After the Health Care M&A Deal, There Are Real Risks to Navigate

For prospective buyers and sellers in the private equity provider and outpatient space, deal flow is calmer and more normalized. Many PE-sponsored physician practice management, or PPM, companies passed—or are approaching —planned exit dates.

PPMs and physician partners must decide whether to grow, hold or aggressively court buyers to buy their ownership stake.

These decisions come amid an era of risk and uncertainty. There’s fallout from the Steward Health Care System LLC bankruptcy and the antitrust roll-up case involving US Anesthesia Partners. The US Department of Justice is pursuing health care fraud and criminal and civil enforcement actions.

Beyond Due Diligence

Buyers and sellers are left wondering what to expect and ways to temper risks. Post-acquisition monitoring presents a strong risk prevention measure.

Acquirers and sellers should prioritize a post-deal clean-up process that emphasizes monitoring operations and compliance. To avoid losses on earnings or compensation, focus on:

Audits of billing and coding practices. Health care revenue depends on proper billing and coding practices. PE buyers must ensure the company’s revenues over time are legitimate and comply with government and commercial payer rules.

Look for undisclosed compliance risks inviting government inquiries, clawbacks or penalties. Stay current on state scope-of-practice laws, supervision requirements, and Centers for Medicare and Medicaid Services payment rules. Monitor and self-audit coding, billing and collection practices, including potential upcoding, lack of medical necessity, or unbundling.

Maintaining a clean audit reduces surprise post-closing overpayment liabilities.

Compensation and provider ownership structures. The forms of economic participation by physicians and providers are the most complex pieces of the transaction. This may include indirect physician ownership or synthetic equity arrangements in upstream management entities or their controlled affiliates, and ancillary profit sharing among physician groups. Underlying structures can change after the deal closes.

Federal Stark Law and Anti-Kickback Statute and state-specific analogues are complex and generally bar the exchange of remuneration that could directly or indirectly induce referrals or other business generated between parties.

What may have been compliant when the deal closed may not be today. PPMs should ensure that their ownership, compensation structures, and benefits provided to physicians and other referral sources are compliant, are reviewed by counsel, and are following written agreements.

It’s crucial to monitor physicians and other types of production or incentive compensation. These formulas can be complex. Accounting and payment processes must be consistent and render accurate readings to avoid provider friction and noncompliance.

Getting compensation right can bolster retention and prevent disputes and litigation with providers. Less friction means less regulatory interest and better post-close economics.

Changes in the law could undermine the investment thesis that underpinned a deal. Medicare reimbursements changes could reduce cash flow and cause second-deal valuation challenges.

Changes in enforcement priorities, state licensing, or scope-of-practice rules could threaten profitability, change corporate structure, or force divesture of some service lines.

Scrutiny regarding price increases and transparency may change the profitability of highly valued services, so companies should monitor:

• Corporate Practice of Medicine. Known as CPOM, this legal doctrine generally prohibits corporations or non-physicians from owning medical practices or hiring physicians to provide medical care. Restrictions still exist after a deal closes and can expand to create constraints that limit PE value-creation strategies.
  
  Such concerns may arise in integration and conflicts over physician autonomy. Overly aggressive or percentage-based management fees or control mechanisms could trigger state CPOM or fee-splitting violations, physician lawsuits, and consequent regulatory actions and physician licensure enforcement.
  
• Noncompete agreements. Post-acquisition departure of key physicians is one of the top threats to a PE firm’s healthcare investment. Many states have started dismantling or limiting the scope and enforceability of physician noncompete laws, particularly for physicians who didn’t participate in the original deal.
  
  A well-drafted noncompete or non-solicitation agreement can be a valuable preventive measure. The goal is to avoid a situation where enforcement of a noncompete is even necessary.
  
• Transaction review laws. Pre-closing approval requirements are just the beginning. Restrictions around operations are primed to expand. There may be price transparency measures or caps or minimum staffing requirements.
  
  Oregon’s health care transaction review law, ORS 415.500, and similar measures, can require pre-closing notices and approvals from state agencies, post-close reports on prices, quality metrics and access, among others. Compliance costs rise, operational efficiency may be stymied and roll-up strategies could slow down.

Federal, State Regulation

The Trump administration has shifted federal priorities from prices and quality of care to “waste, fraud and abuse.”

The Comprehensive Regulations to Uncover Suspicious Healthcare initiative would apply across CMS programs, such as Medicare and Medicaid. Exposure to False Claims Act violations could increase for some health care providers.

DOJ’s Joint FCA Working Group’s enforcement focus include Medicare Advantage plans, drug and device companies, skin substitute suppliers, durable medical equipment suppliers, labs, pain clinics and opioid prescribers. Each could implicate physicians and providers and/or their ancillary offerings.

DOJ also has broadened its Corporate Whistleblower Awards Pilot Program to reward tips related to fraud schemes involving private health insurance plans.

Meanwhile, state health care regulatory enforcement has been less. Compared to their federal counterparts, state attorneys general rarely enforce all-payer anti-kickback and Stark law state analogues.

We anticipate an uptick in enforcement and contractual breach actions relating to violations of such laws. Massachusetts’ H. 5159 legislation expanded the scope of liability, marking a substantial departure from traditional corporate protections. It appears targeted at PE firms and other owners to hold them accountable when they become aware of state violations and fail to act.

Moving Forward

A well-executed legal and compliance game plan, implemented after a deal closes, can prevent catastrophic losses due to costly penalties, exclusions from federal programs, or license revocations, but also enable growth.

A strategic, integrated compliance program across the platform can expand earnings, support adaptations to avoid regulatory headwinds, increase provider retention, justify management fees, and boost equity values for a platform exit.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

David ‘Beau’ Haynes and Douglas Wolford are health care lawyers at Phelps.

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