Many pharmacy owners wonder if contracting with Medicare directly (as a Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (“DMEPOS”) provider) adds value to a pharmacy business. The answer depends on whether the sale of the pharmacy is structured as an asset or a stock purchase.
To become a DMEPOS provider under Medicare Part B, a pharmacy must obtain accreditation, post a surety bond, and obtain a Medicare contract by filing form CMS-855S. (The pharmacy does not need to obtain accreditation if it bills Medicare only for the items that are not subject to CMS Quality Standards, such as immunosuppressive drugs, oral anti-emetic drugs, etc.). If the Medicare Administrative Contractor (“MAC”) approves the pharmacy’s application, it assigns a Provider Transaction Access Number (PTAN) to the pharmacy and it can start billing Medicare directly.
When the pharmacy owner sells the assets of the pharmacy, the PTAN and accreditation could not be assigned to the buyer. Therefore, the buyer will have to (1) obtain a new accreditation (if billing for the items subject to CMS Quality Standards, such as DME, diabetic shoes, parenteral and enteral items, etc.), (2) submit a new CMS-855S form to the MAC, (3) post a new surety bond (unless reassigned); and (4) obtain a new PTAN. These could take a substantial amount of time and cause potential gaps in Medicare billing. The buyer, however, could complete these steps before the closing of the deal or request that the new PTAN be retroactive to the date of the closing. Here is an example of the latter scenario: when the deal closes, the buyer continues serving Medicare beneficiaries but does not bill Medicare until it obtains a PTAN. On the day its application is approved and a PTAN is issued, the buyer then bills for all accumulated claims. The risk is obvious: Medicare might not approve some (or even all) of the claims. 42 CFR 424.57 establishes the criteria DMEPOS suppliers must meet in order to be eligible to receive payment for a Medicare-covered item. Therefore, if the buyer does not comply with any of the requirements, Medicare may deny reimbursements leaving the provider in a vulnerable financial position.
By contrast, when the buyer purchases stock or 100% interest in the existing DMEPOS pharmacy business, it will continue using the same TIN, PTAN, accreditation, and all third-party payors’ (3PP) contracts. The buyer simply steps into the shows of the previous owners and continues to operate the business as is. The buyer, however, will need to notify all 3PP (including its MAC) of the change of ownership (CHOW). The caveat is that the new owner assumes all liabilities of the existing business. If the business was in operation for a number of years, it may have existing issues for which the buyer might end up paying a hefty price. For example, we have recently assisted a DMEPOS pharmacy which was acquired by our client through a stock purchase about 2 years ago. Subsequent to the purchase, the federal government became interested in the prior owners’ marketing practices. As a result of the investigation – which determined that improper kickbacks were paid to marketers – our client had to endure payment suspension and an administrative action because he purchased the stock of this business. That’s why you do not see many stock purchases of a healthcare business (mergers and asset purchases are much more common).
The buyer may attempt to protect his business from the liabilities stemming from the prior owner’s conduct by drafting a strong indemnification language in the stock purchase agreement. But it does not guarantee that the seller would comply with the indemnification request and cooperate, especially if a long time has passed since the CHOW.
If you are selling stock of your company – provided that you find a buyer willing to assume the liabilities – adding a Medicare part B contract to your arsenal would potentially increase the value of your business. If it is an asset purchase, however, a Medicare Part B contract is not likely to increase the value of your pharmacy (because the buyer will have to obtain its own contract with possible gaps in billing).
Please note that nothing in this post constitutes legal advice. Each business and pharmacy sale is different and you should consult an experienced transactional attorney, tax specialists, and other professionals prior to making any decisions regarding a business sale.