Appropriate Due Diligence Eases M&A Transactions

Coming off a banner year for mergers and acquisitions in the healthcare industry, it’s easy to believe most deals are smoothly completed. Yet, those who have been involved in M&A activity would be quick to say even the most successful transactions are time consuming and disruptive. Going in, the hope is that any short-term pain will be alleviated by long-term improvements.

Cindy Reisz, member at Bass, Berry & Sims PLC, recently shared thoughts on four steps sellers can take during the due diligence phase to ensure the process works as efficiently as possible. Reisz, who serves on the American Health Lawyers Association Board of Directors, has deep transactional and operational experience within the healthcare industry.

Keep Compliant

“One of the things we see with clients is those who have a true culture of compliance in the way they operate get through the process more easily,” Reisz observed.

She said hospital systems that routinely have lawyers and auditors look at financial arrangements and compliance with the Stark Law and Anti-Kickback Statute won’t be taken by surprise when a potential buyer delves into their history. “The method by which you are conducting your business is not going to expose you to risk,” she said of that type of operational mentality.

Besides, Reisz added, it’s how day-to-day business should occur anyway. “You never want to have to be concerned if the OIG comes to visit or a payer wants to do an audit,” she pointed out.

That said, such operational transparency doesn’t always happen. Reisz noted in recent years buyers have increasingly made self-disclosure a condition of closing the transaction.

“They do not want any lingering liability coming with the closing,” she said of buyers requiring sellers to self-report any potential Stark violations to the Centers for Medicare & Medicaid Services and anti-kickback issues to the Office of the Inspector General.

She added such assertions by a buyer could really put the seller in a tough position … especially when the seller disagrees that any wrongdoing has occurred. Potentially a seller might have to choose between reporting an incident they believe to be unwarranted or losing the deal.

“If you’ve crossed all your t’s and dotted all your i’s along the way, you shouldn’t run into any potential violations that would require self-disclosure,” Reisz said of having business practices and transactions stand up to scrutiny.

Centralized Data

Sellers can make it much easier for buyers to work through the myriad details that make up any healthcare business – from a physician practice or health system to a services company or consulting firm – by centralizing information. Reisz said the process is much more manageable if physician contracts, lease arrangements, valuations, equipment leases and other useful data points are kept in a central repository.

This is especially important for health systems that have hospitals across the country, large physician practices with multiple offices across a region or industry service providers that have a presence in a variety of locations throughout the nation.

While it’s important to have centralized records in order to prepare for the scrutiny that comes along with selling, Reisz said really it should just be standard operating procedure. Having data from multiple sources and geographic regions flow into one location allows a clinical or service provider to more easily analyze operational efficiencies and share best practices across the enterprise.

Consider the Culture

“I think it is important for both parties … both the buyer and the seller … to look long and hard at what is the corporate identity of the other party,” Reisz said.

There is more than one ‘right’ way to strategically conduct business, but if two potential partners operate in very different manners, it could be difficult to marry the two philosophies.

A common example, Reisz said, might be trying to merge two hospital systems where one utilizes a highly integrated physician employment model and the other relies on medical director agreements or co-management arrangements where physicians also maintain an independent practice. “It will be hard to merge those two different models. It can be done, but it requires a lot of effort,” Reisz noted. “If you’re more integrated, it’s hard to buy into that other strategy … both work, but they are very different approaches.”

Reisz added that given the expense to unwind a failed merger, she thinks both parties are increasingly paying attention to the issue of culture on the front end.

Careful Communication & Competition

Reisz noted the Affordable Care Act encourages integration, but she said some providers are struggling to find the sweet spot where they have enough critical mass to drive quality and take advantage of operational efficiencies that lower costs without being so large that they quash all competition. Size alone isn’t the tipping point, Reisz said; instead, it really comes back to perceived competitive advantage.

“When you have a community that had some competing entities, and one dominant provider begins to acquire many of them, those acquisitions would probably get you on the radar,” she said of attracting the attention of the Department of Justice or Federal Trade Commission.

Reisz continued, saying it is critical to “make sure when you are considering a merger that may give you market power that you are very careful not to use that market power in an anti-competitive manner.”

Casual emails discussing pricing or competitive advantages have derailed more than one deal and landed involved parties in hot water. Reisz said potential partners “should be very careful in how they describe their transaction and the goals. Raising prices,” she stressed, “cannot be one of your main goals.” Not surprisingly, payers are particularly sensitive to any hint of collusion when it comes to negotiated contract rates or of price fixing.

While it’s clearly necessary the potential buyer be provided a general financial picture when evaluating whether to proceed with a transaction, Reisz said fee schedules and specific contracts should not be shared. Instead, information should be provided in aggregate or given to a third party ‘clean team’ to de-identify, analyze and summarize the sensitive data.

It’s important to realize that not every deal gets done. “Think of yourselves as competitors until the transaction closes,” Reisz advised.

RELATED LINKS:

Becker’s Hospital Review: 9 Strategies for Robust Healthcare Due Diligence