Mergers and acquisitions are risky business. Throw in antitrust laws, Stark Law and the False Claims Act and a deal can implode long before it hits the table.
In today’s M&A market, due diligence is the name of the game, said healthcare attorney Tim Gary, CEO of DW Franklin Consulting Group. “In this atmosphere, nothing is more important than investigating the background of the company you’re looking at,” said Gary. “You’re certainly looking for a strategic and cultural fit in a merger; but if compliance or billing baggage is out there, you can see a good acquisition turn to a nightmare on a dime.”
Due Diligence
Gary said CMS and the Affordable Care Act have increased the need for compliance-related due diligence. “The aggressive enforcement environment intended to combat fraud and abuse has had unintended consequences, and now fraud is being looked for around every corner,” said Gary. As a result, recoveries have gone up 30-40 percent annually.
Due diligence begins with an intense look at a company’s money patterns. Fortunately, red flags don’t necessarily take a deal off the table, and even worst-case scenarios can become M&A success stories with proper legal counsel.
Gary and his colleagues recently handled a hospital transaction where the previous owner had been convicted of Medicare fraud and was awaiting sentencing. Through meticulous due diligence, the buyer was able to purchase bricks and mortar without acquiring the company’s debt, license, contracts or payer number.
Unfortunately, not all M&A deals have a happy ending. Legal stories abound of buyers who didn’t realizing they were acquiring liability – or how much – until it was too late. Gary said it’s imperative that buyers work with attorneys who specialize in healthcare. “Strong due diligence means knowing how payer systems and CMS regulations work because you can’t make it up as you go,” Gary warned. “If someone’s working their first hospital deal, it’s amazing how quickly they can get themselves into trouble without realizing it. You want to do due diligence on your lawyers and advisors just like you do your future company.”
He also warns clients not to get too married to a deal. “Listen to that little voice,” Gary cautioned. “If doesn’t look and feel right, figure out a different way to get it done or walk away.”
Stark Law & Other Regulatory Risks
Nashville attorney Ken Marlow, chair of Waller’s Healthcare Department, said regulatory risks are among the biggest threats to a deal. “Stark Laws have strict liability for failure of technical compliance,” said the veteran healthcare attorney.
Oftentimes those include unintentional but potentially pricey oversights, like a system still operating under an expired lease agreement. The amount of potential overpayments can be extraordinary, especially with a large hospital system with thousands of contracts. “These are quantifiable legal risks with serious financial implications,” said Marlow. It’s critical for buyers to self-report any findings revealed during the due diligence process. “When you self-report, the government often says that, because you came forward on your own accord, the financial liability will be much lighter related to those actions,” Marlow explained.
Due diligence can be a tedious and expensive process, and it can takes years to hear back from the government after self-reporting. Still, deals often go through with indemnification provisions in which both parties agree that the seller will be responsible for such liabilities. Whistleblowers reporting potential False Claims Act violations, as well as significant anti-kickback violations, have proven to be the most significant in terms of jeopardizing a deal and racking up substantial legal expenses.
In an era of heightened healthcare transaction scrutiny by the FTC, it’s important to understand potential antitrust implications and challenges. Marlow advises clients on both sides to mindfully identify constituents within the community who might perceive themselves to be adversely affected by the deal. “Many of these problems center around payers claiming two combined organizations will have too much leverage,” Marlow said. “You need to be able to articulate why it won’t be disadvantageous for the payers. Make sure they’re in your target audience when you announce it and schedule a discussion. While they may not be happy, you’re better off having those discussions on the front end and perhaps avoiding a challenge by the FTC.”
Avoiding Common Pitfalls
Another common mistake, Marlow said, is for both parties to “gun jump” by acting as if they’ve already integrated prior to signing the agreement – a tempting position for financially distressed sellers with fewer resources.
“The seller will often rely on the buyer to provide operational and other advice, which can be perceived as making decisions on behalf of the seller before the transaction closes,” he said. “The FTC can look at that as change of control of that facility prior to consummation of the transaction.”
Marlow educates clients on the importance of building parameters regarding roles and integration activities. Other common mishaps include misunderstanding of underfunded pensions or out-of-state conversion laws between non-profit and for-profit companies. Laws are often state specific and give the attorney general significant power since deals often center around protection of charitable assets. “Financial risk is ultimately the biggest threat to mergers and acquisitions so do your due diligence from the standpoint of scrubbing financials hard,” Marlow concluded.
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