📖 Approx. 8 minutes
In recent years, the business environment surrounding medical institutions has become increasingly severe, with a growing trend of hospitals being forced to choose between business failure or civil rehabilitation. Factors such as revisions to medical fees, progress in regional medical care planning, shortages of doctors and nurses, and the impact of the COVID-19 pandemic are acting in complex ways, placing many medical institutions at a crossroads in their management. This article delves into the background of hospital business failures, explains the overview of civil rehabilitation procedures, and discusses the possibilities of business succession through M&A, providing expert insights into concrete options and considerations for the reconstruction of medical institutions.
The Business Environment and Current State of Failure in Medical Institutions: Why Do Hospitals Go Bankrupt?
Hospital business failures rarely occur due to a single factor; they typically arise from a combination of multiple structural problems. A primary factor is the “revision of medical fees.” Medical fees, which constitute the majority of a medical institution’s revenue, are revised every two years, and negative revisions to the base fee can directly impact management. Furthermore, with the advancement of “regional medical care planning,” the reorganization of hospital bed functions is being pursued, and smaller hospitals that cannot specialize in specific functions may struggle to secure revenue sources.
Moreover, the “shortage of doctors and nurses” is becoming increasingly serious, particularly in rural areas, leading to increased costs for securing personnel and making it difficult to maintain medical services. The “burden of capital investment” associated with the introduction of expensive medical equipment and the aging of facilities also weighs heavily on smaller hospitals. In addition, with the ongoing shift towards “medical corporations without contribution-based equity” as a characteristic of medical corporations, the potential future obligation to refund funds may pose a latent financial risk. While the COVID-19 pandemic provided temporary support through subsidies, medium- to long-term fluctuations in patient numbers and changes in the business environment remain uncertain.
What to Know Before Considering Civil Rehabilitation Act Application
When a medical institution facing financial difficulties aims for reconstruction, one legal option is the Civil Rehabilitation Act. Civil rehabilitation is a procedure where the debtor continues to operate their business while seeking agreement with creditors under court supervision to achieve business regeneration. However, this choice comes with both advantages and disadvantages.
In the civil rehabilitation proceedings for a medical corporation, the responsibilities of the directors, including the chairman, will be questioned. Particularly in medical corporations with contribution-based equity, the change of members and the handling of equity can become complex. Furthermore, the licensing and approval for medical corporations are strict, and whether the necessary licenses can be maintained during the rehabilitation process, or if re-acquisition is necessary, are important issues.
Civil rehabilitation carries risks such as a loss of credibility as a medical institution, a decrease in patient numbers, and an outflow of talented personnel. Therefore, it is crucial to thoroughly consider the possibility of business succession through M&A, including business transfer, before contemplating civil rehabilitation. M&A offers the potential to transfer business resources to a new corporation, continue regional medical care, and simultaneously address debt settlement and business restructuring.
Comparison of Civil Rehabilitation and Business Transfer
| Item | Civil Rehabilitation | M&A (Business Transfer) |
|---|---|---|
| Objective | Continuation and reconstruction of the debtor’s own business | Continuation and development of business, debt settlement |
| Entity | Existing medical corporation (debtor) | New medical corporation (acquirer) |
| Treatment of Debt | Agreement on debt forgiveness and repayment plan | Generally, the acquirer does not assume debt; it is settled by the transferor |
| Licenses and Permits | Maintain existing licenses and permits, with notification of changes as necessary | Acquirer obtains new licenses and permits (partial transfer may be possible) |
| Employees | Employment continuation is the general principle | Re-employment contracts with the acquirer are common |
| External Image | Risk of credibility decline due to legal proceedings | Potential for positive image transformation through business succession |
| Process Duration | Generally 1 to several years | Several months to about 1 year |
Medical Institution Reconstruction Planning and M&A Options
If civil rehabilitation is chosen, the formulation of a feasible reconstruction plan is essential. The reconstruction plan must concretely include cost reduction measures (review of personnel and material costs), revenue improvement measures (reorganization of medical departments, improvement of bed occupancy rates), and debt settlement methods (debt forgiveness, repayment plan). The procedure proceeds when this plan is approved by creditors and authorized by the court.
However, if self-reconstruction is difficult, M&A for business succession becomes a viable option. In particular, in sponsor-type civil rehabilitation, an external medical corporation or company acts as a sponsor, providing financial support and management expertise to aid in reconstruction. The selection of a sponsor is important not only for financial strength but also for their understanding of regional medical care, future vision, and consideration for existing employees and patients.
M&A can take various forms, including business transfer, merger, and stock transfer (transfer of equity in the case of medical corporations). However, for medical institutions on the verge of bankruptcy, business transfer is often chosen. This is because it allows for the succession of only the business assets, licenses, and employees necessary for operations without inheriting non-performing debts, thus reducing risk for the acquirer.
Process and Considerations for Medical Institution Succession through M&A
The succession of medical institutions through M&A involves a complex process unique to the healthcare industry, differing from general corporate M&A. Here, we explain the main steps and considerations.
Main Process of Medical Institution Succession through M&A
- Consultation with M&A Specialists and Preparation
Analysis of business status, clarification of desired transfer conditions, organization of necessary documents, etc. - Search for Counterparty (Potential Acquirer)
Through M&A intermediaries, search for candidates whose willingness to contribute to regional medical care and management philosophy align. - Execution of Non-Disclosure Agreement (NDA)
Enter into an agreement with the candidate for information disclosure. - Execution of Letter of Intent (LOI/MOU)
Reach an agreement on basic matters such as transfer price, conditions, and future schedule. - Due Diligence (Detailed Investigation)
Conduct comprehensive investigations covering legal, financial, tax, medical regulations, human resources, real estate, and more. - Execution of Final Agreement
Based on the due diligence results, agree on final terms and execute the contract. - Closing (Settlement and Business Handover)
Payment of consideration, procedures for changing licenses and permits, and handover of assets and liabilities are carried out, completing the M&A.
Particular attention should be paid to the succession of licenses and permits and the re-acquisition of facility standards. In the case of business transfer of a medical corporation, the acquirer generally needs to obtain new establishment permits and medical corporation establishment approvals. Furthermore, “facility standards” for medical fee billing are determined by the hospital’s size, equipment, and staffing levels. After M&A, it is necessary to re-verify if these standards are met and reapply if necessary. Delays in this process can affect medical fee claims.
From a tax perspective, the treatment of capital gains tax and business tax is also an important issue. The tax implications vary significantly depending on the type of medical corporation (with or without contribution-based equity). Expert advice from professionals well-versed in medical M&A is indispensable for these complex procedures and tax treatments.
Learning from Success Stories: Keys to Successful Reconstruction and M&A
There are several common keys to successfully reconstructing or transferring a medical institution through M&A. While specific individual cases cannot be cited, the following points are generally considered important.
✅ Early Consultation with Specialists: Consulting with specialists knowledgeable in M&A and business reconstruction before the business deteriorates is paramount. This broadens the available options and increases the likelihood of achieving reconstruction or transfer under more favorable terms.
✅ Transparency in Information Disclosure: Accurately and transparently disclosing the business status and financial information to potential acquirers and creditors builds trust and leads to smooth negotiations.
✅ Employee Understanding and Cooperation: Fully considering the continuation of employment and treatment of employees, and carefully explaining the necessity and benefits of M&A, minimizes disruption in the workplace and ensures a smooth transition.
✅ The Greater Good of Contributing to Regional Medical Care: Having a clear vision that M&A is not merely a business sale but contributes to the continuation and development of regional medical care is essential for gaining understanding and cooperation from stakeholders.
In particular, by considering business succession through M&A at an early stage, many cases can be handled relatively smoothly, avoiding the loss of credibility and procedural complexities associated with civil rehabilitation. This can also be a desirable option from the perspective of preventing gaps in regional medical care and minimizing the impact on patients.
Types of Medical Corporations and M&A Strategies: The Impact of Contribution-Based Equity
Medical corporations are broadly categorized into “medical corporations with contribution-based equity” and “medical corporations without contribution-based equity” based on their establishment structure, which significantly impacts M&A strategies. Since the revision of the Medical Care Act in 2007, newly established medical corporations are generally limited to those without contribution-based equity (including those with fund contributions).
For medical corporations with contribution-based equity, “transfer of equity” is an M&A option. This allows for the integrated succession of corporate management rights and property rights, with the transfer price determined based on the valuation of the equity. However, if this valuation exceeds the net asset value of the corporation, there is a risk of being subject to inheritance or gift tax. Furthermore, changes in members require notification to the prefectural governor.
On the other hand, for medical corporations without contribution-based equity (such as specific medical corporations, social medical corporations, or fund-contributing corporations), the M&A method of equity transfer is not applicable as there is no equity. The main forms of M&A are “business transfer” or “merger.” In the case of fund-contributing medical corporations, there may be an obligation to refund the funds contributed at the time of establishment, and the handling of these funds becomes a key issue in M&A negotiations. While funds are generally subject to repayment obligations, their source is the residual assets of the corporation, making repayment difficult in situations close to business failure.
Regardless of the type, M&A succession requires complex procedures and specialized knowledge, making collaboration with experienced M&A support organizations indispensable.
The management of medical institutions plays a vital role in supporting the foundation of regional healthcare. When facing a management crisis, appropriate judgment and professional support can determine the future of the hospital and regional medical care. At M&A Medical, specialists with a deep understanding of the unique circumstances of the healthcare industry will propose the optimal reconstruction and succession plan tailored to your institution’s situation. Please feel free to consult with us first.
Consult M&A Medical for Medical Succession
M&A Medical is a specialized M&A and business succession support service for medical institutions. As an M&A support organization certified by the Small and Medium Enterprise Agency, we support the transfer of clinics and medical corporations struggling with a lack of successors, as well as strategic acquisitions, on a success-fee basis.
- Initial consultation and preliminary assessment are free
- No upfront fees or monthly charges (success fee only)
- Strict confidentiality (proceeds after signing NDA)
- Service available nationwide across all 47 prefectures and all medical specialties
Please consult us early, even if you are just looking to understand market value, have no successor, or are considering joining a group.