Dental Practice Mergers, Acquisitions, Divestituresand...

Dental Practice Mergers, Acquisitions,

Divestitures and AffiliationsDue Diligence, Regulatory Compliance Requirements, Integration Challenges

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THURSDAY, MAY, 9, 2019

Presenting a live 90-minute webinar with interactive Q&A

Anna M. Timmerman, Partner, McGuireWoods, Chicago

Timothy J. Fry, Attorney, McGuireWoods, Chicago

Amanda K. Roenius , Attorney, McGuireWoods, Chicago

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Dental Practice Transactions: Buying and Selling, Mergers and Acquisitions

May 9, 2019

Anna TimmermanMcGuireWoods [email protected]

Amanda RoeniusMcGuireWoods [email protected]

Timothy FryMcGuireWoods [email protected]

McGuireWoods LLP | 6CONFIDENTIAL

Agenda

• Market Conditions

• Dental Practice Transaction Structures

• Legal Due Diligence Issues

• Regulatory Compliance Challenges – Federal and State

• Best Practices and Integration


Market Conditions for Dental Practice Transactions

• Market Composition Divisions

– Large consolidators

– Medium/regional operators (3-15 locations)

– Small practices (1-3 locations)

• Payor Impact on Value – Increase in dental insurance

– Medicaid/TRICARE expansion

• Shift to Dental Service Organization (DSO)-Supported Practices – ADA cites an increased interest for dentists under age 34

– DSOs own/control close to 20% of total practices in the United States, but that percentage is growing (William Blair report)

– 2017 market was estimated at $73 billion (Harris Williams & Co.).

• Continued Involvement and Interest of Private Equity


Market Conditions – Potential Exits

• Strategic Operators

• Financial Acquirers

• Affiliations of Smaller Practices

• Mergers of Mid-Size Practices

• IPOs?


Legal Structuring Considerations


Transaction Process

• Pre-Transaction Strategy

• Transaction Process (3-6 months):

– Self-Diligence/Housekeeping

– Restructuring (if needed)

– Go to Market – Confidential Information Memorandum

– Letter of Intent

– Due Diligence

– Negotiate Documents

– Closing

• Note: A lot of activity in formation without transactions


Key Negotiation Points

• Purchase Price

• Rollover Equity v. Cash Consideration

• Tax-Advantageous Structuring

• Governance Rights/Operational Control Decisions

• Employment Compensation/Terms

• Restrictive Covenants – Sale and Employment

• Indemnification and Representations/Warranties

• Escrow and Holdback


DSOs – The Pros and Cons

Reasons to Form a DSO

• Standardization of Processes

• Professional Business Management

• Non-Dentist Ownership

• Expansion Across Numerous States

• Segregation of Historical Liabilities

Potential Drawbacks to Forming a DSO

• Structural and Operational Complexities

• Employee Benefit Considerations

• Corporate Practice of Dentistry Restrictions


Basic Dental Service Organization Structure

• Non-clinical investor only owns in DSO. There may also be other owners in the DSO.

• Professional corporation (“PC”),* owned by one or more licensed dentists, employs thedentists, orthodontists and other licensed individuals who provide professional dentaland orthodontic services.

• DSO owns the non-clinical assets and otherwise connects to PC only through anAdministrative Services Agreement (“ASA”).

• The DSO must leave the clinical decision making to the licensed orthodontists whoown, or are employed by, the PC (e.g., no pressure to perform additional procedures,recommend additional visits, decide to terminate patients, etc.).

FMV Administrative Fee ($)

Dentist Owner

Administrative Services AgreementDSO

(management company)

PC(Dental practice)

Investor

Administrative Services

* Depending on the state, this may be a professional limited liability company or other entity type.


Balancing Control and Enforceability in a DSO/PC Model

• Enforceability of the ASA

– Must avoid the conclusion that the DSO is really the owner of the PC (or controls clinical decisions) in violation of CPOD laws

• Important to educate platform employees

– Challenges from many parties (e.g., state regulators, dental boards, former sellers, patient class actions, competitors or payors)

• Elements of Control over the Business (clinical v. business)

• Lender/Buyer/Third-Party Conclusions About Enforceability (these can vary)

• State-by-State Analysis of Risk


Balancing Control and Enforceability –Risks in the Model

• Dental boards can challenge the enforceability of the DSO relationship.

• Nominee owner walks away with the business.

• Local dentists walk away.

– They may claim unenforceable non-competition covenants.

• Nominee owner argues this is a regulatory violation.

– This threatens the ability to operate the business.

• This structure may create a lack of corporate control over business collateral or contracts.

• This structure creates a lack of control over the PC (i.e., an inability to replace the PC owner).


Balancing Control and Enforceability –Addressing Some of the Risks

• Enter into a long-term ASA with limited termination rights

• Enter into Share Transfer Restriction Agreement with the nominee

– This can limit voluntary transfers and/or force transfers in certain circumstances.

• Consider ASA fee structures (flat, percentage-based, cost-plus)

• Place a lien on the assets of the PC

• Work with “friendly” owners and consider diverse ownership (i.e., not one single owner)

• Have the DSO own all non-clinical assets and hold the leases

• PC guarantees/pledges PC assets for DSO debt/obligations

• Use enforceable non-competes (against the owner and/or employed dentists)

• Have diverse jurisdictions of operation

• Other contractual tools


DSO Acquisition Structures – Stock Purchase

• Stock could be sold to Acquiring PC or Owner of Acquiring PC.

• State law determines whether a PC can own another PC.

• Legal entity (at practice level) remains the same.

100% of Stock of Target PC

DentistOwner

Purchase Price

TargetPC

Investors

Administrative ServicesAgreement

AcquiringPCDSO

DentistOwner


DSO Acquisition Structures – Asset Purchase

• State law dictates ownership of clinical and non-clinical assets.

• Depending on payor arrangements of Acquiring PC, the parties may also seek to have payor contracts assigned.

DentistOwner

TargetPC

Investors

AcquiringPC

DSO

DentistOwner


Dental Acquisition Transition Efforts

• Often a challenge to continue to bill for services after a transaction—takes time to credential providers with payors.

– Credential pre-closing

– Deferred asset transfer

– Transition arrangement

• A/R treatment for smaller practices.

• Treatment payment plans.


Legal Due Diligence Issues


Diligence Issues for Acquirers - Structuring

• Assets and Collateral Locations

– Hard (non-clinical) assets are often owned by the DSO and non-professionals should be employed by the DSO.

– Licenses and billing agreements should be held by the PC, as should clinical assets and dental records.

– Collections run through the PC.

• Restrictions on Professionals

– Non-competes and non-solicitation restrictions.

– What is your relationship with the professional owners of the PC?

• Payor Contracts

– Assignability? How favorable is a particular contract?

– Medicaid change of ownership timing.


Diligence Issues for Acquirers - ASA

• Administrative Services Agreement

– What is the term of the ASA?

– How is the services fee structured?

– Does the DSO have control over non-clinical decisions?

– Is it an appropriate list of non-clinical decisions under state CPOD?

– Power of attorney for billing/collections

– Does the DSO have right to pledge A/R of the PC (if permitted by law)?

– What types of non-competes and solicitation restrictions are in place through the ASA? Appropriate?

• Specific Tax Issues


Diligence Issues for Acquirers - Dental

• Dental Board/Licensure/Exclusion

– Past board actions may impact business on a go-forward basis.

– Small practices often not checking exclusion lists.

• Medicaid Participation

– States often have specific rules on treatment (e.g., x-rays once per year absent specific medical necessity).

– Enrollment requirements with respect to dental hygienists and billing.

– Section 1557 notifications and grievance procedures – consider non-English speakers.


Diligence Issues for Acquirers – Dental (cont’d)

• OSHA – Blood Borne Pathogen Exposure and Hazard Communication Program

– Training, vaccinations, gloves and personal protective equipment.

– 2016 investigation of Illinois practices.

• Referral Sources

• Staff Turnover

• Cosmetic Services, Teeth Whitening, Other Services

• Payment Plans


Regulatory Compliance Challenges – Federal and State


Fraud and Abuse Challenges

• Federal Anti-Kickback Statute

– Intent-Based Criminal Statute

– Safe Harbors – Group Practice, Employment Personal Services and Space/Equipment Lease

• State Fraud and Abuse Laws

– Medicaid Fraud Laws

– Fee Splitting Prohibitions

• Physician Self-Referral Law (a/k/a Stark Law)

– Dentists are physicians for purposes of the Stark Law.

– Designated Health Services – does it include dental?


Corporate Practice of Dentistry

• Structure of Entity Driven by State Corporate Practice of Dentistry Restrictions

– Licensure of Professionals

– Ownership Restrictions

– Fee-Splitting Laws

– Active Practice Requirements

– State Fraud and Abuse Laws

• Should You Consider CPOM?


Sedation, Anesthesia and Dentistry

• State Regulation of In-Office Dental Anesthesia

– Understand dental board and medical board regulation overlap

– Dentists sometimes need anesthesia permits even if they contract with others to provide anesthesia. (See, e.g., Maryland—COMAR 10.44.12 et seq.)

– Other states allow third-party contracting without permits. (See, e.g., Washington—Wash. Admin Code 246-817-778; Kansas—Kan. Admin Regs. 71-5-9(j).)

• Equipment and Staffing Requirements

– See, e.g., Georgia—Ga. Comp. R. & Regs. 150-13 (“certain specific medical equipment and supplies, including… positive pressure oxygen ventilation… appropriate emergency drugs…, a manual or automatic external defibrillator, and a recovery area.”) and New York—8 CCR NY 61.10 (requiring proof of advanced cardiac life support and/or pediatric advanced life support course completion, depending on services provided).


Sedation, Anesthesia and Dentistry (cont’d)

• Permits for Dentists Administering Sedation

– California—16 CCR 1043.1 (General anesthesia or conscious sedation permit with a Board-approved residency program (one calendar year) or graduate program in oral and maxillofacial surgery.)

– Texas—Tex. Stat. Occ. Codes 258.001 et seq. (Permits required for many procedures and need to delegate to CRNAs.)

– New York—8 CRR-NY 61.10 (As of January 1, 2018, there are five levels of anesthesia/sedation for which a certificate is required, among other requirements.)

• DEA Registration and Rules for Controlled Substances

– Also consider opioid-related issues (see, e.g., ADA policies, state dental associations, Florida law—F.S. 456.44).


Additional Items for Review

• HIPAA

– Policies and procedures?

– Compliance and security officer?

– Past violations?

– Website notice of privacy practices?

• Section 1557 (if Medicaid practice)

– Translators and interpreters?

– Website notice of non-discrimination?

• Marketing

– Following all state (and federal, if applicable) laws?


Registration of DSOs and Practice Locations

• Texas Senate Bill 519, effective September 1, 2015, requires DSOs to annually register with the Texas Secretary of State (SOS).

– Must disclose the name and address of the business and each dentist that the DSO is providing services to, names of owners holding 10% or more of the ownership, and list all services provided – Form 3801 and 3802.

– SOS will then share this information with the Dental Board.

• Texas Office of Inspector General issued a report on DSOs on May 31, 2017, revised November 14, 2017.

– Most DSOs are third-party companies that contract with practices and are owned by dentists, non-dentists or private equity investors.

– In 2015, DSO-affiliated dentists had “higher Medicare and CHIP participation rates than dentists not affiliated with a DSO.”


Registration of DSOs and Practice Locations (cont’d)

• Registration of DSOs is not unique to Texas. (E.g., Kansas requires Dental Office Administrative Services Providers to register pursuant to KSA 65-1424; Nevada registers dental practice managers, see NRS 631.388.)

• Many states require mobile dental permits or registration. (See, e.g., California, Texas and Massachusetts.) This often includes X-rays, too.

• Illinois requires dental PCs/LLCs to register each office location.


Legal Proposals Focused on the DSO Model

• Washington enacted SB 5322 in 2017, which specifically authorized non-dentists to own or lease assets of a dental practice and allows for DSOs in the state. However, a new section was added to the law ensuring such entities cannot control clinical decisions. (See RCW 18.32.677.)

• North Carolina’s dental board must review service agreements, among management arrangements meeting other requirements. (See 21 NCAC 16X.0101.)

– An example of a compliant management service agreement is provided by the dental board.

• Georgia proposed an advertising rule amendment in 2014 (which was withdrawn) that addressed dentists who appeared to have an ownership interest in a practice when they do not. Maryland considers such laws most years.

• Other states have substantial advertising rules, including disclosing information about services and dentists at each location, etc.


Integration and Compliance Best Practices


Integration Best Practices

• Push your clients to keep the target practice’s staff team in the loop, particularly associate dentists, but staff too. Consider a deferred closing if the target practice wants certainty first.

• What’s right at the target practice? Can your client’s operations team examine location-by-location?

• Identity of location. File a d/b/a? New name?

• Do patients need to be notified? Does the buyer want to notify? Need to consider abandonment concerns.

• Get payors changed, especially Medicaid.


Seven Best Practices for Compliance

• Establish Effective Compliance Policies and Procedures

– 7 OIG Elements and HIPAA

– ADSO Code of Ethics and Compliance Self-Assessment

– Practical Guidance for Health Care Governing Boards on Compliance Oversight

• Designate an Independent Compliance Officer and Committee

– ADSO recommends appointing an Ethics Officer.

• Train and Educate Staff

– General Policies

– HIPAA

• Review Compliance Program

• Reporting Channels


Seven Best Practices for Compliance (cont’d)

• Quality of Care, Medical Necessity, Consents and Restraints Issues

• Billing and Coding

– Complete audits at least annually.


Billing and Coding Best Practices

• Pre-screen insurance eligibility in order to determine patient responsibility.

• Provide only those services that are medically necessary.

• Bill only services that are actually performed.

• Bill at the correct service level.

• Ensure all bills contain the:

– Invoice number

– Patient’s name

– Date and description of services

– Procedure codes

• Keep accurate and timely records.

• Provide training programs for billing and coding staff.


Billing and Coding Best Practices (cont’d)

• Conduct periodic internal billing and coding audits.

• Hire consultant to conduct independent billing and coding audit.

• Remember the 60-day overpayment requirement applies to Medicare but overpayments still must be reported and refunded under Medicaid as well.


A HIPAA Compliance Top 10 List

• Expressly name privacy and security officers (can be the same person).

• Implement HIPAA policies and procedures – both privacy and security.

• Ensure there is a HIPAA compliant authorization form for release of PHI.

• Have a sanctions policy, either referenced by or included in the HIPAA policies and procedures.

• Conduct a security risk assessment.

• Perform workforce training, with documentation of the materials and those who attended retained.

• Have business associate agreements in place with business associates.

• Maintain a comprehensive list of business associate agreements.


A HIPAA Compliance Top 10 List (cont’d)

• Have a notice of privacy practices, with appropriate posting and distribution, in the facility and on websites.

• Create a breach response plan, if not otherwise addressed in the HIPAA policies and procedures.


Questions?

116108505_2

Anna TimmermanMcGuireWoods [email protected]

Amanda RoeniusMcGuireWoods [email protected]

Timothy FryMcGuireWoods [email protected]

Dental Practice Mergers, Acquisitions, Divestituresand...

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