Mergers And Acquisitions Leading To Increased Disclosures

Most Mergers and Acquisitions Uncover Issues that Lead to Disclosure to the OIG or DOJ

Mergers and Acquisitions (M&A) take place on an average of twice a week in the healthcare sector. Some involve a single facility while others entail entire systems. The number of mergers has increased in recent years and will likely continue to rise, stimulated by health care reform and the Affordable Care Act (ACA). One interesting result of increased merger activity has been a correlating increase in disclosures to the HHS OIG. In fact, a significant percentage of self disclosures in the last year were in connection with M&A. Although the exact percentage is not tracked, the reason for this is simple. In a heavily regulated environment, such as the health care sector, there is a significant risk that a purchaser can inherit serious regulatory liabilities for not complying with applicable laws and regulations. Failing to uncover these problems in time, often after the M&A, could mean inheriting millions of dollars in overpayments and penalties if later discovered by federal investigation. An essential part of conducting mergers and acquisitions is learning the potential liabilities prior to closing a transaction. This fact underscores the need to determine what regulatory risks and exposures exist. Competent experts assessing risk frequently find issues that should have been disclosed to the OIG, but were not. Many of these issues may be smaller such as technical violations of the Stark Laws or the existence of individuals and entities on an exclusion list; however, some issues prove to be more serious problems that implicate both the Stark and the Anti-Kickback statutes.

Tom Herrmann, a former senior executive in the Office of Counsel to the Inspector General (OCIG) and former Medicare Appeals Council Appellate Judge, provides interesting insights on this subject as result of his government experience and work with due diligence reviews. He makes the following points:

1. Any party considering an acquisition or entering into a merger should not assume potential burdens arising from future government enforcement or regulatory action. This provides an incentive for the acquiring party to force the acquired entity to disclose, prior to the closure of the merger and acquisition, any legal problems that might give rise to potential liability.
2. The issues disclosed during a due diligence review may encompass a broad range of issues, including employing or contracting with an excluded party, a flawed arrangement with a physician, or Medicare or Medicaid overpayments.
3. Regardless of the violation detected in a review, once formally identified, the health care entity has no option other than to disclose and resolve the problem with government officials.
4. If a significant percentage of self-disclosures to the OIG are as result of M&A due diligence reviews, and these organizations make up only a tiny fraction of the universe, how many other events exist that are not being disclosed?

Regulatory Due Diligence

Public accounting firms assess the financial accountability and viability of an entity while attorneys examine a multitude of areas including an entity’s structure; contractual, intellectual and property obligations; securities and financing regulatory compliance; tax exposure risks; and previous and current litigation. It is not uncommon for these firms to have their scope limited to specific areas of expertise which often do not include healthcare regulatory compliance. This limiting factor often leads to a failure in addressing potential problems in the regulatory compliance arena. Regulatory due diligence requires its own detailed set of protocols and can be performed quickly and efficiently to identify areas of risk and vulnerability. Reviews can include assessing effectiveness of the entity’s compliance program; evaluation of internal monitoring of high-risk areas; claims audits and extrapolations; and the ongoing auditing processes of the health care organizations. Regulatory compliance experts will know exactly where to look for weaknesses without having to do a “deep dive” and can perform a review in only a few days, resulting in a fraction of the costs that either a financial or legal review would incur.