dental practice mergers, acquisitions, divestitures, and

Dental Practice Mergers, Acquisitions, Divestitures,

and AffiliationsDue Diligence, Regulatory Compliance Requirements, Integration Challenges

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TUESDAY, OCTOBER 27, 2020

Presenting a live 90-minute webinar with interactive Q&A

Amanda K. Roenius, Attorney, McGuireWoods LLP, Chicago

Anna M. Timmerman, Partner, McGuireWoods LLP, Chicago

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Dental Practice Transactions:

Buying and Selling,

Mergers and Acquisitions

Anna Timmerman

McGuireWoods LLP

312.750.8604

[email protected]

Amanda Roenius

McGuireWoods LLP

312.849.8157

[email protected]

October 27, 2020

McGuireWoods | 6CONFIDENTIAL

Agenda

Market Conditions

Dental Practice Transaction Structures

Legal Due Diligence Issues

Regulatory Compliance Challenges – Federal and State

Best Practices and Integration


Market Conditions for Dental Practice

Transactions

• Market Composition Divisions

– Large consolidators

– Medium/regional operators (3-15 locations)

– Small practices (1-3 locations)

• Payor Impact on Value

– Increase in dental insurance

– Medicaid/TRICARE expansion

• Shift to Dental Service/Support Organization (DSO)-Supported

Practices

– ADA cites an increased interest for dentists under age 34

– DSOs control close to 20% of total practices in the United States,

but that percentage is growing (William Blair report)

– 2017 market was estimated at $73 billion (Harris Williams & Co.).

• Continued Involvement and Interest of Private Equity


Market Conditions – Private Equity

Involvement and Interest

• Surge Private Equity. In April 2019, Surge Private Equity closed its acquisition of

Texas-based Access Dental and Lacosta Dental. Plan is to immediately pursue

de novo activity.

• Smile Brands and Gateway Dental. In March 2019, Smile Brands, with over 400

supported offices across 17 states, partnered with Gateway Dental in Seattle.

• Dr. Dental. In February 2019, PE firm Abry Partners acquired Dr. Dental, with 43

branded locations across four northeastern states.

• Mid-Atlantic and Birner Dental. In January 2019, PE-backed east coast dental

platform acquired the only publically traded DSO with more than 65 dental

practice affiliates throughout Colorado, Arizona and New Mexico.

• Western Dental. In December 2018, acquired a DSO with 63 supported offices in

California, Texas, and Alabama. Western Dental now serves offices with 2.9

million annual patient visits

• Heartland. Largest DSO (over 1,400 dentists) announced March 2018 that KKR

will acquire majority interest with Ontario Teachers’ Pension Plan retaining

sizable ownership. In December 2018 announced its 900th office in 37 states.


Market Conditions – COVID-19

Considerations

• Key Stimulus Programs (e.g., SBA Paycheck Protection

Program)

• Employee Furloughs

– Families First Coronavirus Response Act

• Elective Procedure Limitations (historic and potential go-

forward)

• Telehealth/Teledentistry


Market Conditions – Potential Exits

• Strategic Operators

• Financial Acquirers

• Affiliations of Smaller Practices

• Mergers of Mid-Size Practices

• IPOs?


Legal Structuring Considerations


Transaction Process

• Pre-Transaction Strategy

• Transaction Process (3-6 months):

– Self-Diligence/Housekeeping

– Restructuring (if needed)

– Go to Market – Confidential Information Memorandum

– Letter of Intent

– Due Diligence

– Negotiate Documents

– Closing

• Note: A lot of activity in formation without transactions


Key Negotiation Points

• Purchase Price

• Rollover Equity v. Cash Consideration

• Tax-Advantageous Structuring

• Governance Rights/Operational Control Decisions

• Employment Compensation/Terms

• Restrictive Covenants – Sale and Employment

• Indemnification and Representations/Warranties

• Escrow and Holdback


Corporate Practice of Dentistry (CPOD)

• What is the corporate practice of dentistry (CPOD)?

• This drives the structure of transactions in many states that

have this policy, as CPOD imposes restrictions on/creates

requirements regarding:

– Employment and Licensure of Professionals

– Dental Practice Ownership Restrictions

– Fee-Splitting Considerations

– Active Practice Requirements


DSOs – The Pros and Cons

• Reasons to Form a DSO

– Standardization of Processes

– Professional Business Management

– Expansion Across Numerous States

– Segregation of Historical Liabilities

• Potential Drawbacks to Forming a DSO

– Structural and Operational Complexities

– Employee Benefit Considerations

– Corporate Practice of Dentistry Restrictions


Basic Dental Service Organization Structure

* Depending on the state, this may be a professional limited liability company or other entity type.

• An administrative arrangement between a management services organization (“DSO”) and a

professional entity owned by a licensed dentist (“PC”).

• Investor owns all or most of the DSO.

• PC owned by one or more licensed dentists employs the other dentists and clinical personnel.

• Investor connection to the business is limited to an Administrative Services Agreement (“ASA”)

and Stock Transfer Restriction Agreement (if permissible under state law).

• Fee structure varies by state law (flat fee vs. percentage).

• DSO typically holds as many non-clinical assets, contracts (payor & supplier), employees, and

licensees as allowed.

Dentist Owner

Administrative Services AgreementDSO PC*

Investor

Management Fee ($)

Non-Clinical Admin. Services

Stock Transfer Restriction Agreement


Balancing Control and Enforceability in a

DSO/PC Model

• Enforceability of the ASA

– Must avoid the conclusion that the DSO is really the owner of

the PC (or controls clinical decisions) in violation of CPOD

laws

• Important to educate platform employees

– Challenges from many parties (e.g., state regulators, dental

boards, former sellers, patient class actions, competitors or

payors)

• Elements of Control over the Business (clinical v. business)

• Lender/Buyer/Third-Party Conclusions About Enforceability

(these can vary)

• State-by-State Analysis of Risk


Balancing Control and Enforceability –

Continuity Planning Agreement

• Factor in state law considerations with respect to triggering

events

• Is there a holdco?

• Assignment in blank



Risks in the Model

• Dental boards can challenge the enforceability of the DSO

relationship.

• Nominee owner walks away with the business.

• Local dentists walk away.

– They may claim unenforceable non-competition covenants.

• Nominee owner argues this is a regulatory violation.

– This threatens the ability to operate the business.

• This structure may create a lack of corporate control over

business collateral or contracts.

• This structure creates a lack of control over the PC (i.e., an

inability to replace the PC owner).



Addressing Some of the Risks

• Enter into a long-term ASA with limited termination rights

• Enter into Share Transfer Restriction Agreement with the nominee

– This can limit voluntary transfers and/or force transfers in certain

circumstances but may not always be available.

• Consider ASA fee structures (flat, percentage-based, cost-plus)

• Place a lien on the assets of the PC

• Work with “friendly” owners and consider diverse ownership (i.e., not

one single owner)

• Have the DSO own all non-clinical assets and hold the leases

• PC guarantees/pledges PC assets for DSO debt/obligations

• Use enforceable non-competes (against the owner and/or employed

dentists)

• Have diverse jurisdictions of operation

• Other contractual tools


DSO Acquisition Structures – Stock

Purchase

• Stock could be sold to Acquiring PC or Owner of Acquiring PC.

• State law determines whether a PC can own another PC.

• Legal entity (at practice level) remains the same.

• Need to factor in Stark Law considerations (if applicable).

100% of Stock of

Target PC

Dentist

Owner

Purchase Price

Target

PC

Investors

Administrative Services

Agreement

Acquiring

PCDSO

Dentist

Owner


DSO Acquisition Structures – Asset

Purchase

• State law dictates ownership of clinical and non-clinical

assets.

• Depending on payor arrangements of Acquiring PC, the

parties may also seek to have payor contracts assigned.

Dentist

Owner

Target

PC

Investors

Acquiring

PC

DSO

Dentist

Owner


Structuring and Purchase Agreement

Considerations • Who are the buying parties?

• Are there significant liabilities of Target that Acquiring PC needs

to shed?

• How established is Acquiring PC/DSO?

• Does seller have an DSO?

– Are the “right” assets there already?

• Platform v. add on

• Regulatory, tax and corporate should design structure

– Stark, CPOD, holdcos, etc.

• Anti-churning and c-corp issues are prevalent

• Physician equity in DSO

• Associate physicians – nothing to roll

• ASCs and other ancillary services

• Indemnification

• Releases


Dental Acquisition Transition Efforts

• Often a challenge to continue to bill for services after a

transaction—takes time to credential providers with payors.

– Credential pre-closing if possible

– Deferred asset transfer

– Transition arrangement

• A/R treatment for smaller practices.

• Treatment payment plans.


Legal Due Diligence Issues


Diligence Issues for Acquirers –

Structuring

• Assets and Collateral Locations

– Hard (non-clinical) assets are often owned by the DSO and

non-professionals should be employed by the DSO.

– Licenses and billing agreements should be held by the PC, as

should clinical assets and dental records.

– Collections run through the PC.

• Restrictions on Professionals

– Non-competes and non-solicitation restrictions.

– What is your relationship with the professional owners of the

PC?

• Payor Contracts

– Assignability? How favorable is a particular contract?

– Medicaid change of ownership timing.


Diligence Issues for Acquirers – ASA

• Administrative Services Agreement

– What is the term of the ASA?

– How is the services fee structured?

– Does the DSO have control over non-clinical decisions?

– Is it an appropriate list of non-clinical decisions under state

CPOD?

– Power of attorney for billing/collections

– Does the DSO have right to pledge A/R of the PC (if

permitted by law)?

– What types of non-competes and solicitation restrictions are

in place through the ASA? Appropriate?

• Specific Tax Issues


Diligence Issues for Acquirers – Dental

• Dental Board/Licensure/Exclusion

– Past board actions may impact business on a go-forward

basis.

– Small practices often not checking exclusion lists.

• Medicaid Participation

– States often have specific rules on treatment (e.g., x-rays

once per year absent specific medical necessity).

– Enrollment requirements with respect to dental hygienists and

billing.

– Section 1557 – consider non-English speakers and those with

disabilities or who are visually or hearing impaired.


Diligence Issues for Acquirers – Dental (cont’d)

• OSHA – Blood Borne Pathogen Exposure and Hazard

Communication Program

– Training, vaccinations, gloves and personal protective

equipment.

– 2016 investigation of Illinois practices.

• Referral Sources

• Staff Turnover

• Cosmetic Services, Teeth Whitening, Other Services

• Payment Plans


Diligence Considerations in the COVID-19

Era

• Employment Considerations

– Furloughs

– Leave/alternative work considerations

– Compliance with governmental requirements

• Government Funding Considerations

– What if any funds were obtained/how were funds used

• Vendor Considerations

– Force Majeure Provisions

– Rent deferrals

– Any defaults or terminations under agreements as result of COVID

• Operational Considerations

– Addition/removal or service lines

– Telehealth and compliance with applicable laws


Regulatory Compliance Challenges –

Federal and State


Fraud and Abuse Challenges

• Federal Anti-Kickback Statute

– Intent-Based Criminal Statute

– Safe Harbors (e.g., Group Practice, Employment Personal

Services and Space/Equipment Lease)

• State Fraud and Abuse Laws

– Medicaid Fraud Laws

– Fee Splitting Prohibitions

• Physician Self-Referral Law (a/k/a Stark Law)

– Dentists are physicians for purposes of the Stark Law.

– Designated Health Services – does it include dental?


Corporate Practice of Dentistry

• Structure of Entity Driven by State Corporate Practice of

Dentistry Restrictions

– Licensure of Professionals

– Ownership Restrictions

– Fee-Splitting Laws

– Active Practice Requirements

– State Fraud and Abuse Laws

• Should You Consider CPOD?


Sedation, Anesthesia and Dentistry

• State Regulation of In-Office Dental Anesthesia

– Understand dental board and medical board regulation overlap

– Dentists sometimes need anesthesia permits even if they contract

with others to provide anesthesia. (See, e.g., Maryland—COMAR

10.44.12 et seq.)

– Other states allow third-party contracting without permits. (See, e.g.,

Washington—Wash. Admin Code 246-817-778; Kansas—Kan.

Admin Regs. 71-5-9(j).)

• Equipment and Staffing Requirements

– See, e.g., Georgia—Ga. Comp. R. & Regs. 150-13 (“certain specific

medical equipment and supplies, including… positive pressure

oxygen ventilation… appropriate emergency drugs…, a manual or

automatic external defibrillator, and a recovery area.”) and New

York—8 CCR NY 61.10 (requiring proof of advanced cardiac life

support and/or pediatric advanced life support course completion,

depending on services provided).


Sedation, Anesthesia and Dentistry (cont’d)

• Permits for Dentists Administering Sedation

– California—16 CCR 1043.1 (General anesthesia or conscious

sedation permit with a Board-approved residency program

(one calendar year) or graduate program in oral and

maxillofacial surgery.)

– Texas—Tex. Stat. Occ. Codes 258.001 et seq. (Permits

required for many procedures and need to delegate to

CRNAs.)

– New York—8 CRR-NY 61.10 (As of January 1, 2018, there

are five levels of anesthesia/sedation for which a certificate is

required, among other requirements.)

• DEA Registration and Rules for Controlled Substances

– Also consider opioid-related issues (see, e.g., ADA policies,

state dental associations, Florida law—F.S. 456.44).


Additional Items for Review

• HIPAA

– Policies and procedures?

– Compliance and security officer?

– Past violations?

– Website notice of privacy practices?

– Proper patient consents?

• Section 1557 (if Medicaid practice)

– Translators and interpreters?

• Marketing

– Following all state (and federal, if applicable) laws?


Registration of DSOs and Practice

Locations

• Texas Senate Bill 519, effective September 1, 2015, requires

DSOs to annually register with the Texas Secretary of State

(SOS).

– Must disclose the name and address of the business and each

dentist that the DSO is providing services to, names of owners

holding 10% or more of the ownership, and list all services provided

– Form 3801 and 3802.

– SOS will then share this information with the Dental Board.

• Texas Office of Inspector General issued a report on DSOs on

May 31, 2017, revised November 14, 2017.

– Most DSOs are third-party companies that contract with practices

and are owned by dentists, non-dentists or private equity investors.

– In 2015, DSO-affiliated dentists had “higher Medicare and CHIP

participation rates than dentists not affiliated with a DSO.”


Registration of DSOs and Practice

Locations (cont’d)

• Registration of DSOs is not unique to Texas. (E.g.,

Kansas requires Dental Office Administrative Services

Providers to register pursuant to KSA 65-1424; Nevada

registers dental practice managers, see NRS 631.388.)

• Many states require mobile dental permits or registration.

(See, e.g., California, Texas and Massachusetts.) This

often includes X-rays, too.

• Illinois requires dental PCs/LLCs to register each office

location.


Legal Proposals Focused on the DSO

Model

• Washington enacted SB 5322 in 2017, which specifically authorized

non-dentists to own or lease assets of a dental practice and allows for

DSOs in the state. However, a new section was added to the law

ensuring such entities cannot control clinical decisions. (See RCW

18.32.677.)

• North Carolina’s dental board must review service agreements, among

management arrangements meeting other requirements. (See 21

NCAC 16X.0101.)

– An example of a compliant administrative services agreement is provided by

the dental board.

• Georgia proposed an advertising rule amendment in 2014 (which was

withdrawn) that addressed dentists who appeared to have an ownership

interest in a practice when they do not. Maryland considers such laws

most years.

• Other states have substantial advertising rules, including disclosing

information about services and dentists at each location, etc.


Integration and Compliance Best

Practices


Integration Best Practices

• Push your clients to keep the target practice’s staff team in

the loop, particularly associate dentists, but staff too.

Consider a deferred closing if the target practice wants

certainty first.

• What’s right at the target practice? Can your client’s

operations team examine location-by-location?

• Identity of location. File a d/b/a? New name?

• Do patients need to be notified? Does the buyer want to

notify? Need to consider abandonment concerns.

• Get payors changed, especially Medicaid.


Seven Best Practices for Compliance

• Establish Effective Compliance Policies and Procedures

– 7 OIG Elements and HIPAA

– ADSO Code of Ethics and Compliance Self-Assessment

– Practical Guidance for Health Care Governing Boards on

Compliance Oversight

• Designate an Independent Compliance Officer and

Committee

– ADSO recommends appointing an Ethics Officer.

• Train and Educate Staff

– General Policies

– HIPAA

• Review Compliance Program

• Reporting Channels


Seven Best Practices for Compliance (cont’d)

• Quality of Care, Medical Necessity, Consents and

Restraints Issues

• Billing and Coding

– Complete audits at least annually.


Billing and Coding Best Practices

• Pre-screen insurance eligibility in order to determine

patient responsibility.

• Provide only those services that are medically necessary.

• Bill only services that are actually performed.

• Bill at the correct service level.

• Ensure all bills contain the:

– Invoice number

– Patient’s name

– Date and description of services

– Procedure codes

• Keep accurate and timely records.

• Provide training programs for billing and coding staff.


Billing and Coding Best Practices (cont’d)

• Conduct periodic internal billing and coding audits.

• Hire consultant to conduct independent billing and coding

audit.

• Remember the 60-day overpayment requirement applies to

Medicare but overpayments still must be reported and

refunded under Medicaid as well.


A HIPAA Compliance Top 10 List

• Expressly name privacy and security officers (can be the same

person).

• Implement HIPAA policies and procedures – both privacy and

security.

• Ensure there is a HIPAA compliant authorization form for release

of PHI.

• Have a sanctions policy, either referenced by or included in the

HIPAA policies and procedures.

• Conduct a security risk assessment.

• Perform workforce training, with documentation of the materials

and those who attended retained.

• Have business associate agreements in place with business

associates.

• Maintain a comprehensive list of business associate agreements.


A HIPAA Compliance Top 10 List (cont’d)

• Have a notice of privacy practices, with appropriate posting

and distribution, in the facility and on websites.

• Create a breach response plan, if not otherwise addressed

in the HIPAA policies and procedures.

• Utilize legal counsel to prepare necessary patient consent

forms which comply with federal and state laws.

Questions or Comments?

Anna Timmerman

McGuireWoods LLP

312.750.8604

[email protected]

Amanda Roenius

McGuireWoods LLP

312.849.8157

[email protected]