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Jennifer Malinovsky, Nelson Mullins, Atlanta

Health care is one of the most heavily regulated industries in the country. Myriad federal and state laws relating to reimbursement, licensure, privacy, referrals, investments, compensation and tax-exempt status, among others, significantly impacts all aspects of a health care provider’s business, including governance, operations, financing, provision of patient care and strategic considerations. In this current age of health care sales, acquisitions, mergers, joint ventures, equity investments and roll-ups, regulatory compliance plays a particularly important role with respect to transaction structure, business strategy, purchase price and closing efficiencies. Numerous considerations, including oversight from multiple government agencies, regulation of referral relationships, provision of certain ancillary services, changes in insurance coverage and reimbursement trends and successor liability (which are not present generally in other industry arrangements) are integral to a health care transaction and can significantly impact the financial terms of a deal. A robust compliance program and a knowledgeable compliance officer provide important value not only in a provider’s day-to-day business operations but in the structure and negotiations of a business transaction.

At the outset of structuring any health care transaction must be an assessment of the potential applicable regulatory requirements, including certificate of need review, attorney general approval, provider-based regulations, obtaining new provider numbers, change of ownership applications/notifications, corporate practice of medicine, fee-splitting and self-referral limitations. Moreover, in evaluating the merits, and in negotiating the terms and conditions of a transaction, both buyers and sellers need a detailed understanding of a seller’s existing compliance status. In any corporate transaction, due diligence is important. In a health care transaction, however, an appropriate due diligence review can significantly frame the value of the investment in key areas of regulatory compliance, including:

  • Physician contracting and compensation: Check whether the terms of all physician arrangements are consistent with applicable regulatory requirements. Review whether, where required, compensation is commercially reasonable, fair market value, and not based on the volume or value of referrals. Check if independent third-party valuations have been conducted and/or survey compensation data reviewed.
  • Material vendor contracts and leases: Confirm that the terms and conditions of vendor contracts and property and equipment leases are consistent with applicable regulatory requirements.
  • Government oversight and investigations: Ask whether the seller is a party to a corporate integrity agreement. Require disclosure of any pending investigations and notifications of potential investigations received by the seller from the Department of Justice, the Office of the Inspector General or the Centers for Medicare and Medicaid Services. Determine if the seller is engaging in any activity that is a current focus of investigation by government agencies. Evaluate whether the seller has appropriate record retention policies in place with respect to all aspects of operations including finance and litigation.
  • Coding and billing audits: Ask if the seller participates in regular billing and coding audits. Determine if audits are conducted internally or by an independent outside third party. Assess whether the seller is compliant with the 60-day rule regarding any Medicare and Medicaid overpayments.
  • Compliance programs, licensure, permits: Review if the seller has appropriate compliance programs in place. Check whether the seller’s accounting and financial reporting policies and procedures are consistent with applicable regulations. Determine if staff are trained in relevant compliance areas and instructed with respect to hotline and other reporting processes. Review the seller’s policies and procedures to ensure consistency in practice with the terms of the compliance programs. Confirm that licenses, certifications, accreditations, and other permits are up to date.
  • Privacy Matters/HIPAA and HITECH: Check that the seller has business associate agreements in place where needed. Ask whether regular privacy risk assessments have been conducted.
  • Tax matters for nonprofit health care providers: Check whether the seller engages in any activities, directly or through subsidiaries, that may have a negative effect on its tax-exempt status.

Involving compliance officers of both a seller and buyer early in a transaction can ensure that issues are identified and addressed in the most efficient and effective manner for both parties. Sellers who proactively manage their compliance can often better position themselves prior to a transaction to ensure a more financially attractive offer and efficient closing process. They can address identified gaps or inconsistencies in a timely manner and avoid potential buyer-directed resolutions, which may be expensive and time-consuming. They can also project a more trustworthy and confident operational position to a buyer. On the other hand, buyers who understand a seller’s compliance status can avoid (or at least minimize) potential unforeseen post-closing financial liabilities, which could adversely impact their financial and strategic goals. They can better position themselves in contract negotiations to cover potential indemnification exposure, decrease the likelihood of post-closing delays in receivable collections and potential overpayment refundings, and minimize the likelihood of post-closing billing and coding audits and government investigations.

Compliance is an integral part of a health care provider’s business. Failure to comply with applicable rules and regulations can have a significant negative impact on the short and long-term financial position and ultimate viability of a health care provider. Material noncompliance (and even immaterial noncompliance in strict liability situations) can result in significant fines and penalties, ongoing government monitoring through corporate integrity agreements, exclusion from participation in government or other third party payor programs and potential loss of physicians and other clinical providers in already underserved areas. Amending noncompliant contractual or lease arrangements can result in adverse changes in revenue flow. Understanding the “business of compliance” can go a long way in preserving the viability of health-care providers and saving a deal.

Jennifer D. Malinovsky is a partner in the Atlanta office of Nelson Mullins Riley & Scarborough,  where she practices in the areas of health-care corporate and regulatory law and commercial lending/finance. She serves on the firm’s executive Committee and formerly served as chair of its recruiting committee and its associates committee.