The Role of the Compliance Office in Mergers and Acquisitions

Health care reform initiatives have accelerated consolidation within the health care industry in a way we have not seen since the 1990s.  Consolidations take a number of forms.  Regardless of the structure, consolidation activities can involve the assumption of compliance risk by the acquiring party.

Current consolidation is taking place in a more complex regulatory environment that existed during the 1990s.  The government has new fraud enforcement tools and has indicated that it is not afraid to use them.  Providers are subject to a much higher degree of regulatory risk than has ever existed.  Additionally, compliance as a separate and distinct professional has developed since the 1990s.

The rise of the compliance profession as a separate and distinct profession from the legal profession has caused a degree of tension between the roles of the compliance and legal professions.  The relative roles of legal counsel and the compliance office continue to be defined.  The merger and acquisition process is one area where those roles collide.

The merger and acquisition process, including the due diligence process, has historically been in the domain of the attorneys.  However, the need to be proactive in regulatory compliance speaks loudly for a strong compliance officer presence on every merger and acquisition team.

Compliance role in an acquisition includes both assessment and integration.  Compliance assesses the effectiveness of the target’s past compliance efforts as a necessary step toward mitigation of the inheritance of past compliance liabilities.  Based on this assessment, the compliance officer will make judgments regarding the potential impact on the structure of the transaction and additional risk areas that may require further assessment.  The scope of compliance due diligence is a judgment call that is most appropriately made in consultation between compliance and legal.  The difficult issue is not whether due diligence should be conducted but rather “what diligence is due” under all of the facts and circumstances.  These decisions require the perspective of both compliance and legal.

If a judgment is made that past compliance efforts have been robust, the compliance officer may be more comfortable with a lower level of risk area audits.  If the target had an “on the self only” compliance program, the compliance officer will likely find it necessary to drill down further into specific risk areas.  The key here is that this decision requires the judgment of an experienced compliance professional.

The second role of compliance in mergers and acquisitions is integrative.  The pre-closing stage is a key time for the compliance officer to integrate the target into the compliance culture of the acquiring entity.  Compliance due diligence will likely include interviews of the target’s compliance department, upper management, and other key employees.  These interviews can serve an important integrative role of introducing the target to the compliance culture of the acquiring entity.  The information that is collected will form the beginning of a compliance “work plan” for the new division and will help the compliance office identify specific risk areas that may require further examination either before or after closing.  The same information will help compliance integrate the new division into its overall compliance work plan.

I do not want to suggest by any means that compliance take over the merger and acquisition process.  A multi-disciplinary team approach, with legal assuming lead transactional role, is most appropriate.  Legal counsel must recognize the value of the compliance office and the separate and distinct skill that compliance brings to the closing table.  In reality, this is the key to the larger issue of division of roles between compliance and legal.  Each is a separate and distinct professional area with a unique skill set.  In the context of a health care organization, each profession depends on the other to fully perform their role.

Compliance Audits in Mergers and Acquisitions

There is a current trend in the health care industry toward mergers and acquisitions.  As providers consolidate acquisition issues, such as due diligence, become major issues.  Transitional attorneys are well versed in the routine of transactional due diligence.  Health care and compliance attorneys are often asked to become involved in defining the appropriate scope of health care compliance due diligence in the context of a merger and acquisition transaction.

The structure of the contemplated transaction has a major impact on the scope of due diligence that should be performed regarding health care compliance areas.  Where the Medicare provider number of the acquired organization is part of the deal, robust audits of billing and compliance practices is necessary to identify any potential false billing or overpayment claims.  In this type of transaction, the acquiring provider will certainly have successor liability for all matters that took place (or did not take place) with respect to the provider number prior to closing.

Even when the provider number is not acquired, the transaction needs to be structured in a way that minimizes exposure to successor liability under state law.  Even when structured in a manner that insulates a provider from past liabilities, as a practical matter, the past methods of doing things will be carried on the acquiring entity following the acquisition.  Billing practices will carry forward for some period of time.  Referral relationships may exist without a written agreement being in place as required under state law exceptions or safe harbor rules.  It will take some period of time to identify specific problems that might be carried forward into the new organization, even under the most robust compliance program.

In any event, the compliance perspective should be involved to provide insight as part of every health care acquisition.  The scope of compliance needs to be appropriately scaled to reduce potential risk exposure to the acquiring organizations.

For more information regarding health care mergers and acquisitions, contact John Fisher, II at Ruder Ware.

Physician integration has been around since the early 1990s; at least I have been working on integration transactions since then.  There was a ground swell of integration transactions in the mid 1990s during the “great Clinton health care reform scare.”  I have a post coming soon that will bring back some memories for some of you from those early days of integration.   I was recently reflecting on how physician integration has transformed over the years.  There are some new laws out there and we have more to go on for legal guidance when structuring provider organizations.  On the other hand, a lot of what lies at the core of physician integration, the part where the “rubber meets the road,” has stayed fundementally the same.  Those physicians and groups who have not already thrown the towel in with a major health care system are looking for ways to stay independent.  In many cases, their best bet is to integrate with other independent providers.

Here are a few insights from a health care attorney that has been involved with physician integration for longer than he cares to mention:

1. Federal and state antitrust laws are still the primary laws governing the structure of these organizations.  Without antitrust laws, physicians would stay in separate groups and just band together informally to contract with managed care plans.
2. You still need to be clinically or financiallly integrated in order to pass the antitrust “sniff test.”
3. There is more definition regarding what it takes to become clinically integrated than there was “back in the day.”  That is the good news.  The bad news is that it is probably more difficult to clinically integrate than we thought it would be back in the 1990s.
4.  Group practices without walls are now called “divisional models” groups and come in all shapes, sizes and forms.  They are still the same thing; but someone thought it would be “cooler” to call them “divisional mergers.”
5. My guess is that a lot of the “divisional mergers” are actually “failed mergers” waiting to be called out because they have only a very minimal amount of actual integration.  A lot of people are trying to slice the pie to thin and we might just see some of these models be put to the test in the near future.  Some of the new divisional model groups are integrated on a shoestring and the FTC is beginning to look at their structure to determine whether they are truly a “single actor” for antitrust purposes.
6. The Stark Law has expanded to govern treatment of designated health services in integration transactions.  Back in the day, when we first started doing these transactions, the Stark Law was new and only applied to one line of service, clinical laboratory service; that is unless you were lucky enough to be in a state like Florida that had its own anti-referral law.
7. Compliance issues have come to the forefront as a significant part of these integration transactions.
8. Just like back in the olden days, there are plenty of people out there who will tell you exactly what you want to hear.  They usually have something to gain from you moving forward into a combined group; even if the combination is on a shoestring.  I am tempted now to go into a “you might just have an antitrust issue” tirade at this point.  But I will hold off on that for a later post.

There is a current trend in the health care industry toward mergers and acquisitions.  As providers consolidate, acquisition issues, such as due diligence, become major issues.  Transitional attorneys are well versed in the routine of transactional due diligence.  Health care and compliance attorneys are often asked to become involved in defining the appropriate scope of health care compliance due diligence in the context of a merger and acquisition transaction.

The structure of the contemplated transaction has a major impact on the scope of due diligence that should be performed regarding health care compliance areas.  Where the Medicare provider number of the acquired organization is part of the deal, robust audits of billing and compliance practices is necessary to identify any potential false billing or overpayment claims.  In this type of transaction, the acquiring provider will certainly have successor liability for all matters that took place (or did not take place) with respect to the provider number prior to closing.

Even when the provider number is not acquired, the transaction needs to be structured in a way that minimizes exposure to successor liability under state law.  Even when structured in a manner that insulates a provider from past liabilities, as a practical matter, the past methods of doing things will be carried on the acquiring entity following the acquisition.  Billing practices will carry forward for some period of time.  Referral relationships may exist without a written agreement being in place as required under state law exceptions or safe harbor rules.  It will take some period of time to identify specific problems that might be carried forward into the new organization, even under the most robust compliance program.

 In any event, the compliance perspective should be involved to provide insight as part of every health care acquisition.  The scope of compliance needs to be appropriately scaled to reduce potential risk exposure to the acquiring organizations.

For more information regarding health care mergers and acquisitions, contact John Fisher, II at Ruder Ware.

Compliance Issues In Health Care Mergers and Acquisitions
John Fisher to Speak at HCCA National Compliance Institute

The Health Care Compliance Association (HCCA) has released the program and speakers for its annual Compliance Institute that is being held at Gaylord National National Harbor, MD (DC Metro Area) on April 23 and 24, 2013. John Fisher will be presenting at the national conference on the topic “Compliance Issues in Mergers and Acquisitions.” John is a member of the Ruder Ware Health Care Industry Focus Team. He is certified in Health Care Compliance and in Corporate Compliance and Ethics. John began his practice in representing health care providers in 1985. John has a depth of experience in health care transactions, provider integration and mergers and acquisitions involving health care providers. He has been involved in provider integration since the early 1990s.

HCCA is a national association of health care compliance professionals. HCCA provides the following description of John’s presentation:

Compliance Issues in Mergers and Acquisitions
John Fisher II, Health Care & Compliance Counsel, Ruder Ware, LLSC
– When will you be liable for the liabilities of an entity you are acquiring?
– What is the appropriate role of compliance in the transaction?
– Defining the scope of due diligence and addressing compliance issues

A complete description of the Compliance Institute program is included on the HCCA web site at the following link: HCCA Compliance Institute 2013