In a typical investment or acquisition, the buyer conducts due diligence of the target company. Due diligence involves extensive review of the target company’s history, finances, and operations, including its contracts, customer and supplier relationships, and employees, to understand the risks and opportunities associated with the investment or acquisition. Healthcare companies have their own unique requirements and structures, so a buyer’s due diligence must consider and thoroughly evaluate these additional factors to mitigate the buyer’s risk post-closing.

  1. Professional Corporations and Limited Liability Companies. Some states require that a company that performs professional services, including medical services, organize as a professional corporation (PC) or professional limited liability company (PLLC). While the requirements vary by state, PCs and PLLCs that provide medical services must be owned and controlled by licensed medical professionals (some states require full ownership and control, while others require majority ownership and control). Buyers should understand whether the target company is organized as a PC or PLLC and how the investment may affect its ability to continue to qualify as a PC or PLLC post-investment. In addition, the parties may need to restructure the transaction to ensure continued compliance post-closing.
  2. Licensing. State and federal law require a medical provider and the individuals providing medical services on its behalf to obtain and maintain certain licenses to provide medical services and to enroll in the Medicare and Medicaid programs. The particular requirements vary from state to state and the types of medical services that the target company and its individual providers provide. The buyer should review applicable licensing requirements of the target company and its individual medical providers and confirm that they are properly licensed and are in continued compliance with applicable state and federal licensing requirements.
  3. Coding and Billing. Medical providers maintain coding and billing systems to identify and request payments from Medicare, Medicaid, insurance providers, and other third-party payors for the medical services they provide. The coding and billing processes are complex, and pervasive errors can lead to incorrect financial projections and potential costs associated with repayment obligations. A buyer should audit a target company’s billing and coding practices to ensure that they are reliable and accurate.
  4. False Claims Act Compliance. Medical providers that are enrolled in Medicare or Medicaid must be eligible for reimbursements under these programs. Medical providers submit reimbursement requests through the Medicare and Medicaid programs to obtain reimbursements for the services that they provide. However, because these requests are made to government entities, they are subject to False Claims Act liability. If a provider knowingly submits a false or fraudulent claim for payment, the provider may be subject to False Claims Act liability, which includes significant fines and potentially treble damages. The buyer should thoroughly evaluate the target company’s billing and reimbursement systems to ensure that they reflect accurate recordkeeping and reimbursement requests.
  5. Transfer of Medicare Enrollment. Depending on the transaction’s structure, an acquisition or investment may qualify as a change in ownership (CHOW) under the Medicare program. The buyer may opt to request approval of the CHOW by submitting certain documentation to the Centers for Medicare & Medicaid Services prior to the closing of the transaction, or the buyer may choose to reject the prior Medicare enrollment and apply for a new one. Applying for a new Medicare enrollment may protect the buyer from some pre-closing risks associated with the target company’s Medicare enrollment, but will likely result in delayed reimbursement payments under the Medicare program. The buyer should evaluate the risks associated with the target company’s Medicare enrollment and determine whether to retain it or apply for a new Medicare enrollment.
  6. Government COVID-19 Related Funding. In recent months, the federal government has established many financial support programs to assist companies during the coronavirus pandemic (COVID-19), including the Paycheck Protection Program and the Provider Relief Fund under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Participation in these programs requires medical providers to make certain certifications to the federal government and to use the funds for specific purposes; the Provider Relief Fund, for example, requires that the medical provider use funds under the program to prevent, prepare for, or respond to COVID-19. If a target company has received funds under any of these programs, the buyer must carefully review the target company’s certifications to ensure that it was eligible for the proceeds and its use of the proceeds to ensure that the target company has complied with the programs’ requirements.
  7. HIPAA Compliance. The Health Insurance Portability and Accountability Act (HIPAA) has strict requirements on how medical providers maintain, store, and disclose protected health information (PHI). Violation of HIPAA’s requirements can lead to significant fines and financial penalties. The buyer should evaluate the target company’s recordkeeping systems and internal controls to ensure that it is HIPAA compliant and that the target company has entered into appropriate business associate agreements with third parties that may have access to PHI, including, for example, its information technology supplier.
  8. Kickbacks. The Anti-Kickback Statue (AKS) and the Stark Law are federal statutes that prohibit certain types of referrals involving financial incentives. These statutes apply to a wide range of activities and, if violated, can lead to significant liability. A buyer should thoroughly evaluate the target company’s contracts and supplier and customer relationships to ensure they comply with the AKS and Stark Law, including, for example, that any contractual relationships are commercially reasonable under the statutes or decidedly fall within an available safe harbor. For more information on the specific prohibitions contained in these statutes, please see Matthew Kreiser’s blog series on the subject.

If you have questions about investing in or acquiring a medical provider and performing appropriate due diligence on a target company, please contact Francis Massaro, the author of this blog, or a member of PilieroMazza’s Business & Transactions Group. Frank leads the Firm’s Healthcare Industry Team.