Preventing risk in medical institution acquisitions

By Chen Yu, East & Concord Partners
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With the government promulgating a series of policies to encourage and guide social capital to develop medical and health undertakings in recent years, social capital is constantly participating in M&A, reorganization and restructuring of medical institutions. Among them, non-profit medical institutions are more encouraged by the government and have gradually become a new hotspot for investment. Due to its particularity, such acquisitions are different from ordinary acquisitions of shares, and therefore lawyers should know the possible legal risks in the acquisition process as well as possible.

Real estate and land ownership. Many medical institutions, due to age-old problems like vague property rights, usually find that because the land-use certificate is owned by the sponsor, therefore the property ownership certificate is also owned by the organizer, or not handled due to the principle of integration between house ownership and land-use rights.

陈煜 CHEN YU 天达共和律师事务所高级律师 Senior Associate East & Concord Partners
陈煜
CHEN YU
天达共和律师事务所高级律师
Senior Associate
East & Concord Partners

Moreover, in the financial account of the medical institutions, these buildings that do not have a property ownership certificate are still listed in the fixed assets and depreciated. In addition, some medical institutions still have some self-constructed illegal structures that remain in use due to various problems left over by history. During the course of due diligence, lawyers should make a field visit to the real estate used by the institution, to clarify the property ownership and actively communicate with the original sponsor of the medical institution to handle the transfer of premises.

Ownership of medical equipment. Lawyers should obtain a list of medical devices during due diligence and sort out the ownership of each medical device: where the medical devices are purchased by the medical institution, bidding documents, purchase contracts, invoices, and corresponding configuration permits or registration certificates should be obtained; and where the medical equipment is leased or financially leased, the corresponding lease agreement or finance lease agreement should be obtained and the lease expenses payment verified.

In case the medical institution occupies and uses medical devices through co-operative delivery, the lawyer should clarify the ownership of medical devices by understanding the essence of co-operative delivery through the co-operation agreements. In addition, they should verify whether the key equipment has been inspected or checked by the relevant authorities or not, and whether the equipment is mortgaged or not.

Medical qualification certificates. Since medical institutions in the actual operation should have the appropriate qualification certificates, so lawyers need to focus on verification of validity of those qualifications and certificates, including practice licences for profit-making/non-profit hospitals, hospital grade assessment certificates, qualification certificates for fixed-point hospital of basic medical insurance and related agreements, radio-diagnosis and radiotherapy licences, large-scale medical equipment disposition permits, maternal and infant healthcare technology service licences, narcotic drugs and Class-1 psychoactive drug purchase signature card, radiation safety permits, special equipment registration certificates, physician’s certificates, nurse’s certificates, special qualifications certificates to carry out specific medical diagnosis and treatments, and so on. In the process of verifying medical staff’s qualifications, special attention should be paid to whether they have multi-sited practice.

Purchasing process compliance. Procurement in medical institutions mainly involves drugs, equipment and supplies procurement. In the process of drugs procurement, secondary bargaining will often occur, which refers to when the medical institution in the actual procurement of medicines does not follow in the provincial bidding to determine the winning bid, but privately negotiates with the drug suppliers for a final price lower than that determined by the provincial bidding centre. This was banned by the regulatory authorities.

Article 9 of the Opinions on Further Reforming and Perfecting the Policies on the Production, Distribution and Use of Pharmaceuticals, promulgated by the general office of the State Council in February 2017, proposes to improve the pharmaceutical procurement mechanism. In areas where reform of the medical insurance payment system has been fully implemented, or the standards for the payment of drugs covered by medical insurance have been formulated, public hospitals are allowed to procure at the centralized drug procurement platform at the provincial level. This provision can be interpreted as: an autonomous bargaining is allowed for medical institutions to procure medicines; that is, the ban on secondary bargaining has been liberalized.

Although the policy has allowed medical institutions to conduct secondary bargaining, lawyers should still verify the procurement process of medical institutions by reviewing procurement agreements, interviews and walk-through tests to determine the compliance of the medical institutions in the process and focus on rebates, discounts, and allowances.

Negative impact of litigation and arbitration. Litigation and arbitration in medical institutions usually involves hospital-patient disputes and labour arbitration, which may have a negative impact on the operation of the medical institution. In recent years in particular, medical disputes have been frequent and the social image and reputation of the institution are prone to be seriously impaired, thus greatly reducing the possibility of successful acquisitions.

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During the course of due diligence, it is suggested that you know about litigation disputes related to the medical institution through interviews and examination of online public opinions, and determine whether the litigation has a significant impact on the medical institution or not. Meanwhile, you should investigate whether there are any pending or foreseeable major lawsuits or arbitrations related to the sponsor of the medical institution. If the sponsor is facing similar challenges, it will definitely pose a negative impact on the medical institution. In addition, examination of network public opinion should be carried out to verify whether the core staff of the medical institution are or have been involved in criminal cases such as bribery, so as to understand the compliance of the medical institution from indirect sources.

Chen Yu is a senior associate at East & Concord Partners

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