changes involving licensed entities like clinics or labs, often 30–60 days in advance. After closing, Medicare and Medicaid notifications must be submitted, often within 30 days, along with state Medicaid or licensing updates. While asset deals help limit liability, they don’t eliminate it. Careful compliance review and timely filings are essential for a smooth and legally sound transition.

Contract Assignments and Patient Record Transfers

Smooth transitions require careful handling of contracts and patient records—two areas that carry both legal and operational importance.

• Contract Assignments: In asset deals, contracts such as leases, vendor agreements, and payer contracts don’t transfer automatically – they must be assigned, often with third-party consent. Many contracts include anti-assignment or change-of-control provisions that can trigger termination if not properly addressed. Sellers and buyers should identify critical contracts early and start the consent process in advance. In some cases, buyers may prefer to use their own payer contracts post-closing, but this may involve enrollment delays. In equity deals, contracts stay with the entity, though change-in-ownership clauses can still apply. Planning ahead is key to avoiding disruptions in revenue or operations.
• Patient Records: Transferring patient records is sensitive and highly regulated. HIPAA allows it as part of healthcare operations, but some states require patient notification. Best practice is to inform patients of the transition and ensure they know how to access or transfer their records. Buyers should confirm they’ll receive full access to records at closing and verify compliance with privacy and retention laws. If EHR systems are merged or changed, that should be planned and budgeted for in advance. Throughout the process, continuity of care should remain a top priority.

Conclusion

Heathcare Mergers and acquisitions present unique legal and regulatory challenges that demand careful planning. From selecting the right deal structure to managing compliance with federal and state laws, early legal guidance is essential. While this article focuses on key transactional issues, providers should also be aware of post-closing integration considerations, such as operational changes, billing updates, and compliance alignment, that require careful planning. With the right preparation, healthcare providers can navigate M&A successfully while protecting their practice, patients, and long-term goals.

For healthcare providers considering a merger or acquisition, our experienced legal team is here to guide you through the process. Contact our Healthcare Law team today to ensure your transaction is compliant, strategic, and seamless.

Adam Kravatz – Experienced Healthcare M&A Attorney
Adam Kravatz brings extensive experience in mergers and acquisitions, with a focus on healthcare transactions. He has advised clients on deal structuring, regulatory compliance, and risk mitigation, ensuring smooth transitions in complex M&A transactions.

For assistance with healthcare M&A matters, contact Adam Kravatz at akravatz@jpfirm.com.