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April 2021  Volume 2Issue 4
Health Law Connections

Health Care Transactions—Mitigating Risk in a Pandemic Through Deal Structure and Insurance

AHLA thanks the leaders of the Business Law and Governance Practice Group for contributing this feature article.
  • April 01, 2021
  • Stephen M. Angelette , Polsinelli PC
  • Lauren E. Tucker McCubbin , Polsinelli PC

Looking back on a year in which the health care sector experienced more volatility than any in recent memory, it is a useful exercise to consider how lawyers mitigate risk and maintain business continuity in a health care transaction, how that process was affected by the pandemic, and what lessons were learned from that experience. Health care companies were not immune to Chapter 11 bankruptcies hitting a decade high as stimulus measures expired in the third quarter of 2020,1 and risk considerations were on the minds of many health care company buyers. Implications of Coronavirus Aid, Relief, and Economic Security (CARES) Act funds on health care transactions, unexpected uses of accelerated and advanced Medicare payments, and the continued rise of representation and warranty insurance were new topics, but the unique issue of whether the buyer of a health care provider should purchase the assets or equity were also implicated during the pandemic.

“Do no harm” is a health care mantra for physicians but also a key consideration for health care lawyers ensuring that the health care regulatory aspects of the transaction go according to plan. In doing so, there are two primary goals: business continuity and risk mitigation.

Asset vs. Equity

From a business continuity and risk mitigation perspective, the primary consideration is the mechanism through which the target company will be purchased. In an asset purchase, the title to all of the assets held by the target company will change and will be operated under a new legal owner. In an equity purchase, the title to all of the assets will remain with the target company, but the equity (i.e., stock or membership interests depending on the type of entity) will be purchased by a new legal owner.

Asset Purchase

The primary rationale for pursuing an asset purchase (or merger) is to avoid successor liability. Generally speaking, the liability for the action of the company prior to the date of the transaction is retained by the seller, because a new legal entity is purchasing the title to the assets of the company.2 And while many contracts will be assumed by the buyer, the new owner has the ability to reject assignment of contracts with troubling liabilities or disadvantageous terms.

However, in a health care transaction this analysis becomes more complicated. One consideration is that there are a number of regulatory filings that often must be submitted up to 30 or even 60 days pre-closing to provide state licensing agencies and state Medicaid programs with notice that a new legal entity will be operating the health care provider and to allow those agencies to evaluate the new entity and its historical operations. These filings require significant effort and time to compile detailed information about the operations of the buyer, its personnel, and finances, and they often involve a need for criminal background screening or fingerprinting of individual owners, directors, and officers. During the pandemic, this process has been particularly difficult as owners, directors, and officers may be spread out across the country or working from home, so simple acts like obtaining original signatures become an exercise in logistics.

But more troublesome is the likelihood that the buyer will retain successor liability for Medicare payments. Medicare reimbursement makes up 21% of all national health expenditures and a much greater amount of hospital expenditures (40%),3 and that number is growing each year.4 A Medicare provider (i.e. entities that receive reimbursement from Medicare Part A like hospitals, skilled nursing facilities, home health agencies, and hospices)5 that goes through an asset purchase or merger is entering into a “change of ownership” for purposes of the Medicare program.6 In a change of ownership, the existing Medicare provider agreement that is held by the seller is automatically assigned to the buyer along with any historical liability.7 The assigned provider agreement is subject to all applicable statutes and regulations and to the terms and conditions under which it was originally issued. Among other things, this means that the Medicare program has the ability to recoup payments made to the buyer to account for prior overpayments, even if they relate to services provided before the date of the transaction.8 While this does not apply to most entities that are reimbursed by Medicare Part B like physician practices,9 the unfortunate reality is that if a buyer is purchasing a health care provider with a significant amount of Medicare revenue, the buyer will be liable to the Centers for Medicare & Medicaid Services (CMS) for historical liabilities of the seller. This may also be the case for the company’s Medicaid enrollment, although that analysis varies from state to state.

There are certain ways that an asset buyer can mitigate Medicare successor liability risks. One way is to explicitly reject the seller’s provider agreement. However, this has consequences of its own. When a buyer accepts assignment of the provider agreement, the Medicare program will continue to pay the seller until it receives the approval notice of the change of ownership from CMS (called a “tie-in notice”).10 Because the change of ownership process usually takes several months, CMS has explicitly referenced its expectation that this money will be paid to the buyer by saying “it is the responsibility of the old and new owners to work out any payment arrangements between themselves while the contractor and RO [regional office] are processing the CHOW [change of ownership].”11 If the buyer rejects assignment of the provider agreement, the buyer must file an initial application to participate in the Medicare program. In this situation, Medicare will never pay the buyer for services it provides before the date on which the provider qualifies for Medicare participation as an initial applicant,12 which will result in a several months-long period of time in which the buyer will not be able to see Medicare patients or receive Medicare revenue.

A second way that an asset buyer can mitigate successor liability for Medicare payments is a more traditional transactional process of detailed representations and warranties, along with special indemnification. However, in addition to the risk that the seller becomes insolvent and is unable to indemnify the buyer for large-scale overpayments or fraudulent conduct, CMS has the ability to deactivate or revoke the company’s Medicare enrollment and institute a bar on reenrollment for improper conduct.13 Further, Medicare revocation frequently triggers reporting obligations to state Medicaid and licensing agencies that could trigger other revocation and termination actions, starting a spiral that is complicated and costly to defray if not fatal to the company.

An asset purchase also requires a close review of the target company’s commercial payer contracts to determine what notice and consent may be required. Almost every commercial payer contract has a “change of control” provision mandating that the buyer provide at least notice to the payer that a change of ownership is occurring. However, many commercial payers also require that their actual consent be obtained prior to closing, and if such consent is not obtained, the payers have the right to terminate the contract. The first consideration for the buyer is whether its existing commercial payer contracts are superior to the seller’s contracts in either their terms or fee schedule to determine whether assignment of the seller’s contracts is of interest. Frequently, one of the reasons for purchasing another health care company is because its commercial contracts are superior to the buyer’s, and failure to provide notice or seek consent to assignment could lead to an unexpected contract termination that may materially affect the value of the company being acquired without any real remedy because the buyer is the one required to make the filing. This creates a slightly tenuous timing issue, particularly with consents, and most savvy buyers elect to begin seeking those payer consents as proactively as possible. That said, the commercial payer may refuse to provide its consent if its provider network sufficiently covers the market served by the seller anyway so the risks of failing to meet consent timelines is lessened if the payer wants the provider in its network because the payer can always waive the change of control provision.

Equity Purchase

The primary purpose for pursuing an equity purchase is to maintain business continuity, avoiding the complications with a change of ownership at the provider level. The equity purchase can occur at any ownership level, whether at the parent level or further up the chain of indirect beneficial ownership.

While the regulatory filings are much simpler, often only involving post-closing notice filings to state agencies, Medicaid agencies, and the Medicare program (for which a “Change of Information” is required14), the buyer will basically retain successor liability for all contracts, licenses, and Medicare/Medicaid enrollments.

That said, in some cases even an equity purchase may be regarded as a change of ownership requiring a full regulatory filing. For many state licenses and state Medicaid enrollments, a change to 50% or more of the parent entity (and sometimes anywhere in the indirect ownership structure) may trigger a change of ownership and require issuance of a new license and Medicaid provider number. This could result in billing delays or require the buyer and seller to work out payment arrangements because the seller continues to receive reimbursement until the change of ownership is finalized. In addition, just as for an asset purchase, Medicare and many state licensing agencies and state Medicaid agencies require all owners with a 5% or greater indirect ownership interest in the licensed or enrolled provider to be reported. In these situations, not only must the companies at the parent level be reported, but all of the entities that own 5% or more beneficial interest further up the chain must be reported as well. For private equity funds and publicly traded companies, there is often significant pushback against the reporting of these entities because of a general reticence for their involvement to be made “public.” But CMS has taken a few opportunities to reject any exceptions for individuals with 5% or more beneficial interest in the provider or publicly traded companies.15 Similarly, the Medicaid Provider Enrollment Compendium has a specific section stating that there are no exceptions to reporting requirements for publicly traded companies.

Fundamentally, whether the buyer purchases the assets or the stock, in most health care transactions it is difficult to fully avoid liability for the historical actions of the seller. As discussed further below, this was exacerbated by the pandemic in unexpected ways. Careful planning to ensure that all regulatory filings are made and in-depth diligence to expose potential areas of liability are vitally important.

Representation and Warranties Insurance

Regardless of the transaction’s form, insurance products are essential to mitigate the post-closing risks. For example, requiring the seller to purchase extended reporting endorsements, or “tail coverage,” for existing insurance policies written on a “claims made” basis—such as professional liability, directors and officers liability, and employers liability insurance policies—can ensure a source of funding for post-closing claims defense and indemnification. Similarly, representations and warranties insurance (RWI) can ensure a source of funding for the seller’s indemnification obligations arising out of breaches of the representations and warranties in the purchase agreement. Over the last several years, the use of RWI in transactions has increased exponentially. RWI is now considered part of a typical approach to deal structuring, with as many as 45% of all private mergers and acquisitions employing RWI in 2018.16 As the demand for RWI has increased, so has the number of insurance providers, which has led to a broadening of coverage terms and a wider availability of RWI for highly regulated markets, such as health care.

It appears anecdotally that there was a significant increase in RWI because buyers are bringing that additional value in an effort to enhance their bid. As a general matter, the first 1% of purchase price pays the RWI deductible.17 This may be paid for by the buyer, buyer/seller, or seller depending on their negotiations.

Parties seeking to utilize RWI as a means of risk mitigation can anticipate the RWI carrier to be actively involved in the due diligence process. This involvement may provide an additional layer of comfort to a buyer in that there is another set of eyes looking carefully at the potential post-closing exposures. It can also increase the cost and length of the due diligence process, however, and issuance of the policy may be dependent upon resolution of regulatory approvals of the transaction.

Because the substance of the coverage provided by RWI is necessarily tied to the specific facts and circumstances of the target’s business and the form and terms of the transaction, there is room for a substantial amount of negotiation regarding the ultimate language of the RWI policy. Parties should carefully review all of the language of the draft policy—not simply the exclusions specific to the transaction—to consider whether any revisions may be appropriate. For example, buyers may want to eliminate or narrow any requirement in the RWI policy that they pursue indemnification from the seller before seeking coverage under the RWI policy. In addition, buyers may want to negotiate a more flexible notice provision in the RWI policy, as there can be many reasons a buyer would not have the ability or, alternatively, the desire to make a claim under the RWI policy as quickly as that provision might require. If carefully negotiated, RWI can be an excellent means of mitigating the risks associated with health care transactions.

Unique Pandemic-Related Risk Mitigation and Strategy

There have been a number of lessons learned in the pandemic that may be helpful in future recession-type events (although hopefully not!).

CARES Act considerations—who gets the money if there is a change of ownership?

The CARES Act18 has distributed $100 billion and counting of funding (called “provider relief funds”) to support health care-related expenses or lost revenue attributable to coronavirus and to ensure uninsured Americans can get the testing and treatment they need without receiving a surprise bill from a provider.19 These funds were not a loan and were not required to be repaid, but they could only be used to reimburse health care-related expenses and lost revenues attributable to the pandemic. A provider’s share was based on the total amount of Medicare fee-for-service payments that the provider received in 2019 per tax identification number (TIN).

For an asset purchase, the previous sentence is particularly important. Because the CARES Act money was distributed in accordance with the TIN, the original recipient is the only entity that could use the funding. The original recipient was required to use the funds for its eligible expenses and lost revenues and return any unused funds to the U.S. Department of Health and Human Services (HHS). Because the money was dedicated to the use of the TIN, the provider relief funds could not transfer to the buyer of an asset purchase, but rather had to be returned to HHS even if the new owner needed those funds to continue operations. While HHS attempted to address this situation in its Phase 2 and Phase 3 general distributions of the provider relief funds by giving providers who had gone through a change in ownership a chance to apply for additional funding,20 many companies missed out.

For a stock purchase, CARES Act money could be retained by the new owner because the TIN of the provider remained the same. Interestingly, particularly in contrast to how the funds could not be transferred under an asset purchase, most buyers and sellers took the position that this money should not affect the value of the company—the provider relief funds were “dollar neutral” because they had to be used for pandemic-related purposes. As a result, the purchase price was unchanged by the influx of cash received as part of the stimulus.

Accelerated Payments and Advanced Payments—should this be considered different from provider relief funds?

For the duration of the pandemic, the CARES Act, its follow-up guidance, and the other stopgap funding bills21 expanded health care providers’ ability to apply for accelerated or advanced payments on a periodic or lump sum basis. In contrast to provider relief funds, however, all accelerated or advanced funds paid out by the Medicare program were subject to repayment, first by automatic recoupment from submitted claims, and then, if necessary, by payment demand for any remaining funds not automatically recouped.

Because of the requirement for repayment (initially very quickly!), from an acquisition perspective, these accelerated and advanced payments were treated as debt even though in many cases this money was used for the same purposes as provider relief funds. So regardless of whether the acquisition was an asset or stock purchase, buyers took the position that they would require immediate repayment prior to closing or inclusion of the remaining advanced/accelerated payments as a special indemnity.

How have RWI Insurers reacted to the pandemic?

At the onset of the COVID-19 pandemic, RWI carriers began issuing blanket exclusions for COVID-19-related exposures and also required heightened diligence related to the effects of the pandemic on the target’s business. These initial exclusions were so broad they potentially eliminated the beneficial effects of RWI to the transaction. As months passed, the carriers became more amenable to negotiation of the terms of any COVID-19-related exclusion, tailoring it to the specific risks associated with the target’s business. To the extent the parties can, through due diligence, convince the RWI carrier that the target’s operations are not subject to any heightened risk of exposure due to COVID-19, it may be possible to purchase RWI without any COVID-19 exclusion. Parties concerned about this potential should anticipate more intense due diligence on the risks (or lack thereof) to the target presented by the pandemic.


The pandemic brought a host of new angles to the health care transactions world, but fundamentally, whether the buyer purchases the assets or the stock, in most health care transactions it is difficult to fully avoid liability for the historical actions of the seller. As discussed, this was exacerbated by the pandemic in unexpected ways. Careful planning is vitally important to ensure that all regulatory filings are made, and in-depth diligence is critical to expose potential areas of liability to help ensure that unexpected risks are not unveiled too late and that business continuity is maintained.

2 There are theories of successor liability in which buyers in asset deals have been pursued for historical liabilities, but these situations are generally confined to situations in which the transaction constitutes a de facto merger of the seller and buyer (continuity of shareholders, management, and personnel). See, e.g., Acheson v. Falstaff Brewing Corp., 523 F.2d 1327, 1330 (9th Cir. 1975).

4 Ctrs. for Medicare & Medicaid Servs. (CMS), NHE Fact Sheet (Dec. 16, 2020),,34%20percent%20of%20total%20NHE; Andrea Sisko et al., National Health Expenditure Projections, 2018-27: Economic and Demographic Trends Drive Spending and Enrollment Growth, 38 HEALTH AFFAIRS 3.

5 42 C.F.R. § 400.202.

6 42 C.F.R. § 489.18(a). Note that there are other instances that may trigger a “change of ownership” for partnerships and sole proprietorship, as well as other unique situations in which CMS determines the owner has relinquished all authority and responsibility for the provider organization (see Medicare State Operations Manual Ch. 3 Sec. 3210.1D).

7 42 C.F.R. § 489.18(c).

8 Courts have repeatedly supported the federal government levying successor liability on a buyer in such transactions for Medicare overpayments and civil money penalties related to the pre-closing operations of the provider. See United States v. Vernon Home Health, 21 F.3d 693 (5th Cir. 1994), and Deerbrook Pavilion, LLC v. Shalala, 235 F.3d 1100 (8th Cir. 2000).

9 42 C.F.R. §400.202.

10 Medicare Program Integrity Manual Ch. 10 §10.6.1.

11 Medicare Program Integrity Manual Ch. 10 §10.6(A)(5).

12 Id.

13 42 C.F.R. § 424.540; 42 C.F.R. § 424.535.

14 42 C.F.R. § 424.516(e).

15 See, e.g., 76 Fed. Reg. 5872-5874.

16 M&A Insurance: Providing Dealmakers an Edge in a Crowded M&A Market, Aon (2019),

17 Kevin Mills, Alfred Browne, & Michael Coburn, Representation & Warranty Insurance—Current Market Trends, Harvard Law School Forum on Corporate Governance (Dec. 22, 2019),

18 Pub. L. No. 116-136.

19 U.S. Dep’t of Health & Human Servs., CARES Act Provider Relief Fund: General Information (Jan. 21, 2021),

20 U.S. Dep’t of Health & Human Servs., CARES Act Provider Relief Fund: For Providers (Jan. 19, 2021),

21 The Continuing Appropriations Act, 2021 and Other Extensions Act, Pub. L. No. 116-159.


Stephen M. Angelette is a Shareholder in Polsinelli PC. He is board certified in health law by the Texas Board of Legal Specialization and has extensive experience with structuring health care arrangements all over the country, including equity and asset purchases of hospitals, home health agencies, hospices, laboratories, and urgent care centers. He also provides guidance to health care organizations related to their enrollment with Medicare and Medicaid and various state licensing agencies, and assists in responding to government inquiries, suspensions, or terminations of such facility enrollment or licensure.

AHLA thanks the leaders of the Business Law and Governance Practice Group for contributing this feature article: David Weil, Guardian Bridge Group (Chair); John Garver, Robinson Bradshaw & Hinson PA (Vice Chair—Educational Programming); Jed Roher, Husch Blackwell LLP (Vice Chair—Educational Programming); Judy Mayer, Inspira Health Network (Vice Chair—Member Engagement); Kristen Larremore, Waller Lansden Dortch & Davis LLP (Vice Chair—Publishing); and M. Daria Niewenhous, Mintz Levin Cohn Ferris Glovsky & Popeo PC (Vice Chair—Publishing).