Guest Blog: The Change of Ownership Challenge when Buying Texas Long-Term Care Facilities

Just as surely as death is inevitable, so too apparently is the trend toward consolidation in the long-term care properties industry. Publicly traded companies and real estate investment trusts are rushing headlong into the marketplace to acquire privately held senior care chains and independent facilities. While most of these targets are being effectively managed and operated, their suitors recognize an opportunity to benefit from economies of scale. What’s more, long-term care facilities and the land they are built on can retain their value and actually appreciate in what is a very challenging real estate environment. Senior living and care facilities are an especially attractive growth market as more of the Baby Boomer generation approach retirement age. Baby Boomers moving into these care facilities is not a trend, it is the new normal.

So where are these companies shopping?

Florida and California, with their favorable demographics, have been popular states in the past. These days, whether because of market saturation or high real estate prices in other states, more and more companies are looking at Texas. If not the next frontier, Texas is a frontier for opportunity. In fact, over the last 12 months, dozens of companies have looked at Texas and some have actually started filling their cart.

Once at the checkout line, however, they have learned that closing such deals can be fraught with red tape. The primary challenge in Texas is that the application for licensure requires a level of disclosure that is higher than almost every other state in the country.

In particular, Texas requires the disclosure of all “owners” in a company, even owners of 5 percent or less – all the way up the ownership chain. Other ‘controlling persons’ must also be disclosed, but the state’s definition of what is a ‘controlling person’ is ambiguous. In the past, companies have come to us right before a deal is finalized, with the hope that transferring the licenses will be a short, final step. Unfortunately, we have to tell them that transferring the licenses is not an easy process.

Our first step in representing such a client is to contact the appropriate people at the state level and answer as many questions on the front end as possible. We then work with both the state and the federal government, through its Medicare agent in Texas, called “Trailblazer,” to get applications filed.

After the paperwork is filed, the state and Trailblazer will have questions. Outside legal counsel must know how to respond to questions about complex transactions that do not fit neatly into state and federal change of ownership forms. This means serving as translators, bridging the terminology gap between national deal-makers and local regulators.

The licensure and change of ownership process in Texas is complicated as it is, but it is also continually evolving to try to accommodate new ownership structures. For example, last summer the state changed the rules to clarify that when it comes to publicly traded corporations, shareholders and lenders aren't controlling persons’ for purposes of disclosure. If a new owner or a buyer did not know this ahead of time, they could have wasted a lot of time trying to figure out whether to disclose certain information about these groups.

This predicament for national companies is really a catch 22. On one hand, these challenges are not going to go away any time soon. On the other, neither is the value inherent in these properties. It places a premium on finding outside counsel with experience and familiarity in working with these specific state entities, streamlining the acquisition process and allowing the company to move forward with what it does best – whether it is purchasing, managing or operating long-term care facilities.

by Cory D. Macdonald. Mr. Macdonald is the lead attorney of the long-term care and retirement housing practice group at Davis & Wilkerson. He represents continuing care retirement communities, hospitals, skilled nursing facilities, physicians and other providers in a variety of issues including business formation, state licensure, Medicare/Medicaid certification, regulatory compliance, risk management, and the sale and acquisition of health care facilities.

Preparing Your Company For Sale

You’ve invested heavily in building and expanding your healthcare business, and now you’re considering selling. Regardless of why you’re selling—retirement, burnout, the spin-off of a non-core business, or taking advantage of high prices in the marketplace for your type of enterprise—you’ll need to provide potential buyers with a detailed set of information about your business. And that’s easier said than done.

Very often, mid-sized healthcare companies invest heavily in quality care and state-of-the-art medical technology, neglecting the financial and operational systems they need to provide the type of information buyers require. It’s not unusual for a client to tell us, ‘We know the results of our business; we just cannot document it well.”

Due diligence on a healthcare business involves a thorough examination of financial, utilization, and market data to verify results and develop projections. A buyer is unlikely to invest an inordinate amount of time and money reconstructing the business’s results from scratch; there are always other buying opportunities.

Regardless of the true profitability of the business, if you cannot readily document the outcomes and provide consistent information to potential buyers so they can verify your business results and feel confident in the soundness of their investigation and analysis, you will not be able to maximize the selling price of your business. Preparing for the successful sale of a health care business involves work in three main areas: Financial Systems, Professional Accounting Methods, and Market Positioning Research.

Go Beyond the Income Statement

Very often, we find mid-sized healthcare companies using an off-the shelve packaged accounting program such as QuickBooks for cash management and a proprietary program for medical utilization, billing, collections, clinical information, and scheduling. Because there’s no correlation between the two programs, revenues are not tied into volume, types of services, or patient days by payer source. If a buyer wants to know about the volume, type, and payers of services making up the revenue number in the income statement, this information must be derived from a separate database.

The information can be collected from service logs, but the revenue to units to service linkage must be reconstructed, a tedious task most buyers are reluctant to undertake. This will reduce the number of prospective buyers, resulting in a less competitive bidding process and a lower price.

The buyers who choose to explore the transaction will need a long time to complete the evaluation, which can lead to a significant disruption of business operations caused by outside inspectors and the specter of the company being “in play.” Companies with state-of-the-art information systems can cross-tab any set of financial, operational, and clinical data variables and produce a report with a few keystrokes.

Healthcare executives sometimes fail to understand that an income statement alone is insufficient to evaluate business results. It’s true that net operating income is a major determinant of a company’s value, but a buyer cannot have confidence in the net income number unless the seller can document service units, costs, and pricing behind the numbers.

Invest in Accounting

Many healthcare service providers fail to hire qualified financial professionals to manage their financial and accounting systems, believing it’s too expensive relative to the size of their business. The result is that financial records are to manage their financial and accounting systems, believing it’s too expensive relative to the size of their business. The result is that financial records are managed by a less costly, but less qualified bookkeeper who lacks extensive accounting training.

Quite often, these inexperienced accountants produce inconsistent financial statements. The bottom line may be correct, but they record expenses differently by category month by month, making business expenses difficult to track. If there is high turnover in this position, the problem is exacerbated: each new bookkeeper records expenses in their own way. The solution is to invest in qualified financial and accounting professionals. It’s not inexpensive, but it will pay off when it comes time to sell the business because there will be reliable financial statements.

Another benefit of having financial professionals on board is that when it’s time to sell the business, these individuals can compile the information and intelligently respond to questions and requests for additional data during the due diligence phase. This spares owners considerable time during the sale process, allowing them to continue devoting their energy to maintaining the business. When owners spend a large amount of time on the sale of their business, they tend to lose focus on the operations, adversely affecting the valuation as closing approaches.

Know Your Market

Most small and mid-sized healthcare businesses are uninformed about their competition, failing to collect sufficient information about market-share and the competitive environment. But knowing your business’s market area, demo-graphics, upside potentials, and strengths and weaknesses compared to competitors is important in determining its value. It’s a good idea for you, as the seller, to have this information to make a strong case, rather than leaving it up to the buyer.

The buyer will usually hire an external marketing consultant who is unfamiliar with the market. He or she spends a day or two in the field and in the office collecting and analyzing secondary data and presents their “expertise” on the market you’ve spent years cultivating. They almost always miss the subtleties of the market. As the seller, you’ll be in a better position if you can define your market’s characteristics and needs for the buyer.
The successful sale of a healthcare business depends on making quality information about your enterprise available to buyers as they look to corroborate the business’s results, make projections, and price the transaction. Investing in an integrated financial and utilization database, high-caliber financial professionals, and market data will help you maximize the selling price and facilitate a speedy transaction.

Castro Endorses Healthcare Reform Law

The healthcare reform bill has much support....in Cuba.

Cuban leader applauds US health-care reform bill
By PAUL HAVEN (AP)

HAVANA — It perhaps was not the endorsement President Barack Obama and the Democrats in Congress were looking for.

Cuban revolutionary leader Fidel Castro on Thursday declared passage of American health care reform "a miracle" and a major victory for Obama's presidency, but couldn't help chide the United States for taking so long to enact what communist Cuba achieved decades ago.

"We consider health reform to have been an important battle and a success of his (Obama's) government," Castro wrote in an essay published in state media, adding that it would strengthen the president's hand against lobbyists and "mercenaries."

But the Cuban leader also used the lengthy piece to criticize the American president for his lack of leadership on climate change and immigration reform, and for his decision to send more troops to Afghanistan, among many other things.

And he said it was remarkable that the most powerful country on earth took more than two centuries from its founding to approve something as basic as health benefits for all.

"It is really incredible that 234 years after the Declaration of Independence ... the government of that country has approved medical attention for the majority of its citizens, something that Cuba was able to do half a century ago," Castro wrote.

The longtime Cuban leader — who ceded power to his brother Raul in 2008 — has continued to pronounce his thoughts on world issues though frequent essays, titled "Reflections," which are published in state newspapers.

Cuba provides free health care and education to all its citizens, and heavily subsidizes food, housing, utilities and transportation, policies that have earned it global praise. The government has warned that some of those benefits are no longer sustainable given Cuba's ever-struggling economy, though it has so far not made major changes.

In recent speeches, Raul Castro has singled out medicine as an area where the government needs to be spending less, but he has not elaborated.

While Fidel Castro was initially positive about Obama, his essays have become increasingly hostile in recent months as relations between Cuba and the United States have soured. Washington has been increasingly alarmed by Cuba's treatment of political dissidents — one of whom died in February after a long hunger strike.

Cuba was irate over the island's inclusion earlier this year on a list of countries Washington considers to be state sponsors of terrorism. Tensions have also risen following the arrest in December of a U.S. government contractor that Havana accuses of spying.

In Thursday's essay, Castro called Obama a "fanatic believer in capitalist imperialism" but also praised him as "unquestionably intelligent."

"I hope that the stupid things he sometimes says about Cuba don't cloud over that intelligence," he said.

Copyright © 2010 The Associated Press. All rights reserved.

Government Run Healthcare - Freedom vs. Health

What Do You Think About Healthcare Reform? It is a dramatic change and comprehensive overhaul, resulting in much more government control of the healthcare system and the way medical care is delivered. It depends on whether you value freedom and individual responsibility compared to government intervention and control.

Below is an excellent article from Investors' Business Daily:

20 Ways ObamaCare Will Take Away Our Freedoms

By David Hogberg (From Investors' Business Daily)

Sun., March 21, '10 3:24 PM ET

With House Democrats poised to pass the Senate health care bill with some reconciliation changes later today, it is worthwhile to take a comprehensive look at the freedoms we will lose.

Of course, the overhaul is supposed to provide us with security. But it will result in skyrocketing insurance costs and physicians leaving the field in droves, making it harder to afford and find medical care. We may be about to live Benjamin Franklin’s adage, “People willing to trade their freedom for temporary security deserve neither and will lose both.”

The sections described below are taken from HR 3590 as agreed to by the Senate and from the reconciliation bill as displayed by the Rules Committee.

1. You are young and don’t want health insurance? You are starting up a small business and need to minimize expenses, and one way to do that is to forego health insurance? Tough. You have to pay $750 annually for the “privilege.” (Section 1501)

2. You are young and healthy and want to pay for insurance that reflects that status? Tough. You’ll have to pay for premiums that cover not only you, but also the guy who smokes three packs a day, drink a gallon of whiskey and eats chicken fat off the floor. That’s because insurance companies will no longer be able to underwrite on the basis of a person’s health status. (Section 2701).

3. You would like to pay less in premiums by buying insurance with lifetime or annual limits on coverage? Tough. Health insurers will no longer be able to offer such policies, even if that is what customers prefer. (Section 2711).

4. Think you’d like a policy that is cheaper because it doesn’t cover preventive care or requires cost-sharing for such care? Tough. Health insurers will no longer be able to offer policies that do not cover preventive services or offer them with cost-sharing, even if that’s what the customer wants. (Section 2712).

5. You are an employer and you would like to offer coverage that doesn’t allow your employees’ slacker children to stay on the policy until age 26? Tough. (Section 2714).

6. You must buy a policy that covers ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services; chronic disease management; and pediatric services, including oral and vision care.

You’re a single guy without children? Tough, your policy must cover pediatric services. You’re a woman who can’t have children? Tough, your policy must cover maternity services. You’re a teetotaler? Tough, your policy must cover substance abuse treatment. (Add your own violation of personal freedom here.) (Section 1302).

7. Do you want a plan with lots of cost-sharing and low premiums? Well, the best you can do is a “Bronze plan,” which has benefits that provide benefits that are actuarially equivalent to 60% of the full actuarial value of the benefits provided under the plan. Anything lower than that, tough. (Section 1302 (d) (1) (A))

8. You are an employer in the small-group insurance market and you’d like to offer policies with deductibles higher than $2,000 for individuals and $4,000 for families? Tough. (Section 1302 (c) (2) (A).

9. If you are a large employer (defined as at least 50 employees) and you do not want to provide health insurance to your employee, then you will pay a $750 fine per employee (It could be $2,000 to $3,000 under the reconciliation changes). Think you know how to better spend that money? Tough. (Section 1513).

10. You are an employer who offers health flexible spending arrangements and your employees want to deduct more than $2,500 from their salaries for it? Sorry, can’t do that. (Section 9005 (i)).

11. If you are a physician and you don’t want the government looking over your shoulder? Tough. The Secretary of Health and Human Services is authorized to use your claims data to issue you reports that measure the resources you use, provide information on the quality of care you provide, and compare the resources you use to those used by other physicians. Of course, this will all be just for informational purposes. It’s not like the government will ever use it to intervene in your practice and patients’ care. Of course not. (Section 3003 (i))

12. If you are a physician and you want to own your own hospital, you must be an owner and have a “Medicare provider agreement” by Feb. 1, 2010. (Dec. 31, 2010 in the reconciliation changes.) If you didn’t have those by then, you are out of luck. (Section 6001 (i) (1) (A))
13. If you are a physician owner and you want to expand your hospital? Well, you can’t (Section 6001 (i) (1) (B). Unless, it is located in a county where, over the last five years, population growth has been 150% of what it has been in the state (Section 6601 (i) (3) ( E)). And then you cannot increase your capacity by more than 200% (Section 6001 (i) (3) (C)).

14. You are a health insurer and you want to raise premiums to meet costs? Well, if that increase is deemed “unreasonable” by the Secretary of Health and Human Services it will be subject to review and can be denied. (Section 1003)

15. The government will extract a fee of $2.3 billion annually from the pharmaceutical industry. If you are a pharmaceutical company what you will pay depends on the ratio of the number of brand-name drugs you sell to the total number of brand-name drugs sold in the U.S. So, if you sell 10% of the brand-name drugs in the U.S., what you pay will be 10% multiplied by $2.3 billion, or $230,000,000. (Under reconciliation, it starts at $2.55 billion, jumps to $3 billion in 2012, then to $3.5 billion in 2017 and $4.2 billion in 2018, before settling at $2.8 billion in 2019 (Section 1404)). Think you, as a pharmaceutical executive, know how to better use that money, say for research and development? Tough. (Section 9008 (b)).

16. The government will extract a fee of $2 billion annually from medical device makers. If you are a medical device maker what you will pay depends on your share of medical device sales in the U.S. So, if you sell 10% of the medical devices in the U.S., what you pay will be 10% multiplied by $2 billion, or $200,000,000. Think you, as a medical device maker, know how to better use that money, say for R&D? Tough. (Section 9009 (b)).

The reconciliation package turns that into a 2.9% excise tax for medical device makers. Think you, as a medical device maker, know how to better use that money, say for research and development? Tough. (Section 1405).

17. The government will extract a fee of $6.7 billion annually from insurance companies. If you are an insurer, what you will pay depends on your share of net premiums plus 200% of your administrative costs. So, if your net premiums and administrative costs are equal to 10% of the total, you will pay 10% of $6.7 billion, or $670,000,000. In the reconciliation bill, the fee will start at $8 billion in 2014, $11.3 billion in 2015, $1.9 billion in 2017, and $14.3 billion in 2018 (Section 1406).Think you, as an insurance executive, know how to better spend that money? Tough.(Section 9010 (b) (1) (A and B).)

18. If an insurance company board or its stockholders think the CEO is worth more than $500,000 in deferred compensation? Tough.(Section 9014).

19. You will have to pay an additional 0.5% payroll tax on any dollar you make over $250,000 if you file a joint return and $200,000 if you file an individual return. What? You think you know how to spend the money you earned better than the government? Tough. (Section 9015).

That amount will rise to a 3.8% tax if reconciliation passes. It will also apply to investment income, estates, and trusts. You think you know how to spend the money you earned better than the government? Like you need to ask. (Section 1402).

20. If you go for cosmetic surgery, you will pay an additional 5% tax on the cost of the procedure. Think you know how to spend that money you earned better than the government? Tough. (Section 9017).

Does this Deal Make Sense?

A quick way of figuring out if a deal makes sense is to ask the following questions:

1. How does this deal fit my strategy?
2. Is the price supported by current financial results?
3. How do I pay for this?
4. What is the right price, strategically and financially?
5. What are the risk factors?
6. Is the expected return worth the risk?
7. What are the seller's reasons for selling?
8. What is upside potential and what are barriers to their realization?

Each of these questions involve more depth, complexity and permutations, but these are the essential questions.

The Power of Prediction

One important lesson that I learned as an MBA student was that business abhors unpredictability. Business can confront and respond to all sorts of risks provided they are knowable and calculable. In fact, it is the stability of our system of the rule of law and a robust functioning free market economy, that enables businesses to plan, allocate resources and make investments for the future. The Healthcare Reform Bill posited as a massive overall of the healthcare system add a real dimension of fear and unpredictability for healthcare investors and owners, resulting in a slowdown of capital activity and thwarting of new development. The spectre of wealth distribution through much higher taxes and cap and trade tariffs does not help either. Now that it appears that the Reform Act as least as a comprehensive measure is dead, healthcare investors and those companies interested in expansion and development can leave the bunker and bask in the light of day again and get back to the business of growing market share and profitability. There will be challenges with the State Medicaid funding going forward but at least we can make decisions without the expectation that the Federal government will turn the industry upside down and change the rules of the game, let alone socialized overnight. That's the power of prediction. Racers, start your engine.

Mark Davis
President