Blog Post

Regulatory Due Diligence for Mergers and Acquisitions is Critical

Richard P. Kusserow | January 2019

High Return on Investment in M&A Due Diligence

News reports regarding health care mergers or acquisitions are emerging almost daily. Some of these mergers and acquisitions are monumental in scope and create novel ventures and visions for the health care industry’s future. Many are also of a smaller scope, including those involving hospitals or practice groups acquiring physician practices. This upward trend is likely to continue in 2019 with more consolidation and integration among hospitals and physician practices, and in the areas of pharmacy chains and drug manufacturers.

There are two common types of due diligence: financial and legal.  However, the highly regulated nature of the health care industry requires a third type: regulatory due diligence. This type of due diligence is required to address potential inappropriate billing to federal health care programs, which may result in nasty surprises and trigger disclosures of regulatory violations, refunds of millions in overpayments, and potential fines.

Financial and Legal Due Diligence

Prior to a merger or acquisition, due diligence reviews generally focus on financial accountability and reporting and legal liabilities. An independent accounting or audit firm will focus on reviewing the balance sheets, income statements, audit reports, cash flow statements, and projections when measuring financial viability of a business. Many very competent public accounting firms specialize in this type of work.

For legal due diligence, the focus is on examining the entity’s structure, business permits, and legal obligations and exposure in the areas of contracts, real and intellectual property, securities and financial obligations, tax, employment and labor, environmental impact, consumer protection, and external consultants and/or advisors. An abundant number of law firms provide high quality legal due diligence services.

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Health Care Regulatory Due Diligence

Financial and legal due diligence is critical during a merger or acquisition, but regulatory due diligence is also critical in the health care space. The health care sector is highly regulated by numerous complicated state and federal laws and regulations, many of which are heavily enforced by government agencies that can impose serious civil or criminal penalties. Unless regulatory compliance is properly assessed, a purchaser of a facility or company may inherit serious regulatory liabilities, which may drag an entire enterprise into litigation, government scrutiny, or investigation.

Additionally, the acquiring or merging parties may spend significant time and resources on a deal that falls through or must be undone because the health care regulatory risk was not properly assessed early enough. With the right experts that are accomplished in due diligence regulatory compliance reviews, these reviews pay for themselves. The reason is simple; regulatory compliance experts know exactly where to look for any weaknesses, which allows them to have a thorough compliance review process without having to do a costly and burdensome “deep dive.”

Due to the high enforcement and business risks, and the ability of health care compliance experts to provide regulatory due diligence, it is difficult to imagine why a party looking to acquire another health care entity would not want an expert to perform a regulatory due diligence.

Priority of Regulatory Due Diligence

A high priority for any regulatory due diligence review should be the examination of arrangements with referral sources. These types of arrangements have been the highest enforcement priority of both the Department of Justice and the Department of Health and Human Services, Office of Inspector General for many years. It can be devastating for an acquiring party to discover systemic issues in this area late in negotiations or even after the merger or acquisition has taken place.

Additionally, a review of claims processing systems and controls should be another top priority.  Such reviews ensure that no billing improprieties or regulatory violations are waiting to be discovered by Centers for Medicare & Medicaid Services contractors or enforcement agencies. Benefits of regulatory due diligence are obvious, whether they are used to identify and evaluate risks posed by a company before acquisition or, following an acquisition, to further explore possible risk areas and take corrective action when necessary.

Strategic Management provides expert consulting services in many compliance and regulatory areas. For more information on health care regulatory due diligence, contact Dr. Cornelia Dorfschmid at [email protected].

About the Author

Richard P. Kusserow established Strategic Management Services, LLC, after retiring from being the DHHS Inspector General, and has assisted over 3,000 health care organizations and entities in developing, implementing and assessing compliance programs.

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