Legal and Business Issues

1. Healthcare Financial Management Association Western Pennsylvania Chapter April 17, 2014 Mergers & Acquisitions in the Healthcare Industry Focus on Medical Practice Acquisitions Legal and Business Issues George W. Bodenger, Partner Saul Ewing LLP (215) 972-1955 gbodenger@saul.com

2. DISCLAIMER The content of these presentation materials has been prepared by Saul Ewing LLP for informational purposes only.  The provision and receipt of the information in these presentation materials should not be considered legal advice, does not create a lawyer-client relationship, and should not be acted on without seeking professional counsel who have been informed of the specific facts.  Should you wish to contact a presenter to obtain more information regarding your company's particular circumstances, it may be necessary to enter into an attorney/client relationship.

3. Topics to Be Covered Healthcare Merger & Acquisition Landscape Hospitals & Physicians & Others Pursuing Medical Practice Acquisitions Primary Bodies of Law Affecting Medical Practice Acquisitions Fundamental Issues for Buyers & Sellers of All Types Structuring Challenges by Type of Buyer Key Steps in Transaction Process

4. Healthcare Merger & Acquisition Landscape M&A Market Trends Hospitals Merging or Being Bought/Sold at Increased Rate Other Healthcare Business “Rollups” – Urgent Care, Home Health, Wound Care Healthcare Reform Continues to Drive M&A Transaction Flow BUT Physician Practice Acquisitions are Most Common Transactions in Healthcare Today  Hospitals Acquiring Medical Practices “Physician Only” Medical Practice Integration Specialty Physicians and Private Equity Healthcare Providers and Health Plans

5. Healthcare M&A Landscape – continued Medical Practice Acquisitions • Hospitals & Physicians Continue Moving Toward Practice Acquisition/Employment • Tangible Assets Only (i.e., no “goodwill”) • Cost-based Approach to Valuations – Cost of Recreating Practice • Hospitals and Physician Groups Developing Alternative Arrangements • Gainsharing • Co-Management Agreements • New Players in the Marketplace – MOST IMPORTANT • Private Equity • Insurance Plans

6. Hospitals & Physicians & Others Pursuing Medical Practice Acquisitions Hospitals are Pursuing Because: Physicians Control Patients Recruit High End Specialties Improve Physician Cooperation Stabilize Medical Staff Physicians Are Pursuing Because: Strength in Numbers Spreading Infrastructure Cost & Risk Increased Access to Ancillary Services Private Equity/Insurers Present Attractive Alternatives for Physicians Access to Capital Maintaining Physician Entrepreneurship No “Been There, Done That”

7. Primary Bodies of Law Affecting Medical Practice Acquisitions • Anti-Kickback Statute • Physician Self-Referral Restrictions (“Stark Law”) • Corporate Practice of Medicine • 501(c)(3) (Exempt Organization) Law

8. Elements of Anti-Kickback Statute Knowing and willful Solicitation, or receipt/offer for payment Remuneration (direct or indirect, overt or covert, in cash or in kind) Inducement In return for referrals, or in return for purchasing, leasing, ordering, arranging or recommending Patients, goods, facilities, services or items for which payment may be made in whole or in part under a Government Health Care Program

9. Federal Anti-Kickback Statute - cont’d • Unlike Stark, Criminal Statute – Intent Requirement • “One Purpose” Test (see Greber) • Failure to Satisfy Safe Harbor Not Illegal “Per Se ” Exposures Felony - punishable by criminal fines up to $25,000 and/or imprisonment for up to five (5) years, potential False Claims Act exposure, potential civil sanctions and monetary penalties, including exclusion from Medicare & Medicaid programs

10. AKS Safe Harbors Relevant to Medical Practice Acquisitions • Bona Fide Employees • Sale of Practice • Investment Safe Harbors

11. Elements of the Stark Law Physician (or immediate family member) Makes a referral To an entity that furnishes DHS With which he/she has a “financial relationship” • Ownership/Investment • Compensation Unless an exception applies – VIOLATION!!

12. Stark Law Exceptions Relevant to Medical Practice Acquisitions Bona Fide Employment Isolated Transaction

13. Tax Exempt Organization Law • IRC 501(c)(3) – Prohibits Inurement to Private Shareholders or Individuals • Affects All Compensation Arrangements between 501(c)(3) Hospitals and Physicians • Prohibitions on “Private Inurement” and “Impermissible Private Benefit” • Compensation Must be “Commercially Reasonable” and Consistent with “Fair Market Value” • Rev. Proc. 97-21: Provision of Recruitment Incentives to Physicians by Tax-Exempt Hospitals

14. Medical Practice Acquisitions Fundamental Issues for Buyers & Sellers of All Types Purchase of Assets versus Purchase of Stock Subchapter “C” versus Subchapter “S” Corporation Fraud & Abuse Successor Liability Physician Employment Failure to Document Employment Relationship – “technical” violations of AKS and Stark Poorly Drafted Restrictive Covenants Stark Law – Limitations on Patient Referrals Fair Market Value, Productivity/Value Based Compensation No “Salary Caps” (exempt organization only) Strategic/Other Organizational Structure Autonomy & Flexibility Geographic Coverage versus Consolidated Locations

15. Medical Practice AcquisitionsStructuring Challenges by Type of Buyer Hospitals/Health Systems Corporate Practice of Medicine – Challenging to Employ Physicians Exempt Organization Law Cannibalizing Ancillary Services Private Equity Completely New Industry Valuation Concerns Physician Ownership Limitations Ancillary Business Upside Insurance Plans Health Reform Favors Insurer/Provider Integration Corporate Practice of Medicine – Unable to Employ Physicians Outright No Ancillary Business Upside

16. Key Steps in Transaction Process Confidentiality & Non-Disclosure Agreement Term Permitted Disclosures Sharing of Financial and Statistical Information Steps at Termination of Negotiations Negotiation of Key Business Terms Purchase Price Compensation Letter of Intent Exclusive Dealing Due Diligence Steps at Termination of Negotiations Transaction Documents Asset Purchase Agreement Employment Agreement

17. Questions? George W. Bodenger, Esq. Chair, Health Law Practice Group Telephone: (215) 972-1955 Email: gbodenger@saul.com Saul Ewing LLP

18. Baltimore Lockwood Place • 500 East Pratt Street, Suite 900 • Baltimore, MD 21202-3171 • (tel) 410.332.8600 • (fax) 410.332.8862 Boston 131 Dartmouth Street, Suite 501 • Boston, MA 02116 • (tel) 617.723.3300 • (fax) 617.723.4151 Chesterbrook 1200 Liberty Ridge Drive, Suite 200 • Wayne, PA 19087-5569 • (tel) 610.251.5050 • (fax) 610.651.5930 Harrisburg Penn National Insurance Plaza • 2 North Second Street, 7th Floor • Harrisburg, PA 17101-1619 • (tel) 717.257.7500 • (fax) 717.238.4622 New York 245 Park Avenue, 24th Floor • New York, NY 10167 • (tel) 212.672.1995 • (fax) 212.372.8798 Newark One Riverfront Plaza • Newark, NJ 07102 • (tel) 973.286.6700 • (fax) 973.286.6800 Philadelphia Centre Square West • 1500 Market Street, 38th Floor • Philadelphia, PA 19102-2186 • (tel) 215.972.7777 • (fax) 215.972.7725 Pittsburgh One PPG Place • 30th Floor • Pittsburgh, PA 15222 • (tel) 412.209.2500 • (fax) 412.209.2570 Princeton 750 College Road East, Suite 100 • Princeton, NJ 08540-6617 • (tel) 609.452.3100 • (fax) 609.452.3122 Washington 1919 Pennsylvania Avenue, N.W. Suite 550 • Washington, DC 20006-3434 (tel) 202.333.8800 • (fax) 202.337.6065 Wilmington 222 Delaware Avenue • Suite 1200 P.O. Box 1266 • Wilmington, DE 19899• (tel) 302.421.6800 • (fax) 302.421.6813