Jennifer Mannino, Managing Director, Berkeley Research Group, speaks with Jennifer Rangel, Partner, Holland & Knight LLP, about some of the M&A trends and patterns they are currently seeing as they assist clients during and after the acquisition process. They discuss how they advise clients through the process, key due diligence issues that clients need to be aware of, and top warning signs that clients need to address. Sponsored by BRG.
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The following message and support for ALA is provided by Berkeley Research Group, a global consulting firm that helps organizations advance in the areas of disputes and investigations, corporate finance and strategy and operations. BRG helps clients stay ahead of what's next. For more information, visit think brg.com.Speaker 2:
This is Jennifer Menino with BRG Berkeley Research Group. Joining us is Jennifer Ranell, an experienced, highly experienced healthcare attorney at Holland at night. Uh, and Jennifer and I thought it would be, uh, a good topic to address, uh, and compare notes on the m and a activity we're seeing in the marketplace. Our practices are a blended concentration of, uh, compliance, regulatory compliance, healthcare analytics, fraud investigations, and, uh, m and a due diligence. And, uh, Jennifer, I I appreciate that. Well, we have this opportunity to talk through several of the trends and common trends and patterns that we're seeing both, um, in anticipation of an acquisition and, um, some of these, uh, trigger events that we're also seeing, uh, post close when we're helping clients in that integration phase. Um, you know, I thought it would be helpful if we broke this down between the, um, different types of, uh, investor clients we're seeing, right? We have our private equity group, some very sophisticated, some are just, you know, dipping their toes into healthcare. And then we have our healthcare operating companies, uh, who are, you know, their targets are focused more on, uh, integrating new business lines into, um, their model. So I, I wanted to pause there and, and see what, um, what are some of the differences and even similarities that you're seeing between, you know, private equity, whether, again, sophisticated or dipping their toes and, um, a strategic, uh, healthcare operating company that's incorporating a new business line. Absolutely. I think there are both a lot of similarities and differences. Um, as you mentioned, as far as similarities, I think, you know, regulatory healthcare, regulatory diligence is important. Um, I think from a industry, like if you're talking about a institutional or healthcare industry client that is adding a new line of business, they tend to take an extremely deep dive on regulatory diligence. Um, and then I think that sometimesSpeaker 3:
You'll see private equity firms do that as well, and then other times you may see them, if they're doing a smaller add-on deal, they sometimes scale the diligence to the size of the transaction. So I think a lot of the level of diligence depends on the size of the deal, particularly from a private equity perspective. However, from a healthcare provider standard, I think they're tend to be extremely, uh, conservative in their diligence review and want to make sure that they're doing everything they can up front to try to not, um, uncover issues down the road. Um, although that still can happen,Speaker 2:
Right? Yes. And, and we certainly, uh, see that unfortunately the, you know, we see because we do background checks, um, on the targets. And for us, you know, people are people and businesses are businesses when it comes to the methodology of, you know, who and what your background checking most, I would say most of the, the best information we get is when we're, um, communicating with a compliance officer or, um, a transparent, uh, billing manager. But it's not often the case where, you know, we, um, see, you know, the self disclosures and for us, you know, trying to identify if there's any, um, any pattern in fraud claims or QT a cases, which, as we know a lot of QT cases are sealed. You know, we have to go to the actual, um, OIGs office and make, uh, inquiries under the freedom of Information Act to find information that our clients can, you know, identify any patterns, uh, whether you know intentional or not, when it comes to, um, their, their billing practices. And, you know, I was wondering, I was curious when it comes to these healthcare providers who you've mentioned are more conservative in their approach, they typically have, uh, compliance officers, right? And someone is responsible for, um, that administrative, um, billing role when it comes to private equity. We're seeing, you know, less sophistication in the targets, um, and how they're structured. Um, I was curious, you know, what, what trends are you seeing? And, you know, are there any new or, um, added recommendations especially, uh, post covid that, um, you are, you know, advising clients on when it comes to, uh, making sure, you know, the self disclosures are there, or preparing for events post close that no one really, uh, foresaw such as, you know, the oig um, pursuing an investigation.Speaker 3:
Yeah, I think those, those are great, a great points. And yes, seeing a lot of different trends in that, in that area. Um, first I wanted to touch on one thing you mentioned, which was, you know, if you have a rather more sophisticated target that has a compliance officer or officer, I think that does, certainly helps. So one thing I really like to do and try to do, whether they have a compliance staff or not, um, is, is having an in depth kind of inter diligence interview with the billing staff, whether that's the, you know, the head, head of the billing department, um, as well as whoever's kind of responsible for compliance. Now, if it's a small physician office, that may just be whoever the administrative, you know, director or CEO of the firm that really from the business perspective is, or it may be the physician owner themselves. That's who I often get on those sorts of calls in the small, smaller, like one physician or a couple physician office. Um, now in more sophisticated, like home health clients and hospital targets and ASCs, you often do have a compliance officer that you can talk with. But I found that really getting in into those discussions and understanding, um, what are their checks and balances, how are they billing, um, take me, you know, I'll I'll say, walk me through your billing process from the provider to you've, you filed the claim or there's, you know, and even past that, you know, how do you handle appeals or, uh, recruitments and things of that nature. Getting to really understand how they approach their billing and what checks and balances they have in place gives you kind of a good insight into are they, you know, trying to do everything right? How are they staying up to date on what the latest, um, you know, requirements and payer standards are that are coming out and provider manuals and things that are, you know, guidelines that are coming out all the time. So I think that is helpful to really, really understand how they're doing things. So then the, the other thing that we also take a look at is yes, like you mentioned covid. Um, how, how were they billing? Were they doing anything unique or different during covid? We're starting to see a lot of, um, investigations and audits in regards to things like telemedicine, um, you know, laboratory. So was it a physician practice that added a, you know, drive through lab component or an ASC that, um, completed the requirements to become, you know, a, a ho, you know, a hospital, um, or any of the other types of waivers? Did they apply for any waivers? Did they do anything that might, um, have any new actions? Were they doing telehealth, um, in a way that might not have been HIPAA compliant, which there were some flexibilities initially, but just wanting to understand how they did those things. So I think there is, that risk is certainly there and the, the investigations and audits are, are catching up. Uh, we've seen some recent requests out of, even just on a state level, certainly on a federal level, but also, um, state, um, like OIGs are starting to look at some of those things as well. So I, I think there is certainly risk and it's helpful to kind of know what did they do differently? What did they add during the, um, you know, during the pandemic and during the waivers, which, you know, some of them are still in fact. Um, so that I think is important to understand and certainly a trend and something that we have added to our diligence request lists and something we ask about that we certainly wouldn't have asked about before that. Um, I think other kind of things that I would typically focus on trying to get to the, you know, an understanding of where their risk is, is we often wanna look at their, uh, marketing materials, uh, sales, uh, patient, you know, patients, are there any patients on this? Are they taking cookies to physician practices? Just understanding how they're doing that and are they complying with any, um, requirements in order to do so, what, how much are they spending things, getting those kind of questions out there and understanding them is helpful too. So those are just kind of a few of the things that we kind of think about and try to look at. Um, in addition to, of course, the, the background, I mean, I, I as well have done like OIG open records request, but usually by the time you get that information back, um, a lot of times it's, it's too late. The deal's either closed or not. So it's, it's sometimes it's trying to be creative in trying to figure out what the issues underlying issues might be through discussions and through kind of targeted questions and piecing things together. Um, you kinda have to be more creative to try to get some of that information and try to understand where those firsts are.Speaker 2:
Yeah, that's, uh, that's a complex one. We found that the Office of Audit, um, services under the OIG has been, uh, pretty responsive to requests. Hopefully after this conversation there are, they don't get inundated with a bunch of fo year requests. Cause then, then our, you know, we'll, uh, experience lag time there. But, um, as far as the, the, um, the labs in telehealth, um, you know, that you mentioned, you know, is oig, we get this question often and, you know, is oig um, incorporating any new, you know, data mining techniques, if you will, um, to identify these targets. And, um, you know, is it, is there any weight on the fact that these targets could be getting acquired by, you know, bigger institutional money? Um, you know, does, does that affect, um, you know, where, where you're seeing random, we'll call them random audits by, um, any agencies of these labs in telehealth and these freestanding eds that were being set up? Um, during covid?Speaker 3:
I think one, certainly, uh, the OIG as well as, uh, you know, Medicare auditors and the different governmental and payer, uh, auditors have gotten much more, um, proliferated and able to do, you know, very, uh, sophisticated data mining and looking for trends and identifying them. Um, so I certainly think that that has in absolutely increased over the last, you know, decade and or more and continuing to do so as they get more and more sophisticated in how to find what they're looking for and identify concerns. Um, the other thing you mentioned that I think is, it's interesting as well is, is whether they're targeting, I mean, I certainly think that the larger, um, you know, the institution is, uh, the, the larger the company is, the, whether that, particularly whether that's the buyer or the, or the target, that it puts them more at risk. Um, you know, you're, you're gonna be a bigger target if you're on everyone's radar because they've, you know, they've heard about you and you're, you know, a large telehealth company that, or, I mean, I'm just using as an example, not a situation I run into. Uh, but you know, that there are companies that are advertising, they're out there. Um, you, I have a one client not in that area. Um, but that certainly the larger they got, they the more, um, the more attention they got from state governments from, as well as from the federal government. So certainly I think the size of the target and visibility are, are issues as well as the size of the company that's acquiring. Um, so if you have a, you know, a large entity public traded entity, um, regional, you know, or, or national entity that is the acquirer, you know, it's a new line of business or not, I think it certainly puts them at higher risk because they're just much more vis visible.Speaker 2:
Yeah, that, that makes sense. Um, are you seeing any, uh, new criteria under reps and warranties? I know that, um, we're seeing different types of requests and we, um, historically receive from private equity clients as far as, you know, our background investigations go, or, um, just the, the audits that are being done for billing and coding, uh, we're seeing more documentation being integrated as part of that rep and warranty criteria. Are you, I mean, what's, what's the trigger event to that and are you seeing the same thing on the legal side?Speaker 3:
Absolutely. Um, well, I personally continue to, you know, hold my, you know, my standard, uh, healthcare reps and healthcare compliance reps, and in particular bill billing and coding and other types of fraud use and compliance concerns. So we continually are trying to, you know, make sure they are specific enough, but also general enough to cover everything. Um, and as additional issues arise or if something comes up in diligence that concerns us, um, you know, we would definitely tailor that rep to exactly what they're doing or what the concern is. And to that perspective, yes, I think there is a additional amounts of, you know, background. You want the target to confirm that they have looked, you know, and confirm that they haven't done X, Y, and Z. Um, you know, that they are doing, you know, annual billing or periodic billing audits if, if in fact they are. Um, so those sorts of things I think we wanna know and document that if they are doing these things. And for one thing I think that is, is helpful to understand where the risks are when you're evaluating a target from a legal risk perspective, but also helps, um, is helpful if there were any future issues. And I think it's also helpful in the rep and warranty insurance where trying to decrease, um, exclusions, you know, a lot of rep and warranty insurance excludes just blanket excludes billing and coding. I talked to one broker just last week. Um, they have been trying to, and pretty successfully getting some billing and coding back in, but so, you know, to the extent maybe limiting if there is a specific issue identified or excluding just that issue and not an entire blanket exclusion, but that is certainly something that we're also trying to think about is making sure the reps are, are targeted enough, um, thoughtful, tailored to diligence, but also broad enough to cover any concerns that either were identified in diligence or may not have been identified in diligence, but could still be out there.Speaker 2:
I know it's always, uh, it comes down to reasonableness right in, in a transaction. You don't know what you don't know until you've, um, closed on the deal and you're, you know, in the weeds and trying to figure out, um, what the next steps are from an integration perspective. But before we touch on the integration piece, um, you know, you know, what advice would you have to the market pre-close versus post-close, right, again, post close integration, um, you know, new events surface that you, you really wouldn't know until you've bought the business and, um, you're, you're getting involved in, um, integrating all the, the processes and people, but you know, from a pre-close perspective, you know, what, what would be like your top five, um, warning signs, if you will, that need to be investigated versus, um, what would happen on the, on the post close side, which is, you know, uh, could be a considered, I guess, more of a proactive, um, um, approach.Speaker 3:
Sure, I mean, in looking just exclusively at the, at the target and not thinking about how they're going to be, you know, integrated in, which I think has its own world of issues as you were mentioning. Um, but just looking at the target, I think some of the biggest issues are, I certainly always recommend, uh, a billing and coding sample audit. So at least you, if there are any high level trends, you're hopefully going to pick those up. You, you're not guaranteed to, but it kinda gives you some sense, certainly, um, as I mentioned before, a diligence compliance interview where you can ask those detailed questions and understand exactly how they're handling things, who reports to who, how does the compliance program actually work, you know, reviewing and understanding their, their compliance policies. And it's pretty easy when you start looking at'em to know whether they just pulled it off a shelf where it's been gathering dust or if maybe, you know, it is a living breathing document as it ought to be. So sometimes you can tell that by, just by looking at it and re and reading it as well as then by asking them questions. If you follow it up with a diligence interview, um, you know, we always look at, at audits, um, try to get a sense of whether there are any investigations out there. Uh, and then ask them, you know, is there anything, one question I typically will ask in the, at the end of the compliance interview is, you know, is there anything that we haven't asked that you think we ought to, or that you're concerned about in your own, you know, running of your own business? Um, sometimes those open-ended questions can be really helpful in, in getting them to say, well, yeah, actually I was wondering about this, or, um, you just never know. Sometimes they say absolutely nothing, but sometimes you do get some information that you might not have gotten another any other way. Um, obviously the background checks and, you know, exclusion checks are extremely vital and important. Um, those are probably my top things I would say to really focus on with the target. I think, you know, you can usually get a pretty good sense, certainly contracts too. We wanna, we wanna understand if there are any, you know, and kick back our stock stark law risks, um, or if you get into a review of the physician employment agreements and looking really closely at how comp is structured and is it, does it comply with Stark Law? Cuz that has, um, that comes up a lot,<laugh>, you look at the, you'll get into the weeds of the physician contracts and realize that, you know, maybe they're not quite structured the way they ought to be. Um, so those are some of the main things I focus on in regards to the target. I do think it's important as you're looking at the target to also think about how they're going to become part, particularly in a situation where it's not necessarily a private equity buyer or they're not rolling into an ongoing company. Um, but they are, you know, being acquired like, um, you know, nowadays we have, you know, large, you know, health plan and payer clients that are acquiring healthcare providers and medical device and pharma companies that are getting into the, that world as well, more into the provider world. So you're seeing all these new lines of business or you know, value based care lines being added that are, um, that you have to kind of think through, well how, how does the integration and use of these, of this target by the acquirer raise any risks? What type of regulatory risks does it raise? Are there fraud and abuse concerns? Is one gonna be a referral source for the other? And is that, are there any firewalls we have to put in place to make sure that structured appropriately or doesn't raise fraud and abuse concerns? So there's, there's a lot of, I think, things that you should think about in a diligence stage too, because you may have to ask different questions during diligence depending on how they plan to integrate that, that entity.Speaker 2:
Yes. And we, we are seeing a trend of, um, platforms pursuing investments to replace subcontractor relationships or vendor and supplier relationships. So this, um, these concerns of, uh, fraud and abuse and having, uh, a designated compliance officer and, um, like you said, a living in, uh, breathing compliance work plan that's, um, you know, critical in these, um, new lines of business. Um, is there anything else that, uh, like, you know, again, top, you know, top trends that you're seeing post close integration from a fraud perspective or investigation perspective, that has now become part of that due diligence checklist, right? It's, I know in our industry doing investigations, um, you need that, you know, trigger experienced event lessons learned, uh, in order to, you know, take a litigation approach to, uh, an m and a due diligence checklist. And I'm wondering if, especially, you know, during covid and post covid, I know you touched on, uh, on a few practices, but has there been anything where, um, you know, something new that has come up in the industry from a legal due diligence perspective that really hadn't been incorporated or contemplated? Um, you know, pre pandemic?Speaker 3:
That's a good question. Um, I think you, you certainly see a continued movement not necessarily related to the, to the COVID 19 pandemic, but, um, it's continuing through it and probably increasing is the, you know, value-based care being an increasing focus. I, I also agree with the trend. I've certainly seen quite a bit of replacement of vendors and subcontractors and trying to bring more things in house and provide them not just to for themselves, but also then to provide them to other, other entities in the market, which I think is, is interesting from a diligence perspective. I think, uh, you know, one question we're always interested in is whether the target is going to continue to use all the same like compliance policies and billing policies and software that the acquirer or that the target had in place. And just kind of, cuz it makes a difference how, how you, you still have to review them very closely from a risk perspective, but sometimes if they're gonna be changing them out, that kind of impacts how, how you think about it when you're reviewing them. As far as trends, I mean, I think it really comes back to just really understanding if their, if their business practices changed during the pandemic and how, how they might have changed. Did they take advantage of any waivers? Did they end those practices? Um, how did, how did that transition go? And then from a li like from a licensing perspective, one thing we've run into quite a bit is there were a lot of licensing flexibilities, um, during the pandemic and some, there's a few that are still in place in some states, but for the most part, a lot of'em have, have been terminated. But things like practicing across state lines and ability to, um, not seeking a license or to seek a temporary license, um, every state had different requirements. So, you know, having done a 50 state review on those issues, um, there was a wide variety of approach and depending on the sides of the company, they may have taken the approach that they weren't overly concerned about. You know, did the, did the, all their providers did to be licensed in every state in which they were providing, you know, say telehealth or some other service into, uh, so that's an issue that we look pretty closely at is understanding, um, and it's something we've always looked at, but I think that changed, you know, even more focus as it became, there were more flexibilities during the pandemic, so people were looking less at, um, did they have to be licensed in, you know, x, y and Z states as opposed to, well we're, we're providing a service and a doing to provide it and not as worried about it, which I think today we know would create quite a bit of risk. And we knew that before the pandemic too. Um, cuz every state law requires you to be pretty much licensed in the state in which the resident, um, is sitting. So I think that's been an issue that has kind of evolved over the pandemic and I think it's gonna be an issue of continuing risk and, and particularly looking at how they handled it and did they handle it correctly during that timeframe and are they handling it correctly today. Um, another issue that comes up quite a, a bit unlicensed, um, like licensed providers is looking at if they are licensed in multiple states like a pharmacy or, or you know, different types of providers, home health that may hold licenses in multiple states. Are they, um, are they reporting any issue in one state to other states? Cause you end up with a, an approach where if they get disciplined in one state and don't report it to the 49 other states, um, they can get disciplined again for that. Or even if they do report it, they can be disciplined for having the issue in the first state. So sometimes there's that kind of, um, approach that just, you know, know bleeds across the country if you're not looking at it carefully. So we typically like, like to see that they have reported everything that needed to be reported and any, you know, penalties that were gonna be issued have already been issued and just understanding those sorts of things.Speaker 2:
Yeah, no, we've, uh, we've, we have found it difficult getting feedback from the licensing agencies themselves because, uh, like for example, if we're, uh, background checking a practitioner, there's, um, an adverse event in their profile before the renewal of license, which could potentially, um, lead to, you know, suspension. You know, we have, we, you know, don't, um, you know, ask, uh, agencies, you know, uh, tell us how this criminal activity will affect this specific practitioner's license that, you know, we don't do that, but when we make an inquiry even to get, um, you know, a copy of the licensing application when you're not a practitioner yourself and looking into examining, um, what the future risk is for a practitioner to even hold the license, um, you know, it's, it's been difficult to have, um, agencies, um, give us, you know, a commentary on it or even share with us, uh, application files altogether, um, even, you know, as part of a public records request. So I can see on the regulatory compliance side, you know, fortunately, you know, we haven't, um, dug into all 50 states from a background check perspective, but I know our regulatory teams have have made, um, similar, you know, assessments, um, to, to get that information in place. But for us, when we're dealing with providers, uh, you know, if their licensure is on the line, it's difficult to get an opinion from the state until that license application is, is filed and the self-disclosure is made of any, um, you know, potential criminal activity that we're seeing. The whole landscape of healthcare seems to, uh, be changing quickly in accessibility to information. Um, are you finding the same from a legal due diligence perspective? Is, you know, are, do we, are we expecting any new regulations that can affect, you know, our payer clients?Speaker 3:
I think it's hard to know until it comes out. Um, it's, it's certainly, it's helpful to get that, um, sense of what might be coming down the horizon. Um, you know, one thing that we find particularly, probably more so on the private equity side, as they're often very, um, concerned with what, what might be coming from a payment rate change. Um, you some of that information you can, you can certainly clean from, like on the Medicare side, from, you know, proposed rules and things like that. It can be a lot harder when you're, when you have clients that may be operating in multiple states and are trying to think about what, um, what those changes might be in say, 10 or 15 states or more and what might be on the horizon for, for payment reductions or complete, you know, reworking of different systems. So that's the kind of thing where we often will turn to, um, you know, work with a, a, a consultant or an agency that has kind of that insight into multiple states, which, um, like brg, which, um, we don't necessarily have, although I've made those calls,<laugh> spend a lot of time calling state Medicaid agencies trying to get information. Um, not always that fruitful.<laugh>Speaker 2:
Might be best to call on a Friday before three 30<laugh> when we, we get, we, uh, see some positive results when we're reaching out to agencies.Speaker 3:
<laugh>. It's a good tip.Speaker 2:
Yes. Uh, well, I mean this is, uh, hopefully, you know, helpful to our audience. Certainly, you know, I love the collaboration and exchanging notes, um, with you both, you know, online and offline. Was there anything else, um, Jennifer, that you felt, you know, we, we need to point out to the market, um, from the perspective of, you know, m and a warnings? Um, you know, uh, as far as like the due diligence process is concerned,Speaker 3:
Um, maybe not so much from the due diligence perspective. I mean, I think, I think the most important thing in the diligence process is to be very, very thoughtful and to follow the rabbit trails where they lead<laugh>. Um, if you uncover one issue, then to continue asking questions and, and see what information you can get and, and if you're not getting the whole story from the, from the documents and from the data room to, to have a call and really ask those questions, I found that to be the, the most helpful. And then I think the other thing I would add is that no matter how diligent your diligence is and how careful and, uh, insidious you're, you can still run into issues post closing and, and certainly, um, it's, it's not, I think it's helpful to educate, particularly private equity investors who may not, who are, as you said, are just tipping, dipping their toe in the, in the healthcare, uh, market and don't have a lot of experience that no matter what you do, those risks are still out there. Healthcare is a, you know, it's a high risk industry. There's a lot of regulation, there's a lot of enforcement, there's a lot of investigations and inquiries. Um, false claims act risk. So it's important to understand that I think no matter how much diligence you do, which is still very key because you wanna pick up everything you can pick up in the beginning, you often aren't gonna know until you get, you know, boots on the ground within the target post closing and can see what's going on sometimes. And, and, you know, there are bad actors that may do do everything they can to cover something up and you won't really realize or, you know, or they're, or they're trying to, you know, increase their numbers to get a higher evaluation. So, you know, I'm not saying that's out there a lot, but there, or there's something unintentional. We certainly run into that quite a bit too, uh, where you figure out, you know, a year or two down the line that there was this, um, you know, error being made, a billing error of some sort that wasn't being handled appropriately. And you have to think about, well, self disclosure questions, um, who do you report to? Is it an issue where you can, it's a handful of claims or even hundreds of claims which you can identify them on a claim by claim basis and report those, or is it something where you actually need to, um, do some sort of extrapolation and report that? And there, the how you do that and how you report that can be different based on what the issue is and how broad it is and the dollars you're talking about, as well as, um, whether it's extrapolated or not, because how the repayment works differs with both of those. So I think it's something to think about and, and it helps to think about it upfront in regards to identification and escrow. Will there be an identification escrow? How are you going to handle it? Um, is there a structured, you know, payout or things of that nature where there might still be money, um, available to stand behind the identification. So I think those are all things to think about as you're structuring a transaction and working through the diligence.Speaker 2:
Thanks Jennifer. Lots, lots of, uh, knowledge sharing there. Uh, I appreciate your time and, and again, Jennifer Ranel Holland and I, um, it was great, um, talking to you and I look forward to, um, keeping in touch and comparing notes as, uh, as the this market ever shifting, changing healthcare market evolves.Speaker 3:
Yes, me too. This has been a great discussion.Speaker 4:
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