Buying a Treatment Program: Licensing Diligence Before You Sign

A buyer of a treatment program is usually buying its licenses, enrollments and accreditation as much as its lease and staff. The problem is that most of those credentials are issued to a specific operator at a specific address, and many do not survive a change of ownership. A deal that closes before the regulatory plan is in place can leave the new owner running an unlicensed program, which in Florida is a third-degree felony (Fla. Stat. 397.401). Diligence on the licensing side is not paperwork to finish after closing; it decides how the deal is structured and when it can close.

Does a state license transfer to a buyer?

Usually not. The state rules we have verified fall into a few patterns:

• Not transferable; a majority change is a transfer. Florida's substance abuse provider license cannot be transferred, and a transfer includes a majority ownership change (Fla. Stat. 397.407(5)).
• Void on a set percentage. Illinois licenses become void on an ownership change of more than 25 percent, or a 50 percent board change at a nonprofit, within a year; the provider gives at least 10 days' notice and files a new application (77 Ill. Adm. Code 2060.255, 2060.265).
• New application within days. In Kentucky a new owner files a license application with the $500 fee within 10 calendar days, and acquiring more than 25 percent counts as a change of ownership (908 KAR 1:370). Louisiana requires the change to be reported within five days, with the new owner submitting everything required for a new license and the fee (LAC 48:I.5607, 5613).
• Prior approval. Connecticut issues a license only for the premises and persons named and requires prior approval of a change in ownership (Conn. Gen. Stat. 19a-493). North Carolina's license is not transferable without the Secretary's prior written approval (G.S. 122C-23).
• Report or lose it. Pennsylvania licenses are not transferable; a change of ownership is reported on DDAP forms within 90 days or the license expires automatically (28 Pa. Code 709.14). South Carolina requires notice within 30 days of a change in ownership or controlling interest (S.C. Code 44-7-280, 44-7-285).
• A new license, with a fee. Maryland requires a new license when a sale or transfer changes ownership (COMAR 10.63.06). New Jersey charges $1,500 for a transfer of ownership interest (N.J.A.C. 10:161B-2.1), and Washington $1,150 for a change of ownership application (WAC 246-341-0365).

Vermont adds a different gate: a transfer of more than 50 percent ownership in a health care facility other than a hospital or nursing home is itself a project needing a certificate of need. Check the target's state page on our state licensing index for what we have verified, and read the rule itself for the definitions of ownership and control.

How does Medicare treat a change of ownership?

For a provider with a Medicare provider agreement, such as a community mental health center, 42 CFR 489.18 defines what counts as a change of ownership: in a corporation, a merger into another corporation or a consolidation creating a new one does, but a transfer of corporate stock does not (489.18(a)(3)). The existing provider agreement is automatically assigned to the new owner, along with any plan of correction and the duty to keep meeting the health and safety standards (489.18(c) and (d)). The current and prospective owners must both submit enrollment applications before the change is completed (42 CFR 424.550(b)), and changes of ownership or control, including new authorized or delegated officials, are reported within 30 days (424.516(e)). A Medicare billing number can never be sold or lent (424.550(a)).

A community mental health center buyer should also plan for the 40 percent rule: the CMHC must submit a certification from an independent entity that at least 40 percent of its services go to people not eligible for Medicare, at enrollment and every revalidation (42 CFR 485.918(b)(1)(v)). See Medicare enrollment for community mental health centers.

What about Medicaid?

Each state's Medicaid agency screens every person with a 5 percent or greater ownership interest and every managing employee, and must deny or terminate enrollment if an owner was convicted of a Medicare, Medicaid or CHIP offense in the last 10 years, unless it documents a reason not to (42 CFR 455.416(b)). It must also terminate if an owner fails to provide information or fingerprints when required. New owners therefore go through screening. North Carolina's statute also bars new licenses and Medicaid enrollment for owners tied to recent revocations or certain penalties (G.S. 122C-23(e1)). See Medicaid enrollment for behavioral health facilities.

Does the accreditation survive the sale?

Treat it as something to confirm with the accreditor before closing, not after. Where the state license depends on accreditation, the timing is unforgiving: Ohio requires certified providers to report any change in accreditation status to the director within ten days (Ohio Rev. Code 5119.36(D)), Indiana's regular certification expires 90 days after accreditation lapses (440 IAC 4.4-2-3), and Louisiana's deemed providers send current accreditation papers with each annual renewal (LAC 48:I.5617). Ask the seller for the accreditation decision letters, the survey reports and the quality improvement plans, and read the accreditor's own rules on reporting a change of ownership. See where accreditation is required.

Is an opioid treatment program different?

Yes, because it carries federal approvals with their own rules:

• SAMHSA. SAMHSA's program changes page says OTPs must notify its Division of Pharmacologic Therapies or the state's SAMHSA compliance officer of a change of ownership, and must report a change of program sponsor or medical director within three weeks on Form SMA-162, which only the sponsor may sign and submit (42 CFR 8.11(e)(5)). See changing program sponsor or medical director.
• DEA. A registration may not be assigned or transferred except on conditions DEA specifically sets and with its written consent; a registrant transferring its business must give the Special Agent in Charge at least 14 days' advance notice (21 CFR 1301.52(b) and (d)).
• The state. Some state OTP rules look at the owners' history. Ohio requires an OTP license applicant and its owners, sponsor and medical director to show three years of good standing everywhere they have run an OTP.

Which documents belong in the diligence request?

1. Every license and certification, by site and service component, with expiration dates.
2. The last two or three inspection reports, deficiency notices, plans of correction and any complaint investigations.
3. Pending enforcement, conditional or provisional status, and correspondence with each agency.
4. Accreditation decisions, survey reports, quality improvement plans and annual reports.
5. Medicare and Medicaid enrollment records, revalidation dates and any overpayment or suspension notices.
6. For an OTP: SAMHSA certification and expiration, accreditation as an OTP, DEA registrations and the state OTP license.
7. The policy manual, the Part 2 Patient Notice and consent forms, and the breach log.
8. Every vendor, marketing and referral arrangement, reviewed for EKRA and state patient brokering law (EKRA and treatment centers), and in Florida the recovery residence list in the license application.

None of this requires patient charts. Diligence on records practice can be done from policies, logs and blank forms; how patient records themselves pass to a buyer under 42 CFR Part 2 and state law is a question for counsel.

How should the deal be sequenced?

Read each state's change-of-ownership rule before choosing between an asset purchase and an equity purchase, because definitions differ: Illinois counts percentages, Florida counts a majority change, and Medicare's rule turns on mergers and consolidations rather than stock sales. Then build a closing calendar with every notice and application deadline counted from the closing date, prepare the filings before closing, and line up the new owners' background checks and fingerprints early. Where a state requires prior approval, closing waits for it.

What do we prepare?

Our Ownership Change or Relocation service is $795, flat: the state change-of-ownership filing or new application, the ownership and background packet, and the notice calendar for Medicaid, Medicare, accreditors and, for an OTP, SAMHSA and DEA. The new owners sign every application and pay every fee; for Medicare, we submit only as an approved PECOS surrogate after your authorized official signs. A $149 Facility Readiness Review is a good first step during a letter-of-intent period. We do not value businesses or give legal advice, and we never receive patient records.