Adult day care ownership is a noble, increasingly essential venture in today’s healthcare landscape. However, for those considering the purchase of an existing adult day care operation, diligence and a keen understanding of various legal, financial, and contractual components is crucial. A successful transition hinges not only on the physical infrastructure and client base, but also on the integrity and sustainability of the program’s relationships with third-party payers, regulatory bodies, and oversight entities.
Here’s a comprehensive guide on what to review before making that final decision:
1. Third-Party Payer Contracts: Know What You’re Inheriting
One of the most significant assets (or liabilities) in an adult day care program is its contracts with payers. These agreements determine revenue, compliance obligations, and often the very viability of the business. A buyer should request, review, and understand the following:
Mental Health Contracts (Often CMH or Community Mental Health):
- Scope of Services: Confirm if the contract covers just supervision or includes psychiatric support, medication management, or behavioral therapy.
- Reimbursement Structure: Are rates based on service intensity (e.g., per diem or hourly)? Are there tiered payments?
- Termination Clauses: Understand under what conditions the contract can be canceled or suspended.
- Credentialing Requirements: Ensure current staff meet the required credentials, as new ownership may require re-credentialing.
Veterans Affairs (VA) Contracts:
- Eligibility and Referral Process: VA contracts often require specific documentation for veteran eligibility and prior authorization.
- Per Diem Rates and Adjustments: Are the rates competitive? When were they last updated?
- Audit Protocols: VA contracts are subject to stringent compliance reviews. Ensure past audits have been clean.
Managed Care Organizations (MCOs):
- Service Authorization Workflow: Are services authorized on a rolling basis? Is reauthorization required every 30 days?
- Payment Timeframes: Identify any delays in MCO payments and whether there are penalties or interest applied to late payments.
- Utilization Review Expectations: MCOs often conduct stringent utilization reviews; confirm that the documentation standards are currently being met.
Medicaid Waiver Agents:
- Service Agreements: Review all executed provider agreements and appendices. Are they current?
- Billing Codes: Validate whether the adult day care is using appropriate and updated HCPCS/CPT codes.
- Incident Reporting Obligations: Medicaid waiver contracts require specific documentation protocols for sentinel events and service interruptions.
2. Medicare-Certified Programs: Special Attention Needed
If the program offers Medicare-certified outpatient rehabilitation, you must review:
- CMS Certification Documentation: Ensure that all CMS (Centers for Medicare & Medicaid Services) approvals are in good standing.
- Billing Integrity: Review past claims and audit reports to ensure there are no recurring denials or suspected fraud investigations.
- Therapist Qualifications: Medicare mandates specific licensure and documentation standards. Make sure all therapists are certified and maintain up-to-date continuing education.
- Program Logs and Treatment Plans: Therapy must be medically necessary and well-documented. Request recent logs to review for compliance.
3. Tax and Revenue Department Filings
Business continuity depends on financial health and regulatory standing. Evaluate:
IRS Records:
- EIN Verification and Tax Returns: Confirm that the business’s Employer Identification Number (EIN) is current and matches the operating entity.
- Payroll Tax Filings: Check for delinquencies in federal payroll taxes or existing payment plans.
- Form 941 Compliance: Ensure that all quarterly employer tax returns have been submitted and match payroll records.
State Department of Revenue:
- Sales and Use Tax: Some states apply these to transportation or meal services. Review all returns.
- Business Privilege or Occupational Tax Licenses: Ensure proper business licensing is current and transferable.
- Withholding and Unemployment Contributions: Validate payments to state workforce agencies.
4. Compliance and Risk: Licensure and Inspections
Don’t ignore the legal operating foundation:
- State Licensing Status: Ensure licensure is not probationary or conditional.
- Survey and Inspection Reports: Review the past two years of state inspections, especially for deficiencies or citations.
- Corrective Action Plans: If deficiencies were cited, obtain copies of correction plans and evidence of resolution.
5. Client Data and Service Volume Trends
Contracts and credentials are one side of the coin — client engagement is the other.
- Payer Mix Reports: What portion of clients are funded by Medicaid waivers, private pay, VA, or other third-party contracts?
- Service Trends: Look for consistent or growing participation. A declining census could signal trouble.
Final Word: Due Diligence Is Protection:
Purchasing an adult day care program is more than acquiring a building and a staff roster — it’s buying into an ecosystem of services, regulatory compliance, and reputational commitments. Have all documents reviewed by an experienced healthcare attorney and a qualified accountant, particularly one familiar with long-term care and community-based service operations.
Adult day care programs change lives — but only if built on a sound, legal, and sustainable foundation. Make sure your acquisition starts on the strongest footing possible.
Another Blog Post by Direct Care Training & Resource Center, Inc. Photos used are designed to complement the written content. They do not imply a relationship with or endorsement by any individual nor entity and may belong to their respective copyright holders.
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