When I started in healthcare mergers and acquisitions, one comprehensive and cohesive acquisition agreement was used to memorialize the transaction. However, over time, when buying healthcare services businesses, lawyers have adopted the practice of two acquisition agreements, one is an Operations Transfer Agreement (OTA), covering the business and operations, and the other is an Asset Purchase Agreement (APA), limited to the purchase of the assets. This dual-agreement structure in healthcare acquisitions has evolved primarily to address the unique regulatory and compliance complexities of the healthcare industry. Here’s why this practice developed and its benefits:
Why This Structure Evolved:
The healthcare industry faces particularly stringent regulatory oversight and liability matters that makes traditional single-agreement acquisitions problematic. Healthcare businesses often hold numerous licenses, certifications, and regulatory approvals that cannot be easily transferred or may require separate approval processes. Additionally, healthcare operations frequently involve ongoing patient care responsibilities, compliance obligations, and relationships with payors that need careful handling during transitions. Typically, organizations set up with an Opco and a Propco. Thus, the OTA encompasses the sale of the Opco and the APA covers the sale of the Propco.
Key Drivers:
Regulatory Compliance – Healthcare businesses must maintain continuous compliance with federal and state regulations (HIPAA, Stark Law, Anti-Kickback Statute, state licensing requirements). Separating operational transfer from asset acquisition allows for staged compliance verification and smoother regulatory transitions.
License and Certification Issues – Many healthcare licenses are non-transferable or require lengthy approval processes. The Operations Transfer Agreement can address the operational handover while asset purchase occurs separately, ensuring business continuity during regulatory approval periods.
Liability Segregation – Healthcare businesses carry significant potential liabilities (malpractice, regulatory violations, patient care issues). This structure allows buyers to more precisely allocate and limit their exposure to different types of risks.
Payor Relationships – Medicare, Medicaid, and insurance contracts often require separate assignment processes. The dual structure accommodates these administrative requirements without disrupting patient care.
Is This Good Practice?
Yes, this approach offers several advantages:
Risk Management – Better isolation and allocation of different risk categories between operational and asset-related exposures.
Regulatory Flexibility – Allows transactions to proceed even when certain regulatory approvals are pending, maintaining business operations and patient care continuity.
Due Diligence Precision – Enables more targeted due diligence processes for operational versus asset-related issues.
Financing Optimization – Different lenders may be more comfortable financing different aspects of the transaction, potentially improving overall deal economics.
However, this structure does add complexity and transaction costs, particularly intertwining the two documents so that they are consistent with one another. The dual structure also requires careful coordination of closing conditions and timing between the agreements to ensure neither transaction can close without the other.
If there are different ownership structure or principals of the “opco” and the “propco” that presents challenging indemnitor and indemnitee issue. However, the benefits typically outweigh these drawbacks in healthcare acquisitions due to the industry’s unique regulatory environment and the critical importance of maintaining uninterrupted patient care during ownership transitions.