Due diligence is often perceived as a mundane part of the mergers & acquisitions (M&A) process, but its importance in healthcare transactions is critical. Due diligence is one of the first steps of any transaction and involves a buyer undertaking an in-depth examination of the target to evaluate the business and uncover potential issues or liabilities. In the healthcare industry, diligence is especially important considering the heavy regulation of the industry, the unique areas of risk, and the significant liabilities that could be imposed upon a buyer if issues and liabilities are not identified before the transaction closes.
Some of the unique areas of risk in healthcare deals, and how to evaluate them in the due diligence process, are provided in the chart below.
What is it?
What due diligence is required?
|Anti-kickback Laws (and state counterparts)
|If reimbursement from government payors is sought, it prohibits the exchange of anything of value in an effort to induce or reward the referral of healthcare services or the purchase of goods.
|Stark Laws(and state counterparts)
|With certain exceptions, prohibits physicians from making referrals of Medicare “designated health services” to any entity in which a physician or family member has a financial interest.
|Compliance Policies and Procedures
|Due to the complexity of the regulations affecting the healthcare industry, most healthcare organizations have compliance policies and procedures.
|Corporate Practice of Medicine (CPOM)
|Many states restrict the employment of physicians by non-physicians.
|The FTC and DOJ have placed increased scrutiny on healthcare transactions that involve consolidation or affiliation.
|Civil Monetary Penalty Laws and False Claims Act
|Prohibits various forms of inappropriate activities, including submitting false claims to the federal government, violating anti-kickback statutes, and failing to return overpayments.
|Patient privacy and data security laws.
|Licensing and Certification
|Depending on the nature of the target company’s business, it’s bound to have various healthcare and non-healthcare licenses, permits and authorizations.
Recent transactions demonstrate the importance of due diligence in healthcare. For example, as part of due diligence, several hospitals that discovered physician contracts potentially violating the Stark Laws have self-disclosed and settled matters with the federal government as part of the closing. Some of these settlements exceeded $30 million, which is a liability the purchaser was able to avoid by conducting due diligence.
In light of the foregoing and the unique considerations in healthcare transactions, it is particularly important to customize your due diligence request list to expressly include the items listed above. That is, buyers beware of the form due diligence request list – it’s not going to work for your healthcare deal. It is also important to understand that if a material compliance issue is uncovered in diligence, the target may be required to self-disclose the violation to the government – which can be fatal to a transaction.
Finally, in addition to typical buyer due diligence, it is becoming increasingly common and recommended that sellers undertake a “defensive due diligence” well in advance of a transaction in order to proactively review the business for compliance with fraud and abuse laws. This allows sellers to address issues up front and best position the company for a more efficient transaction.