Healthcare mergers and acquisitions are often heavily scrutinized and labeled as disadvantageous to the community at large. However, when they are managed with care and cost efficiency in mind, larger operators can achieve economies of scale and greater negotiating power with insurance payers, pharmaceutical companies and other suppliers. These cost savings have the potential to benefit not only the operation but also the patients and the communities they serve.
 
During times of transition, one of the biggest challenges an investor faces is keeping a steady flow of cash coming into the new operation. There may be enough cash on hand to get through the first month of operation – maybe two – but beyond that, they start to run into trouble.

With cash flow and cost-containment as top priorities, the incoming operator will want to hit the ground running once the deal is finalized so they can begin collecting reimbursements and recovering revenue. But first, a few key decisions will need to be made, including whether they will assume the existing operator’s receivables and liabilities, or start over with a clean slate.

There are pros and cons on either side of this decision. Careful analysis of the balance sheet and payer contracts will provide the insight needed to assess aging and receivables, and the likeliness they can be recovered.

The benefit of assuming the outgoing operator’s financials is that the cash flow will not be interrupted. Money will resume into the outgoing operator’s accounts until they are moved over to the incoming operator’s accounts. Once a “cutoff date” is determined, the accounts will need coordination to ensure cash is allocated to the appropriate party.

The alternative to assuming existing financials is to start with a clean slate. In this situation, the new operator must be prepared to operate for at least one full month without any cash flow. This can be risky if there isn’t a cushion of cash to fall back on, but the benefit of starting fresh is that the new operator will not be responsible if any hidden liabilities surface later on.

Another major component in any change of ownership is the operations transfer agreement (OTA), which details each party’s responsibilities before, during and after the transition. Both parties will want to ensure the agreement protects their own best interests, especially where finances are involved. If assets are overlooked and not included
in the agreement, there are no guarantees that they will be distributed fairly—which could cost one party to lose significantly.

Below are just a few of the financial line items that should not be omitted in your OTA:

Reconciling Cash Transactions
Whether the incoming operator assumes assets and liabilities or not, there will be funds coming in that belong to the outgoing operator. These need to be closely managed and reconciled properly, until all the credentialing and ownership changes are complete and all payments are directly depositing into the new bank number.

Cost Reporting
Medicare-certified facilities are responsible for submitting annual cost reports, dictating whether they require or owe reimbursement. Settlements are held in arrears, so this will need to be addressed in the purchase agreement to coincide with the operator’s dates of service.

Takebacks/Medicaid Audits
The incoming operator will need to ensure takebacks are documented in the transition agreement, otherwise they will be responsible for any funds that could be owed back to Medicaid.

Trust Accounts
The incoming operator is required to open a new interest-bearing resident trust account, and funds must be accessible to the residents on day one of the transition. If at any point during the transition residents cannot access their funds, serious penalties can result. All trust accounts, including any petty cash kept onsite at the facility, must be reconciled and cannot be retained by the facility.

Payroll
In most cases, employee pay periods will not be in perfect alignment with the operation transfer date, which can make payroll a little tricky. Essentially, the outgoing operator will need to run payroll up through their last day, and the new operator will need to pick up the remaining days. It becomes more complicated when health insurance deductions factor in, especially if benefits between the two operators are different. The incoming operator will also need to decide whether they will honor accrued vacation, and how it will be bought out or rolled over.

Escrow Accounts
If the property is leased and has an escrow account that the outgoing operator has been paying into each month (as part of the rent), the transfer agreement should specify ownership of these funds if they are paid out posttransition.

Insurance Policies
Many commercial insurance policies require the insured to pay a portion of their coverage upfront. For example, a 12-month coverage term would be paid over the course of nine months instead of 12. If a change of ownership occurs before the policy ends, the current operator could be owed a refund for the term that was pre-paid. Whether the outgoing operator will receive the refund will depend on the policy terms, and whether the incoming operator is assuming payables.

Utilities
The facility may need to update utility records to reflect a change of ownership. Some utilities may charge an administrative fee for the name change, and may require a new deposit fee which can range from $5,000 up to $30,000. This amount is usually refunded when the account is closed, and should therefore be noted in the transfer agreement so there is no confusion about which party is owed the payment.

Physical Property
Incoming operators should know who owns the land and property where the facility resides. Different rules apply depending on whether these assets will be included in the purchase agreement, or whether a lease will continue through the existing landlord. Calculate the monthly rental fee and any property taxes that might apply, and factor
those into negotiations. Keep an eye out for any unpaid property taxes, as those will become the responsibility of the new owner unless otherwise specified in the OTA.

Financial planning is a critical part of any merger or acquisition, as it directly impacts both operators’ bottom lines. It is generally (and rightfully) given a lot of attention during the transition process, but there are other important factors that investors need to take into consideration to make a deal successful for the long haul.