Pharmacy Succession Planning: Navigating Change Of Ownership, Medicare, Medicaid And PBM Requirements

For pharmacy owners, succession planning involves much more than finding a buyer, negotiating a purchase price and signing a purchase agreement. A pharmacy operates within a complicated network of state licenses, federal and state healthcare programs, pharmacy benefit manager (PBM) contracts, pharmacy services administrative organization (PSAO) relationships, National Provider Identifier (NPI) records, Drug Enforcement Administration (DEA) registrations, accreditations and other payor arrangements. A transaction that is properly structured from a corporate perspective can still create significant operational problems if these regulatory and payor requirements are addressed too late.

This is particularly important because there is no single definition of a pharmacy “change of ownership,” commonly referred to as a “CHOW.” A transaction may constitute a change of ownership for one regulator or payor but only a change of information (CHOI) for another. The distinction can determine whether the pharmacy simply updates an existing enrollment or must complete a new enrollment, credentialing or contracting process.

For owners contemplating retirement, transferring a pharmacy to family members, selling to employees, bringing in new investors or selling to an unrelated buyer, succession planning should begin well before closing. The goal is not simply to complete the transaction. The goal is to ensure that the pharmacy can continue dispensing prescriptions and receiving reimbursement after the transaction closes.

Start With the Transaction Structure

The first question is how ownership will change. An asset purchase, stock purchase, membership interest transfer, merger, internal restructuring and transfer following the death of an owner can produce very different regulatory and contractual consequences.

An asset transaction, for example, frequently involves a new legal entity and taxpayer identification number. That can trigger new licensing, Medicare or Medicaid enrollment, PBM credentialing and commercial payor contracting requirements. An equity transaction may preserve the existing pharmacy entity and taxpayer identification number, but that does not necessarily mean that no CHOW has occurred for regulatory or contractual purposes.

Pharmacies should therefore avoid assuming that maintaining the same NPI, taxpayer identification number, pharmacy permit or corporate entity automatically eliminates CHOW obligations. Each regulator and payor must be evaluated under its own requirements.

This analysis should occur before the parties lock themselves into a closing date. Otherwise, the parties may discover shortly before closing that the buyer cannot bill one or more significant payors immediately after taking control of the pharmacy.

Medicare Enrollment Requires Separate Attention

Medicare enrollment requires its own analysis. Pharmacies should determine which Medicare enrollment records are implicated by the transaction and whether the change can be reported through the existing enrollment or requires a new enrollment. This is particularly important for pharmacies enrolled with Medicare as suppliers of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS).

For DMEPOS suppliers, CMS generally requires changes to enrollment information to be reported within 30 days. The applicable Medicare enrollment requirements also distinguish between changes involving an existing supplier and circumstances in which a new owner operates under a different taxpayer identification number. Depending on the structure of the transaction, the new owner may be required to complete a new Medicare enrollment rather than simply update the seller’s existing information.

Location changes can create additional issues. A transaction that includes moving the pharmacy, consolidating locations or changing the licensed premises may implicate enrollment, accreditation, insurance and other supplier requirements in addition to the underlying ownership change.

The practical lesson is straightforward: Medicare enrollment should be reviewed as part of transaction planning, not after closing. Failure to properly or timely report enrollment changes can create billing problems and potentially jeopardize the supplier’s Medicare billing privileges.

Medicaid Requires a State-by-State Analysis

Medicaid presents a different challenge because pharmacy enrollment requirements are administered at the state level. There is no single national Medicaid CHOW procedure that a pharmacy can follow.

States may impose different definitions, deadlines, documentation requirements, application fees, screening procedures, disclosure obligations and rules governing whether an existing provider number survives a transaction. Some states require advance notice of an ownership change. Others require a new enrollment application or specific ownership and control disclosures. Changes involving officers, directors, managing employees, pharmacists-in-charge or other individuals associated with the pharmacy may also trigger reporting requirements.

The analysis becomes even more important for pharmacies licensed and enrolled in multiple states. A transaction involving a single legal entity may require separate Medicaid submissions in every state in which the pharmacy participates, and those submissions may not be processed on the same timetable.

Accordingly, the parties should identify all Medicaid enrollments early in due diligence and determine, state by state, whether the transaction requires a new enrollment, CHOW application, provider maintenance filing, ownership disclosure or other submission. A multistate pharmacy should not assume that approval or acceptance in one state resolves the Medicaid requirements in another.

PBMs May Present the Greatest Operational Risk

For many retail and specialty pharmacies, the most immediate post-closing concern is not the state pharmacy license or even government enrollment. It is whether the pharmacy can continue adjudicating prescriptions through its PBM networks.

PBM agreements and provider manuals typically contain their own change-of-ownership and change-of-information provisions. Those requirements should never be treated as interchangeable with state licensing, Medicare, Medicaid, NCPDP or PSAO requirements.

Depending on the PBM and transaction structure, a pharmacy may be required to provide advance notice, complete a CHOW submission, undergo credentialing or recredentialing, execute a new provider agreement or obtain approval before the ownership change becomes effective for network purposes. PBM agreements may also contain restrictions on assignment or transfer that become particularly important in an asset sale or transaction involving a new legal entity.

These requirements create significant transaction risk. A seller may believe that its network agreements simply “follow” the pharmacy after closing. They may not. Assignment restrictions, credentialing requirements, ownership disclosures, network closures, specialty network limitations and PBM approval requirements can affect whether the buyer can continue processing claims.

This issue can become particularly significant where the pharmacy derives a substantial percentage of its revenue from one PBM. A transaction may make economic sense on paper, but become materially different if the buyer cannot immediately participate in the same network as the seller.

The purchase agreement should therefore address PBM participation expressly rather than treating it as a routine post-closing administrative matter.

Do Not Overlook the PSAO

Independent pharmacies participating in PBM networks through a PSAO have another layer to consider. The PSAO should be notified and its procedures reviewed, but notifying the PSAO does not necessarily satisfy the pharmacy’s obligations to each underlying PBM.

The parties should identify every material PBM network in which the pharmacy participates, determine whether participation is direct or through a PSAO and confirm the CHOW requirements applicable to each relationship. This process should also determine whether existing contracts can be assigned, whether new credentialing is necessary and whether the buyer qualifies for the same networks in which the seller participates.

This issue is particularly significant for specialty, long-term care, mail-order, infusion, compounding and other pharmacies operating under specialized network arrangements. The fact that a buyer qualifies for a standard retail network does not necessarily mean that it will receive the seller’s specialty designations, network arrangements or other contractual privileges.

Change of Information Is Not the Same as Change of Ownership

Not every succession-related event constitutes a CHOW. A pharmacy may instead need to report a CHOI.

Examples can include changes to officers, directors, managing employees, pharmacists-in-charge, addresses, telephone numbers, banking information, authorized officials, corporate names, ownership percentages or other enrollment and credentialing information. Whether a particular event constitutes a CHOW, CHOI or new enrollment depends upon the applicable regulator, government program or contract.

The distinction matters because reporting deadlines and consequences can differ substantially. A change that does not require a new license or enrollment may nevertheless be subject to a relatively short reporting deadline. Conversely, a transaction that appears to be a simple ownership update may constitute a new enrollment or credentialing event for a particular program or payor.

Pharmacies should therefore maintain a regulatory and payor matrix identifying what is changing, which entities must be notified, the applicable deadline, the required forms and supporting documents and whether notice or approval is required before closing.

Build the CHOW Timeline Backward From Closing

A pharmacy transaction should effectively have two closing checklists. The first is the traditional corporate checklist covering the purchase agreement, financing, lease, inventory, employment matters, representations and warranties and closing deliverables. The second should be a pharmacy-specific regulatory and payor checklist.

That checklist should address, as applicable, state boards of pharmacy, DEA registrations, Medicare, each state Medicaid program, NPPES and NPI records, NCPDP, PBMs, PSAOs, wholesalers, accreditation organizations, commercial payors, Medicare Advantage and Part D relationships, surety bonds, insurance policies, banking and electronic funds transfer information and specialized licenses or permits.

The timeline should work backward from the anticipated closing date. Some filings can occur only after the transaction closes. Others require advance notice. Still others may require approval, credentialing, inspection or enrollment before the buyer can bill.

The purchase agreement should account for these realities through appropriate closing conditions, covenants, cooperation requirements and other mechanisms tailored to the transaction. The parties should not assume that a contractual closing date controls when a government program or PBM will recognize the new ownership.

Succession Planning Should Begin Before There Is a Buyer

The best pharmacy succession planning occurs before an owner decides to sell. Owners should understand how the pharmacy is structured, which licenses and enrollments it maintains, which PBM agreements generate material revenue, whether those agreements can be transferred, and what would happen if ownership changed unexpectedly due to death or incapacity.

This is particularly important for closely held and family-owned pharmacies. A will, trust, operating agreement or buy-sell agreement may determine who owns the business following an owner’s death, but those documents do not automatically transfer pharmacy licenses, Medicaid enrollment, Medicare billing privileges, DEA registrations or PBM network participation.

The same concern applies when multiple pharmacies are owned through different legal entities or holding-company structures. Succession planning should identify exactly which entity owns each pharmacy, which individual or entity holds the relevant ownership interest and how a contemplated transfer affects the licenses, enrollments and contracts associated with each location.

A well-designed succession plan, therefore, addresses both ownership of the company and authority to operate the pharmacy.

The Bottom Line

A pharmacy CHOW is not a single filing. It is a coordinated regulatory, enrollment, credentialing and contractual process involving multiple government agencies and private payors, each potentially applying a different definition of what constitutes a change of ownership.

Whether a pharmacy is being sold to a third party, transferred to the next generation, reorganized internally or transferred following the death of an owner, the parties should identify the regulatory and payor consequences before establishing the closing timeline. Medicare, Medicaid, PBMs, PSAOs, state boards of pharmacy, DEA requirements, NCPDP records and other payor relationships should be evaluated independently.

The purchase agreement gets the transaction closed. Proper CHOW and succession planning keep the pharmacy operating after the closing. For pharmacy owners, buyers and their advisors, that distinction can determine whether a successful transaction remains successful on day one under new ownership.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.