Will health care reform deter merger & acquisition activity?

The Affordable Care Act (ACA) adds even more layers to the already complicated process of one business buying or selling another.  

Kathi Wright and Monica Kelley, attorneys at Minneapolis-based Gray Plant Mooty, told Twin Cities Businessthat since ACA passed, they have heard from numerous clients who say health care reform has a significant effect on how they approach mergers and acquisitions.

According to Wright and Kelley, M&A activity may actually decline as a result of the ACA, as companies avoid purchases that accompany potential health care penalties or would require them to make benefit changes themselves.

Wright said one of the first things a company needs to think about when approaching a merger or acquisition, with ACA in mind, is the size of both companies.

Only companies that maintain at least 50 full-time employees will be subject to the employer-shared responsibility provision of the ACA—commonly known as “play or pay.” Click here to learn more about the complexities of “play or pay” and determining your company’s size.

Wright said that even though the employer-shared responsibility requirements were delayed to 2015, companies still need to know whether a merger or acquisition will tip either company into “large” employer status.

“We’ve heard from companies—particularly franchise organizations—that are now much less likely to expand because of the significant increased costs they’d incur becoming a large employer,” said Kelley.

It’s not just small companies that need to be cognizant of ACA mandates, however.

“Even when two large companies are merging, they both need to carefully examine the impact of health benefits, post-merger,” said Wright.

A large company acquiring another needs to know exactly how the health care program at the other company operates—to avoid any surprise penalties.

“The company needs to know if the company they’re acquiring has any bad practices or a lack of health care rights enforcement,” Wright said. “That is why record keeping is so essential; the other company needs to be able to prove why they do or don’t offer coverage to specific employees.”

ACA compliance is riddled with possible penalties that may transfer from one company to another during a merger.

“Historically in health care, we really haven’t had this kind of exposure before—there just haven’t been any national requirements that had this type of impact,” said Wright. “So it really ups the ante for how companies need to explain themselves pre-merger.”

Kelley said businesses also need to keep in mind the health care affordability requirement. According to the ACA, the employee’s contribution for their health coverage cannot exceed 9.5 percent of their household income. Because a merger can lead to companies paying different wages, businesses need to take the affordability aspect into account when choosing to join with another company.

Despite all these new obligations that need to be taken into account, Wright and Kelley still believe Minnesota’s M&A activity forecast is positive.  

“Minnesota’s corporate climate is better positioned to not experience a slow down compared to other areas,” Wright said. “Largely because Minnesota was already at the forefront of providing good health care. In areas that have seen added costs, they’ve had less of an impact here because our state insurance guidelines already imposed some of those requirements.”

Twin Cities BusinessWright said Minnesota’s business makeup also bodes well for M&A activity. Because a lot of companies in Minnesota require more skilled labor, the positions are better paid and received fairly good health care coverage already.

“Now that isn’t to say we don’t have plenty of restaurants and franchisee groups that have more part-time employees and will need to struggle with it more,” Wright said. “And for some of them it will be quite a shock, because if they haven’t had to offer any coverage in the past, they’ll be going from zero to full turbo.”

This article is reprinted in partnership with Twin Cities Business.

Handshake photo by Flickr user Álvaro Canivell and used under Creative Commons license.

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