In the health care industry, the right kind of due diligence is critical.
“Health care providers are heavily regulated, both at the federal and state levels,” says Barbara Pankau, partner and senior health care lawyer with Shumaker, Loop & Kendrick LLP of Tampa. “Many lawyers conducting due diligence are not familiar with the ever-changing health care laws and the ramifications of not following them.”
The consequences of not following these laws mean more than just a slap on the wrist: it could mean criminal penalties and jail time, says Pankau.
Smart Business spoke with Pankau about the importance of conducting a proper due diligence with purchasing or entering into a joint venture with a health care provider, and the steps to take to ensure that all federal and state laws are being followed.
What makes due diligence in health care different than any other business?
The difference is the laws and regulations with criminal and/or civil fines against anyone that does not comply. Things that make perfect sense in other businesses — like arranging referrals — can have serious consequences in the health care industry.
Could you give a summary of some of the prominent federal and state (Florida) laws and regulations that need to be considered when conducting due diligence?
The penalties for not complying with these laws are severe.
The federal anti-fraud statute makes it a crime for anyone to pay, receive or arrange for a referral for Medicare business.
The so-called ‘Stark’ law, which applies only to physicians and certain designated health services (DHSs), says that a physician may not refer a patient for DHS to an entity with which he has a financial interest unless the transaction fits into one of the exceptions explained in the Stark Law and its accompanying regulations.
In Florida, the Patient Brokering Statute provides criminal penalties for activities similar to those covered by the federal anti-fraud statute. The Patient Self Referral Act applies to physicians, and is somewhat similar to the Stark Law, except that the Florida Act applies to any health care service and the Florida Act applies only to physician ownership interests.
Florida also has multiple prohibitions on ‘fee splitting’ with broad regulatory interpretations. For example, a management company that advertises for the health care provider (or otherwise assists in obtaining patients for the provider) engages in an illegal fee split if its fee is based on a percent of revenues of the provider.
Could you explain the unique steps that are necessary to conduct a thorough due diligence of a health care provider?
Some questions are unique to this industry.
Are the licenses current? Have the license holders ever been sanctioned?
When is the renewal date? What ‘change of ownership’ (‘CHOW’) procedures apply?
Do any current activities threaten the accreditation status? What are the backgrounds of the key employees? Have any employee ever been sanctioned under the applicable state or federal regulations?
What could run up a red flag?
Red flags include any current audits or regulatory investigations and any obligation to repay reimbursement overpayments that the business has received in the past. Also, any ‘clouds’ on the licensure of the current owners or key employees, such as limits on their licenses or certifications.
What are the consequences of not conducting due diligence?
The consequences are severe. Even if the investor does an asset purchase rather than a stock purchase, the investor may be subject to civil and criminal penalties if he or she participates in a health care business that violates the many applicable regulations. If the investor is a licensed health care provider, such as a physician, he may lose his license to practice medicine.
What are some of the other considerations when conducting proper due diligence on a health care company before acquisition?
It would be helpful, from a business standpoint, if the investor gained an understanding of the market. This would uncover nuances that might prove detrimental to business. For example, one current market trend is for specialty groups to invest in expensive equipment to provide services that, historically, hospitals have provided (such as diagnostic imaging like CAT Scans, MRIs, etc.). However, there also has been a trend to limit these activities, or there may be regulatory restrictions already imposed.
The Florida Patient Self Referral Act, for example, requires a group practice with ‘ancillary equipment’ — such as an MRI — to meet six conditions before the group can provide services to patients of other physicians.
BARBARA PANKAU is a partner and senior health care lawyer at Shumaker, Loop & Kendrick LLP of Tampa. Reach her at (813) 227-2321 or [email protected].