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Avoiding the Pitfalls in Purchasing SNFs

July 1, 2003
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They may look like "bargains" these days, but follow these steps for a sound service program BY WENDY L. RUBAS, ESQ., AND JOHN M. CALLAHAN, ESQ.

Some daunting challenges for nursing homes have made this a buyer's market, but a poorly crafted purchase agreement can only add to the difficulties

by
Wendy L. Rubas, Esq.,
and
John M. Callahan, Esq. The nursing home field is in a period of transition and is facing many challenges, both financial and legal. This environment has caused many nursing home chains to put facilities on the market, sometimes at fire-sale prices. To the savvy buyer, this can be a mecca of opportunity. But the risks inherent in purchasing a nursing home should not be understated.

Acquiring a long-term care facility is like navigating a minefield: There are known risks, unknown liabilities, and always the uneasy feeling that unforeseen dangers are lurking. At a time when regulatory scrutiny of long-term care facilities, as well as the imposition of major fines and penalties, have increased, the purchaser of a long-term care facility should heed the ancient adage caveat emptor-"let the buyer beware."

Entities that are considering the purchase of a nursing home often feel ill-equipped to anticipate the many consequences and considerations involved with a change of ownership. With a thoughtful plan for tackling the key legal considerations involved, a purchaser can overcome these uncertainties and help to ensure that its newly purchased Cadillac is not, in fact, an Edsel in disguise.

A sound purchasing plan has three key steps. First, the purchaser should conduct critical due diligence of the facility in an effort to learn as much as possible about its existing and potential liabilities. Second, the purchaser should carefully negotiate purchase and sale agreements to anticipate and allocate liabilities. Third, purchasers should understand and plan to make the multiple regulatory filings that occur as part of a change of ownership in this field. What follows is a general overview of each of these critical steps.

Step One: Careful, Thorough Due Diligence
When a nursing home is being sold at a bargain price, or is part of a major divestment, the purchaser may experience intense pressure to avoid or at least curtail due diligence. Usually this pressure comes in the form of a demand to "close the deal quickly." Certainly due diligence is not the most glamorous aspect of a purchase. Purchasers of nursing homes, though, have a particular interest in proceeding carefully and resisting these pressures.

As with any commercial acquisition, the purchasing parties will want to conduct a full financial review of the target facility's books and ledgers to assess for any accounting irregularities. An important part of this process will be a review of contracts and arrangements with other healthcare providers, including pharmacy companies and therapy companies. The terms of these arrangements must be reviewed for potential kickback or other illegal provisions. These terms can not only overstate the value of the facility, but can lead to serious civil and criminal liabilities.

In addition to performing a financial checkup, the purchaser must examine the facility's compliance history, which involves reviewing past surveys (including statements of deficiencies and plans of correction) and other compliance activity. The purchaser will often find an array of violations. In many cases, these violations may be outstanding and the facility may be still operating under a plan of correction. In the most extreme cases, the facility could be at risk of losing its provider number.

Another key area of due diligence is to assess the insurance claims history of the facility. The number and types of claims filed, as well as the amounts paid on them, can provide insight into the risks associated with operating the facility. More importantly, the purchaser will want to assess if there were lapses in coverage, especially since many nursing homes are experiencing trouble obtaining and maintaining liability coverage.

Step Two: Skillful Drafting of Purchase Agreement
Once potential liabilities and similar issues are identified, the purchaser must ensure that the purchase agreements are drafted to insulate the purchaser from these liabilities. Legal counsel can work with the purchaser to craft "representations and warranties" in the purchase agreement. For example, a seller usually "represents and warrants" that it has operated the facility in compliance with the law, that it has not received notice of any government investigations, and that its financial statements accurately reflect the results of the facility's operations. From the purchaser's standpoint, the "covenants" made by the seller and contained in the purchase agreement also are critical because they address the seller's future conduct, requiring the seller not to take actions to hurt the facility (such as by operating competing facilities in the same geographic market or disparaging the facility).

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