Court interpreted APA as giving the hospital buyer the right to a $2.4 million interim lump sum adjustment determined by audit of seller services.
Try to make you’re M&A documents user friendly: “Please, speak as you might to a young child, or a golden retriever” — From the film “Margin Call”
January 22, 2021
A common issue in an acquisition is how to handle post-closing settlements with customers for pre-closing sales and services. The solution depends upon the target business.
This deal involved the acquisition of the assets of two hospitals. These hospitals received a significant amount of their revenue from Medicare and Medicaid. The hospital received Medicare and Medicaid payments every two weeks. The payments were calculated by Medicare and Medicaid based upon the overall projected claims for payment for the full year. These payments were an estimate based upon the seller hospitals’ budget and projections and was susceptible to upward or downward adjustments during the course of a year.
The payments were reconciled on an interim and final basis to ensure that the payments accurately reflect the actual value of the claims processed by the seller hospitals. In the event that the interim and final review of payments reflects that the seller hospitals had been underpaid, Medicare/Medicaid can modify the amount of every two-week payment and/or issue a lump sum adjustment to bring payments received in line with reality and updated projections. If the review indicates that the hospitals has been overpaid, the seller hospitals must remit funds back to Medicare directly or via offsets to future payments.
About two months before the closing, the Medicare auditor sent its report to the seller which contained an analysis of the payments made to the seller in the first six months of 2019, along with a projection of services the seller was expected to provide for the balance of the calendar year. Based upon that analysis, the auditor determined that the two hospitals were entitled to a lump sum adjustment payment in the amount of $2.4 million.
Payment of the amount to the seller was delayed due to the seller’s bankruptcy filing. The deal closed September 30, 2019.
The seller received the $2.4 million lump sum adjustment 2 days after the closing. Subsequently, in April 2020, the seller prepared their final cost report which reflected amounts due to Medicare/Medicaid in the amount of $2.3 million. The overpayment liability was owed by the buyer to Medicare/Medicaid under the asset purchase agreement.
The buyer claimed that it was entitled to the $2.4 million lump sum adjustment that the seller received from Medicare 2 days after the closing.
The dispute ended up in a Delaware bankruptcy court. The court said that the $2.4 million lump sum adjustment received by the seller was not a receivable (which is an excluded asset under the APA and not acquired by the buyer). Instead, was a “settlement” asset purchased by the buyer.
The court supported its decision by the words of the asset purchase agreement: a receipt “(i) relating to supplemental, disproportionate share or waiver payments, or Medicaid GME funding with respect to time periods prior to the Closing Time; (ii) relating to the Seller Cost Reports or Agency Settlements (whether resulting from an appeal by Sellers or otherwise) and other risk settlements with respect to time periods prior to the Closing Time …”
This case is referred to as In Re Hospital Acquisition LLC, Case No. 19-10998 (BLS), United States Bankruptcy Court, D. Delaware, (December 21, 2020).
Certainly, it is fair result since the buyer had to pay back the overpayment. Don’t know if the APA language quoted by the court gets you there, but maybe. That language was hard to follow.
By John McCauley: I help people manage M&A legal risks.
Telephone: 714 273-6291
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