The Provider Relief Funds (“Funds”) provided by the Department of Health & Human Services (“HHS”) through the CARES Act have been an assist to healthcare providers working to fight COVID-19 and keep patients, residents, and staff healthy. However, the Funds, like the COVID-19 pandemic itself, will have lasting implications. This article highlights one way in which the Funds will continue to impact the healthcare industry: successor liability after a change of ownership (“CHOW”); that is, liability that transfers from a Fund recipient to a stock or asset purchaser of the entity that received Funds. We note that, despite the many Frequently Asked Questions (FAQs) issued by HHS, the agency has not expressly addressed post-CHOW successor liability. However, herein we cover the topic based on related concepts found in agency guidance.
For purposes of example, we will analyze successor liability in the context of an asset purchase using a seller operator that sells its Medicare-certified nursing facility to a buyer in 2021. HHS has made clear in its FAQs that a seller in an asset sale may not transfer its Funds to the operator buyer. For example, see the following FAQ:
Can an organization that sold its only practice or facility under a change in ownership in 2019 or 2020 and is no longer providing services accept payment and transfer it to the new owner? No. A provider that sold its only practice or facility must reject the Provider Relief Fund payment because it cannot attest that it was providing diagnoses, testing, or care for individuals with possible or actual cases of COVID-19 on or after January 31, 2020, as required by the Terms and Conditions. Seller organizations should not transfer a payment received from HHS to another entity. If the current TIN owner has not yet received any payment from the Provider Relief Fund, it may still receive funds in other distributions.
Given the clear guidance, a 2021 asset sale of a skilled nursing facility would result in seller keeping the Funds. Buyer would not be authorized to receive the Funds from seller, so no liability for the Funds should transfer. In addition, seller would be required to fulfill its reporting obligations associated with Funds, none of which would pass on to buyer.
The benefit and drawback of an asset sale is that the funds cannot transfer—resulting in no liability for buyer, but also no transfer of what could be critical Funds to address the pandemic. We note that some providers, many of whom were unaware of the prohibition against transferring Funds in an asset sale, did effect such a transfer. Because HHS has not directly addressed the repercussions of such a transfer, we cannot provide certainty on the distribution of liability between parties, but based on our experience liability may shift to the buyer, especially if seller has attempted to recover the funds from the buyer so that it can return the Funds to HHS and buyer has refused to return the funds. Buyer liability may also be more likely if it participates in Medicare and/or a Medicaid program in which successor liability automatically attaches by way of assignment of a provider agreement, though HHS has not specifically addressed this.
Where a healthcare provider that received Funds is acquired via stock purchase, such that the entity that received Funds continues to exist, FAQs make clear that the Fund “recipient may continue to use the funds, regardless of its new owner.” Additionally, the acquired subsidiary may report on the use of Funds or its new parent/owner (if an eligible healthcare provider) may direct and report on the use of Funds. In the scenario described above in Section I, if a buyer purchases the stock of an existing nursing facility operator in 2021, it would likely acquire the liabilities associated with the Funds received in 2020 (especially if Funds remain to be spent). This would mean, for example, that if the seller inappropriately expended Funds, buyer could be on the hook for recoupment and repayment efforts by HHS.
Note that the FAQs appear to only address a stock purchase where Funds remain to be spent. However, if the Funds were all expended in 2020 and a purchase occurs in 2021, it is possible that the stock purchaser could avoid liability where the previous owner was the Fund applicant and attested to the Funds on behalf of its subsidiaries. Because the stock owner would have been the entity that attested for the Funds, it is likely on the hook for liabilities and reporting obligations (though this has not been confirmed by HHS).
AGG Analysis and Recommendations
- Negotiate deal documents: Given the current lack of clarity from HHS related to successor liability for Funds in a CHOW situation, parties to a transaction should seek as much certainty as possible in deal documents. For example, an asset buyer should make sure the deal document clarifies that any remaining Funds are not included in the purchase, seller is solely responsible for its Funds, and seller will indemnify buyer for any Fund-related liability.
- Structure deal with goals in mind: In light of current HHS guidance related to asset and stock purchases, parties to a CHOW transaction should keep Fund liability in mind and factor it into their analysis when structuring a deal.
- Due diligence: Where successor liability is likely, such as in a stock deal, it is critical that buyers perform an in depth review of seller’s use of Funds and compliance with reporting obligations prior to the effective date of the CHOW. As previously discussed, penalties for issues related to Funds could be substantial.
For more information about changes of ownership or this article, please contact Hedy S. Rubinger or Alexander B. Foster.
The Arnall Golden Gregory Change of Ownership (CHOW) team leads all regulatory aspects of healthcare transactions for investors, operators, managers, capital partners, and developers of every size in all 50 states. The team streamlines the regulatory process so that clients close their transactions on or ahead of schedule. Whether obtaining licensure and Medicare/Medicaid approvals, structuring transactions to expedite closing, anticipating issues to minimize cash flow disruption, negotiating regulatory terms in deal documents, creatively resolving diligence issues, or advising on CHOW guidelines and compliance, the team provides extensive experience and practical solutions. To date, the CHOW team has served as primary regulatory counsel in transactions valued at more than $25 billion.