Certificates of Need: Why You Need to Understand the Certificates Ahead of a Transaction

Certificates of need (CONs) are a creature of state law, which means no two states take exactly the same approach to the review, issuance, or maintenance of certificates of need (that is, if the state has a CON program at all). According to the National Conference of State Legislatures, 38 states have a CON program or a variation thereof. However, if you are planning a purchase or sale of a CON-covered provider in a CON state, you need to know more than just whether the state maintains a CON program. This article will cover at a very high level the different ways a CON may have an impact on a change of ownership (CHOW), with a primary focus on transactions involving long term care facilities.

• CON review may have a significant impact on transaction timing. For example, in Georgia, most CHOWs of CON-covered providers result in a required post-CHOW notice/filing. Typically, there is no pre-CHOW notice or filing requirement. However, if the seller is a hospital authority, the pre-CHOW timeline may be significantly longer—to the tune of 3-5 months or longer.

• CON applicability should be a fine-tuned analysis, and applicability may not be determined by provider type (e.g., whether the provider is licensed as a nursing facility or assisted living facility), but rather sub-type (e.g., whether the facility is a “Level 4” assisted living facility or a “Level 3” facility). That is exactly the distinction that matters in Louisiana, where Level 4 adult residential care providers are covered by CON, but not Level 3 providers.

• In addition to the above, the seller and buyer should understand how a CON is “held.” In some states, the property owner typically holds the license; in others, it is the operator/licensee. In still others, the CON holder is determined based on contract right. Who “holds” the CON is important because it is often the “holder” who retains the value of the bed rights. For example, in a state where the property owner holds the CON, a tenant operator may transfer its operations to a new operator, but it does not have the ability or right to sell the CON. It is important for those contemplating a CHOW to include this consideration when valuing a deal, because a lot of value can be added or lost depending on who holds the CON. In states where CON rights are assigned by contract, it is also important that such rights are carefully negotiated and included in the underlying deal documents.

• In some states, a buyer may believe it is obtaining a CON when purchasing operating rights only to learn that the CON disappeared when the facility was initially constructed and licensed. For example, in Florida, a CON often “merges” with the license after a nursing facility obtains licensure and opens its doors.

• CON review may be triggered by changes other than a change in CON-holder or licensee/operator. For example, in Michigan a new lease agreement between an existing operator/licensee and property owner, especially where the rent figure and term change, can trigger a time-intensive and expensive CON review.

The points above reflect only a subset of the many reasons why it is so important that parties to a CHOW pay attention to CONs and engage experienced counsel where needed. That is particularly true where parties engage in a multi-state transaction, which may trigger as many varying CON processes as there are states involved. In addition, CONs have become a “hot button” issue in a number of states, resulting in the need for any interested party to pay close attention to legislative proposals.

For more information, please contact Hedy Rubinger or Alexander Foster.