There are numerous moving pieces and parts when selling a hospital. This presentation provides an overview.

1. PAGE: 1
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
TWISTS AND TURNS OF A HOSPITAL SALE
The Anatomy of a Deal
Beverly Hills Bar Association
Health Law Committee
DATE: March 9, 2016
TIME: 12:00 PM to 1:30 PM
PRESENTERS:
Michael J. Sarrao, Esq.
Craig B. Garner, Esq.
This Program Offers One Hour of MCLE Participatory Credit

2. PAGE: 2
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
EVENING BEFORE CLOSING
11:59 p.m.

3. PAGE: 3
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
While Everyone Sleeps
In the two minutes just before and after midnight on closing day,
a hospital transaction nears completion.
Ø Seller terminates all employees just before midnight.
Ø Buyer hires (substantially) all employees just after midnight.
Ø Patients transition seamlessly from seller to buyer.
Ø What could go wrong?

4. PAGE: 4
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
While Everyone Sleeps – the Employees
Ø State and federal W.A.R.N. Act concerns
Ø Union issues
Ø Final paychecks from sellers and treatment of PTO
Ø Employee personal and trust assets
Ø Overtime and/or shift differentials overlapping at midnight
Ø Employees on a leave of absence or disability leave

5. PAGE: 5
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
While Everyone Sleeps – the Patients
Ø Right to bill for patient charges
Ø Patient belongings
Ø Payer contracts
Ø Length of stay issues (Medicare, Medi-Cal, other insurance)
Ø Patient expirations and claims for professional negligence

6. PAGE: 6
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
While Everyone Sleeps – Vendors and Valuables
Ø Liability to third parties before and after midnight
Ø Pre and post close reconciliations and treatment of accounts
payable
Ø Assumed and rejected contracts
Ø Third party (patient, employee and vendor) equipment and
valuables

7. PAGE: 7
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
While Everyone Sleeps – Other Considerations

8. PAGE: 8
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
SIX MONTHS EARLIER

9. PAGE: 9
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Is It Time To Sell?
Ø Between 2004 and 2013, 28 hospitals in California closed
and 20 opened.
Ø Hospital consolidations and closures continued at record-
breaking levels in 2014 and throughout 2015.
Ø Consolidation also extended to medical device companies,
pharmaceuticals and insurance companies.

10. PAGE: 10
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Is It Time to Sell? continued
Ø The number of acute care hospitals in California declined by
4% between 2004 and 2013.
Ø The top eight hospital systems account for 40% of California
hospitals.
Ø More California hospitals were profitable in 2013 than in
2014.
Ø The cost of uncompensated care (charity care and bad debt)
increased by 45% between 2004 and 2013.

11. PAGE: 11
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Necessary Ingredients
Ø Hospital – Preferably financially distressed or in trouble with
state or federal government. Active license and/or patients
optional.
Ø Seller – Willingness optional. For non-motivated sellers, see
Title 11, United States Code.
Ø Buyer – Money and experience optional.
Ø Regulatory Approval – For certain transactions only.*

12. PAGE: 12
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Recommended Ingredients
Ø Management Company – Recommended with certain buyers.
Ø Broker/Investment Banker – Recommended, especially with
financially distressed hospitals or buyers limited experience.
Ø Lender – Recommended for buyers without money and those
with unlimited cash.
Ø QAF – Offer limited while supplies last.
Ø Regulatory Approval – Lawsuit possible alternative.*

13. PAGE: 13
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Pre-Sale Checklist (theoretical for seller)
Ø Step 1 – understand your market
Ø Step 2 – identify your target buyer
Ø Step 3 – clean up your mess
Ø Step 4 – come to terms with your price / value
Ø Step 5 – realize the futility of steps 1 to 4

14. PAGE: 14
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Pre-Sale Checklist (theoretical for buyer)
Ø Step 1 – understand your target market
Ø Step 2 – identify your target
Ø Step 3 – your target is a mess
Ø Step 4 – dictate terms for price / value
Ø Step 5 – wait for seller to realize the futility of steps 1 to 4

15. PAGE: 15
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Pre-Sale Checklist (practical for seller)
Ø Step 1 – draft an NDA and BAA
Ø Step 2 – find a good broker and/or lender
Ø Step 3 – don’t tell anyone
Ø Step 4 – always smile
Ø Step 5 – include some but as few key employees as possible

16. PAGE: 16
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Pre-Sale Checklist (practical for buyer)
Ø Step 1 – sign seller’s NDA and BAA; it earns trust and both
documents are useless
Ø Step 2 – find a better broker and/or lender
Ø Step 3 – pretend to care about confidentiality
Ø Step 4 – always smile
Ø Step 5 – identify the key employees as quickly as possible

17. PAGE: 17
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
FIVE MONTHS EARLIER

18. PAGE: 18
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Letter of Intent
Ø Short version vs. long version: What kind of road map do the
parties prefer to follow throughout the transaction?
Ø Typically non-binding, but serves as a test of the integrity of
each party.
Ø What provisions can be binding?
Ø How should the parties approach valuation?

19. PAGE: 19
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Confidentiality Concerns
Confidentiality can be an integral part of any hospital transaction.
Information about a possible sale can disrupt operations, cause
physicians and employees to seek work elsewhere, and
ultimately have a negative impact on a hospital’s bottom line.
At the same time, information about a possible sale can attract
other potential buyers and drive the price of a possible sale, and
maybe even create a “bidding war.”

20. PAGE: 20
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Valuation– What Is the True Value of a Hospital?
Ø Enterprise value v. price per hospital bed
Ø Cash flow analysis
Ø Market value
Ø EBITDA (earnings before interest, taxes, depreciation and
amortization); EBITDAR (earnings before interest, taxes,
depreciation, amortization and rent/restructuring costs);
EBITDARM (earnings before interest, taxes, depreciation,
amortization, rent and management fees)

21. PAGE: 21
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Transactions in Bankruptcy Court
Ø What happens to the hospital sale process in bankruptcy
court?
Ø What is the scope of the bankruptcy court’s authority?
Ø Does the Office of the Attorney General play a role?
Ø What is a “Stalking Horse” bidder?
Ø How can a creditors’ committee impact the sale process?

22. PAGE: 22
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Offers You Can’t Refuse
Sometimes a potential buyer has more to offer than just a sales
price.
Ø Bridge loans
Ø Management services
Ø Inclusion in a larger system
Ø Assistance in avoiding bankruptcy
Ø May include exclusivity or no shop clauses

23. PAGE: 23
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
What the Government Needs to Know
A provider who is contemplating or negotiating a change of
ownership must notify CMS. 42 C.F.R. § 489.18(b)
What can constitute a change of ownership?
Ø Removal, addition or substitution of a partner
Ø Transfer of title and property to another party
Ø Merger or consolidation (but transfer of corporate stock does
not constitute change of ownership)
Ø Lease of all or part of a hospital (change of ownership for the
leased portion)

24. PAGE: 24
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
FOUR MONTHS EARLIER

25. PAGE: 25
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Buyer Due Diligence
Ø Corporate structure
Ø Financial information
Ø Litigation / insurance
Ø Licensing / regulatory
Ø Human resources
Ø Real estate / environmental / seismic
Ø Information technology

26. PAGE: 26
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Seller Due Diligence
Ø Buyer’s financial stability
Ø Corporate structure, the scope of which may depend upon
guarantees in the transaction
Ø Ability to close (regulatory approval or other non-financial
contingencies)
Ø Interim management agreement (due diligence may expand)
Ø Knowledge qualifier

27. PAGE: 27
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Using Public Information
Ø OSHPD reports (http://www.oshpd.ca.gov/HID/DataFlow/
HospMain.html)
Ø HospitalCompare (https://www.medicare.gov/
hospitalcompare/search.html)
Ø UCC filings
Ø Court filings
Ø Community / public opinion
Ø SEC filings

28. PAGE: 28
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
THREE MONTHS EARLIER

29. PAGE: 29
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Asset or Stock Purchase Agreement?
Ø APA: Buyer may not acquire all assets
Ø APA: Focus on excluded assets and assumed liabilities
Ø APA: Schedules take center stage
Ø APA: Used for mergers and acquisitions
Ø SPA: Transfer of company shares title
Ø SPA: Less flexibility than an asset purchase agreement
Ø SPA: Potential for easier/faster regulatory process

30. PAGE: 30
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Purchased Assets (APA)
Ø Real and leased property
Ø Quality assurance fee payments
Ø Furniture, furnishings and equipment (FF&E)
Ø Accounts receivable
Ø Information systems / proprietary rights
Ø Inventory

31. PAGE: 31
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Assumed Liabilities (APA)
Ø Accounts payable
Ø Quality assurance fee obligations
Ø Assigned contracts
Ø Past Medicare obligations
Ø Lease obligations

32. PAGE: 32
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Excluded Assets (APA)
Ø Personal articles
Ø Cash and cash equivalents
Ø Prepaid loan fees
Ø Employee-owned assets
Ø Seller’s organization and governing instruments / irrevocable
licenses

33. PAGE: 33
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Retained Liabilities (APA)
Ø Employee wages / PTO
Ø Reserve / extended sick leave banks
Ø Historical Medicare claims
Ø Broker fees
Ø Past tax obligations
Ø Tail policy

34. PAGE: 34
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
SCHEDULES, SCHEDULES, SCHEDULES

35. PAGE: 35
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Real Estate
Ø Often the most valuable asset in a transaction
Ø Value may be inextricably connected to the hospital license
Ø Existing mortgage– friend or foe?
Ø Consider scope of any appraisal
Ø Hospital campus and / or medical office buildings – consider
in proper context
Ø Environmental concerns

36. PAGE: 36
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
What Goes Into a Purchase Price?
Ø Deposit
Ø Holdback
Ø Adjustments (assumed liabilities or acquired assets)
Ø Outstanding obligations on assigned contracts
Ø Prorations
Ø Items payable at closing
Ø Transition services

37. PAGE: 37
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Representations and Warranties
Ø Organization and good standing
Ø Necessary consents
Ø Corporate records
Ø Financial statements
Ø Disclosure of liabilities (known or should be known)
Ø Net working capital

38. PAGE: 38
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Contracts
Ø Material contracts
Ø Assumed and assigned contracts
Ø Types of consent required
Ø Payer contracts
Ø Employee contracts
Ø IT contracts

39. PAGE: 39
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
TWO MONTHS EARLIER

40. PAGE: 40
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
California Department of Public Health
Ø Issues hospital licenses in California
Ø Primary regulatory agency for hospitals
Ø Oversees hospital administrative penalties
Ø Licenses hospital ancillary services, units and outpatient
facilities
Ø Licensing forms: https://www.cdph.ca.gov/pubsforms/forms/
Pages/HealthFacility-GACH.aspx

41. PAGE: 41
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Centers for Medicare & Medicaid Services (CMS)
Ø Oversees the Medicare and Medicaid programs in the United
States
Ø Hospital inpatient and outpatient prospective payment
system, as well as inpatient psychiatric facilities
Ø Hospital value based purchasing program
Ø Hospital readmissions reduction program
Ø CMS 855A (application for hospitals)

42. PAGE: 42
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Assignment of Medicare Provider Number
Ø Upon assignment of Medicare provider number, buyer
retains data to calculate Medicare DSH payments (42 C.F.R.
§ 412.106), charge-to-cost ratios for outliers (§ 412.84(i)(3)
(i)), IPPS “base period” for payment and cost report history,
wage index (§ 412.230) and E.H.R. incentive payments (§
495.105(c)).
Ø However, buyer becomes responsible for any past Medicare
liabilities and overpayments. 42 U.S.C. § 1395g(a).

43. PAGE: 43
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Board of Pharmacy
Ø The California Board of Pharmacy (“BoP”) licenses pharmacies
located within any licensed hospital, institution, or establish-
ment that maintains and operates organized facilities for the
diagnosis, care, and treatment of human illnesses to which
persons may be admitted for overnight stay and meets all of
the BoP regulations.
Ø Biggest timing issue in most hospital transactions.

44. PAGE: 44
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Other Licenses / Approvals
Ø Board of Equalization
Ø Business licenses
Ø CLIA
Ø Radiology
Ø FCC
Ø EDD

45. PAGE: 45
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
A FEW DAYS BEFORE

46. PAGE: 46
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Transactional Closing Items
Ø Escrow instructions
Ø Bill of sale
Ø Closing certificates
Ø Assignments and assumptions
Ø DEA power of attorney
Ø Deed(s) of trust
Ø Closing statement
Ø State and county documentation
Ø Title policies
Ø Wire instructions

47. PAGE: 47
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Logistical Closing Items
Ø 11:59 p.m. to 12:01 a.m.
Ø WARN Act considerations
Ø IT systems
Ø Badges and keys
Ø Patient valuables
Ø Medical staff
Ø Patients and the community
Ø When is it really over?

48. PAGE: 48
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
What Could Go Wrong?
Ø Most transactions do not end at closing
Ø Most transactions do not close as originally planned
Ø Certificates of good standing have a shelf life
Ø Lenders
Ø Title concerns
Ø Certifications and opinion letters

49. PAGE: 49
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
TWO MONTHS LATER

50. PAGE: 50
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Adjustments After the Closing
Ø Found money
Ø Hidden liabilities
Ø Holdback
Ø Indemnification issues
Ø Tail coverage
Ø Periodic true ups

51. PAGE: 51
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Access to and Retention of Records
Ø Buyer should provide reasonable access to all patient
records relating to purchased assets (if needed by seller in
the future).
Ø For how long should buyer retain hospital records?
Ø Application of “60 Days to Pay” regulation.
Ø What records should seller retain?

52. PAGE: 52
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Management-Leaseback Agreement
Ø Buyer = Manager
Ø Seller = Licensee
Ø If Manager has not obtained an acute care license from
CDPH for the continued operation of the hospital by the
closing, a management agreement may be necessary.
Ø Licensee leases hospital facilities and equipment from
Manager.

53. PAGE: 53
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Medicare Reassignment Prohibition
Ø General Rule: No payment which may be made to a
provider of services under [Medicare] for any service
furnished to an individual shall be made to any other person
under an assignment or power of attorney. (42 U.S.C. §
1395g(c); 42 C.F.R. § 424.73(a).
Ø Exceptions: (1) Payment to a government entity; (2)
Assignment by court order; and (3) Payment to a billing and
collections agent, subject to certain conditions.
Ø Lock box agreements

54. PAGE: 54
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Michael J. Sarrao
Law Offices of Michael J. Sarrao
Mike Sarrao, a healthcare and business lawyer, is a senior executive with
Alecto Healthcare Services, a California based healthcare company which
owns, operates, and/or manages acute care hospitals in 3 different states
including Olympia Medical Center in Los Angeles.
Mike previously served as General Counsel at Prime Healthcare. In addition
to representing hospitals in a variety of legal matters, Mike has served as lead
counsel for the buyer in the acquisition of 23 hospitals.
For additional information please email msarrao@sarraolaw.com.

55. PAGE: 55
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Craig B. Garner
Garner Health Law Corporation
Craig is an attorney and health care consultant, specializing in issues
pertaining to modern American health care and the ways it should be
managed in its current climate of reform.
Craig’s law practice focuses on health care mergers and acquisitions,
regulatory compliance and counseling for providers. Craig is also an adjunct
professor of law at Pepperdine University School of Law, where he teaches
courses on Hospital Law and the Affordable Care Act.
Between 2002 and 2011, Craig was the Chief Executive Officer of Coast Plaza
Hospital in Norwalk, California. Craig is also a Fellow Designate with the
American College of Healthcare Executives and a Vice-Chair of the State Bar
of California, Business Law Section, Health Law Committee.
Additional information can be found at www.garnerhealth.com.

56. PAGE: 56
Michael J. Sarrao
Craig B. Garner
Twists and Turns of a Hospital Sale
The Anatomy of a Deal
Thank You
Craig B. Garner
Garner Health Law Corporation
1299 Ocean Avenue, Suite 450
Santa Monica, CA 90401
(310) 458-1560
craig@garnerhealth.com/
www.garnerhealth.com
Michael J. Sarrao
Law Offices of Michael J. Sarrao
16310 Bake Parkway, Suite 200
Irvine, CA 92618
(949) 783-3976
msarrao@sarraolaw.com