Your Primer to Healthcare Mergers and Acquisitions

Audit Liability Following the Sale of Your Healthcare Business

Oct 16, 2020

by admin

Volume 7 Issue 20, October 13, 2020

by Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.

Two common questions I am often asked by owners of healthcare businesses considering whether to sell their companies are: 1) If I sell my business, can I still get audited? 2) If I do get audited after selling my business, do I have personal liability? This article addresses these questions.

Rules for an Asset Sale

Let's assume that John Smith owns ABC Pharmacy and Medical Equipment (ABC) and that on January 1, ABC sells its assets to XYZ Pharmacy and Medical Equipment (XYZ). After January 1, Smith will continue to own ABC. However, ABC will not have any assets — except for the purchase price paid to it by XYZ.

After January 1, Centers for Medicare & Medicaid Services (CMS) contractors, pharmacy benefit managers, and other third-party payors can audit ABC for claims submitted before January 1. Let's assume ABC does not respond to the audits and, therefore, ends up owing $100,000 to the third-party payor. For the purposes of this article, assume that the third-party payor is CMS. This is an unsecured liability owed by ABC. In a sense, it's no different than a bill owed to Visa. CMS's recoupment claim against ABC will eventually end up with the U.S. Treasury.

At this juncture, the likely scenario is that the U.S. Treasury will send several collection letters to ABC but will not file a collection lawsuit. The debt that is owed is owed by ABC — not by Smith personally. Therefore, barring something unforeseen, Smith's personal assets should not be vulnerable to the government's unsecured claim.

It is wise for Smith to maintain ABC's corporate charter for at least two years. This usually entails paying minimal annual franchise taxes to the state's secretary of state's office. The corporate charter should remain intact so that ABC (i.e., the corporate entity) can "absorb any arrows" that are fired after the asset sale.

Assume that ABC files articles of dissolution on January 1 (the day that it sells its assets to XYZ). And then assume that ABC (which no longer exists) is subjected to audits and, ultimately, recoupment liability sometime after the asset sale. In this scenario, is Smith personally liable for the recoupment? The answer depends on the law of the state in which ABC was incorporated. In some states, by virtue of the dissolution of ABC, creditors of ABC can proceed against ABC's prior owner (Smith). In other states, even though ABC has been dissolved, creditors cannot proceed against Smith, personally. So, to be safe, healthcare business owners should maintain their corporate charters for at least two years following the sale.

Notwithstanding the above, Smith can be personally liable to CMS if it alleges and proves that ABC committed fraud while it was owned by Smith.

There is one more thing to keep in mind. Let us assume that after ABC sells its assets and Smith continues to own other pharmacies/DME suppliers. Under the Affordable Care Act and subsequent regulations, Smith is required to disclose to CMS that he was associated with a provider/supplier (ABC) that did not repay to CMS monies owed by ABC. Upon such disclosure, CMS will determine if Smith should continue to own (or have an ownership interest in) a provider/supplier.

Rules for a Stock Sale

In an asset sale, the seller is ABC. In a stock sale, the seller is Smith as he is selling his stock certificate. The buyer (XYZ) ends up owning ABC, an ongoing operating entity. In other words, ABC is a wholly owned subsidiary corporation of XYZ. ABC retains its national provider identified, pharmacy license, Drug Enforcement Administration permit, DME accreditation, state DME licensure, surety bond, provider transaction access number, Medicaid provider number, and most, if not all, third-party payor contracts.

Assume that the stock sale closes on January 1. Assume that during the subsequent year, ABC is subjected to audits for claims submitted before January 1. Absent an allegation of fraud, any audit liability rests solely on ABC's shoulders; such audit liability will not be imposed on the parent (XYZ). If CMS alleges and proves that ABC committed fraud prior to January 1, then following January 2, Smith can be personally liable for the fraud, notwithstanding that he no longer owns ABC.

Assuming that there is no fraud, then after the stock sale, Smith might conclude that he can "walk away from ABC without looking back." This is true to a point. While CMS will likely not pursue Smith, individually, XYZ will likely insist that the stock purchase agreement (SPA) impose an obligation on Smith to indemnify XYZ for any pre-closing audit liability. XYZ will want the SPA indemnity provision to be broad, imposing on Smith the indemnity obligation for any pre-closing audit liability, known or unknown. On the other hand, Smith will want the indemnity provision to be narrow, imposing on Smith the indemnity obligation for any pre-closing audit liability known by Smith and disclosed to XYZ.


Jeffrey S. Baird, JD, is chairman of the healthcare group at Brown & Fortunato, PC, a law firm with a national healthcare practice based in Texas. He represents pharmacies, infusion companies, home medical equipment companies, and other healthcare providers throughout the United States. Baird is board certified in health law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or jbaird@bf-law.com.

Bradley M. Smith

Bradley M. Smith ATP, CM&AA

Managing Director/Partner

For over 20 years, Brad has held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT, and home health care company, and BMS Consulting, where he has provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, he is a regular columnist for HomeCare magazine and HME News, where he focuses on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies. At VERTESS, Brad is a Managing Director and Partner with considerable expertise in HME/DME, home health care, hospice, pharmacy, medical devices, health IT, and related healthcare verticals in the US and internationally.

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