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Third Party Consents in Health Care Transactions

In a health care transaction, the primary driver of the fundamental deal structure is the business goal of each party. Assuming that alternative transaction forms are feasible in structuring the transaction, the parties will then consider, among other things, a few additional considerations including tax consequences, the mechanics of making the transfer, the excludability of certain assets or liabilities, and the need for regulatory approvals and third party consents.

This post will provide a brief overview of how the structure of a health care transaction affects the need to obtain regulatory approvals and third party consents. All health care transactions, regardless of how they are structured, ordinarily require multiple approvals from regulatory bodies at the state and federal level, as well as the consent of various third parties that have contracts with the target company. Some governmental approvals and third party consents required as a general consequence of the acquisition are unrelated to the form of the underlying transaction. Some will require notice only and others will require affirmative consent or approval.

Generally speaking, stock purchases and mergers require fewer such consents than an asset purchase because the target’s corporate identity and existing licenses and permits with not be affected by the transaction. For this reason, stock purchases are sometimes preferred to streamline the transaction.

Conversely, the parties to an asset purchase may be required to procure numerous regulatory approvals and third party consents to transfer the licenses, permits, and buyer contracts that enable the operation of the target business. Many permits are not transferable even with consent, forcing the buyer in an asset acquisition to apply for and secure new licenses to operate the target business after the deal closes.

Medicare regulations are one of many specific considerations affecting health care transactions. If a hospital is part of the transaction, the Medicare program will consider the transfer of substantially all of the hospital’s assets to be a change of ownership of the hospital. This causes the buyer to assume the seller’s provider number and existing agreement by default; the buyer can only avoid this outcome by explicitly rejecting this assumption and notifying the agency in writing pursuant to the relevant regulations.

Likewise, many commercial contracts such as those with health care providers or third party payors, and even leases on real property used by the target company, may not be transferred or assigned without the written consent of the parties. If the necessary consents cannot be secured, the parties may simply be forced to structure the transaction as a stock purchase, foregoing the benefits of the asset purchase structure.

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