Mergers and acquisitions (M&A) have become commonplace in the healthcare industry. Some M&As are monumental in scope, but most relate to individual hospitals, facilities, or entities. M&As have continued their upward trend through the first quarter of 2017, increasing from 25 to 27 transactions compared to 2016’s first quarter. These additional transactions equate to an eight percent increase in M&As in just one year.
This trend is likely to continue, as health care reform has supported consolidation and integration among hospitals and physician practices. Traditionally, there are two common types of due diligence: financial and legal. However, the healthcare industry is highly regulated, necessitating a third type: regulatory due diligence. Companies use regulatory due diligence reviews to avoid discovering and, subsequently, disclosing regulatory violations.
1. Financial and Legal Due Diligence
Due diligence reviews generally focus on financial accountability and legal liabilities. During financial due diligence, an independent accounting firm reviews and evaluates the balance sheets, income statements, audit reports, and cash flow statements and projections in measuring financial viability.
For legal due diligence, professionals examine the entity’s structure; business permits and/or approvals; employment and labor law compliance; environmental law approvals, permits and compliance; contractual rights and obligations; and intellectual property rights and obligations.
Additionally, legal professionals focus on real property law compliance; securities and financing regulatory compliance; tax exposure risks; consumer protection law and exposure risks; previous and/or current litigation; media reports; and external consultants and/or advisors. There are many competent law firms that can perform this work, but this often overlooks potential health care regulatory and legal compliance issues.
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2. Health Care Regulatory Due Diligence
Diligence is more complicated in the health care sector, as healthcare facilities are subject to a tremendous number of federal and state laws and regulations that govern business conduct. Thus, purchasers can inherit significant regulatory liabilities without reviewing the entity’s compliance with the governing laws and regulations.
Experts with appropriate experience can perform these reviews at a fraction of the time and costs required for financial or legal reviews. Financial and legal due diligence involves the detailed examination of a large volume of information; however, regulatory compliance experts know exactly where to look for weaknesses without having to do a “deep dive.” High on the list for any reviews should be provider arrangements with referral sources. This has 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.
Additionally, review of the claims processing system and controls to ensure that there are no regulatory issues waiting to be discovered by the Centers for Medicare and Medicaid Services contractors or enforcement agencies. In virtually all cases, problems will be identified that ordinarily do not interfere with the acquisition decision. However, unveiling these issues can not only help avoid future liabilities but provides the organization with additional tools to improve negotiation terms and conditions.