According to the Centers for Medicare & Medicaid Services (CMS), more than 3,000 skilled nursing facilities (SNFs) experienced a change in ownership between 2016 and 2021. Of those purchased, 62.3% have a single organizational owner and 18.2% have only individual owners. As long-term care providers continue to face post-pandemic financial pressures, merger and acquisition activity is sure to continue through 2023 at a growing rate.
While there is a great deal of time and effort put into an investor’s decision whether to add to their portfolio, investors must not forget about the equally important matters that will need addressed after the deal has been finalized. Buyers or incoming operators must be prepared to coordinate time-sensitive post-acquisition activities diligently to minimize operational interruptions, prevent cash flow issues, and create a seamless transition for employees and residents alike.
Whether you are a buyer who is expanding your portfolio or your organization is anticipating a change of ownership, we will discuss some of the biggest – but less obvious – financial and operational considerations to prepare you for what lies ahead.
1. Pre and Post Acquisition Due Diligence
In the weeks and months leading up to the sale, the incoming operator will be extremely busy researching and documenting the seller or the outgoing operator’s state of affairs. Allowances will need to be made by both the buyer and the seller, before, during, and after the sale. The buyer will need access to the building and to financial data so they will be more prepared coming in the door, and the seller must reasonably accommodate those requests even as operations continue. The buyer should specifically review agings to identify and assess any problems they may be unknowingly inheriting. As issues are identified, this is the buyer’s chance to create strategies right out of the gate to minimize any bad debt they may be taking on.
Licensing, Agreements & Contracts
Whether or not a change of ownership is successful can really boil down to one thing: the operations transfer agreement (OTA). The legal team of both the buyer and seller drafts this agreement, and it dictates many of the rules that follow an acquisition. The agreement must be thorough and include all the necessary details surrounding the deal - especially where funds are involved. How will reimbursements from government and third-party payers be handled? And private payments? Who will be responsible for depositing and transferring funds, and how often will that occur? There are many moving parts and if the OTA is not specific and thorough at the onset, it could cost both parties additional legal fees to resolve any discrepancies. And while negotiations are under way, the incoming operator will encounter extended payment delays and cash flow issues as a result.
Buyers also need to be aware of the administrative burden involved with obtaining the proper state and local operating licenses, as well as new letters of agreement with insurance payers. As part of their due diligence, buyers should request copies of all the outgoing operator’s existing contracts. New contracts will need to be secured under the new incoming operator, and it will take time to renegotiate with each vendor while also assessing the benefits of that relationship. Keep in mind that some contracts and licenses will need to be in place before the transition, while others need to wait until the sale is final. It is critical that these not slip through the cracks, so we suggest assigning a dedicated project manager. This person will need to develop a good system for creating timelines and tracking milestones for the duration of the transition. If these resources are not available in-house, seek the assistance of a qualified third party such as Richter.
Buyers cannot afford to ignore the software and other systems that play such a prominent role in day-to-day operations. They should never assume they can simply “take over” the outgoing operator’s systems and historical information, as there are HIPPA and other privacy rules that forbid unauthorized users to access private resident information. It may be necessary to clean up or even extract data tied to the outgoing operator to avoid any risk of violation. Not only will buyers need to start with a clean slate and develop their own data, but they will need to notify system vendors of the change of ownership and secure new contracts in their own name. This will ensure the contract is still valid and that it is contractually tied to the right party, limiting any risk of interruption that could impact a resident’s care.
Incoming operators who already manage multiple facilities will be more inclined to favor their processes and infrastructure over the ones currently utilized by the outgoing operator. There are benefits in standardization and essentially having one set of rules, but operators must integrate changes with caution. Understanding that standardization is the goal, buyers should cross reference the way operations are run now, and the way they envision them to run in the future. This will provide more insight as you develop a strategy to get from point A to point B.
One item that is often overlooked during a transition is job descriptions. The incoming operator must ensure that employees who are staying on through the transition have accurate job descriptions that reflect any new workflows, responsibilities, or job titles. Spelling this out upfront will help prevent misunderstandings that can cause confusion or frustration among staff. Depending on the situation, it may be appropriate to conduct skill tests to assess whether employees should be “rehired” once the new infrastructure is in place. This is a good opportunity to identify any gaps or inefficiencies with personnel, and correct them with training before it is too late.
Cash Flow Planning
There is often a misconception that once a facility is acquired and “the deal” is done, cash will automatically begin flowing in to the new owner. The reality is that the transition period after a sale when both the incoming and outgoing operators have their hands in the mix is a complicated and sensitive time. For a specified amount of time (which is usually dictated in the OTA), both parties have a responsibility to each other to report any funds received on their behalf, and to transfer applicable funds in a timely manner. Tracking cash due to and due from the rightful owner can be extremely difficult if the process is not managed closely and carefully. A schedule and reconciliation process must be established, actively monitored, and shared regularly with both parties.
Enhance Outcomes with Richter
Even for the most experienced healthcare operators, times of transition are tough. Each one is unique and presents its own set of challenges. As the industry’s leading LTPAC performance advisor, Richter can help make the process more seamless for everyone involved. Our insight will not only help speed up the integration process, but will keep you in compliance with regulatory requirements. To learn more about our comprehensive solutions, contact us here or call us at 866.806.0799.