Lori Foley, Office Managing Principal, PYA, speaks with Jay Dewald, Partner, Norton Rose Fulbright, about recent trends and developments related to health care acquisitions. They discuss the Biden Administration’s approach to private equity in health care, diligence and the impact of government payers, examples of Travel Act indictments, state approaches to private equity, and key takeaways related to diligence. Sponsored by PYA.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
Lori Foley, Office Managing Principal, PYA, speaks with Jay Dewald, Partner, Norton Rose Fulbright, about recent trends and developments related to health care acquisitions. They discuss the Biden Administration’s approach to private equity in health care, diligence and the impact of government payers, examples of Travel Act indictments, state approaches to private equity, and key takeaways related to diligence. Sponsored by PYA.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
Support for A HLA comes from PYA for nearly 40 years, PYA has helped clients find value in the complex challenges related to mergers and acquisitions, clinical integrations, regulatory compliance, business valuations, and fair market value assessments and tax and assurance. PYA is recognized by Modern Healthcare as one of the nation's top 20 healthcare consulting firms, and by inside public accounting as a top 100 accounting firm. Learn more@ppyapc.com.
Speaker 2:Hi, good morning. My name is Lori Foley , and I am a principal with PYA, a National Healthcare Consulting and accounting firm. I lead P'S Revenue and Compliance advisory service line, and I'm excited to be joined here today with Jay Dewald to talk a little bit on a hot topic in the compliance space. A little bit about my background. I have spent 30 years in healthcare , uh, spent eight , uh, approximately eight years working for a very large employed physician network. And then the last 22 years as a consultant , uh, the majority of my time here with PYA focused on compliance matters, both for employed physician networks and private practices, physician practice operations, revenue cycle, really a a hybrid of, of areas that hit the, the healthcare space. And excited to spend some time with Jay . Jay Dewald . Jay , do you want to introduce yourself?
Speaker 3:Sure thing. Um , my name is Jay and I'm a partner at Norton Rose Fulbright, and I'm also , uh, the firm's head of Healthcare Investigations for the United States. I am a former , uh, assistant US attorney out of the Dallas and Fort Worth offices of the Northern District of Texas, which is a very, very vigorous healthcare enforcement environment up there. Uh, during that time, handled all types of , uh, healthcare matters. I was the healthcare fraud coordinator for the district, and , uh, handled securities fraud, public corruption, everything, white collar that you could. I've been , uh, in private practice now for , uh, gosh, almost nine years. Uh , crazy whenever I hear myself say that. But , uh, practice now is, is very heavily focused on , uh, healthcare , um, enforcement issues, false claims act, grand jury , uh, whatever, whatever kind of government enforcement or private civil enforcement , uh, for healthcare providers. Uh, we handle it. So that's, that's kind of what we're doing now.
Speaker 2:Absolutely. And, and Jay, as we were talking, there were a myriad of topics that, that we were debating on discussing. They really, I think we kind of coalesced around acquisitions of, of acquisitions in the healthcare space, specifically related to physician practices. Um, and, you know, a lot of traditional diligence that goes into that, I think related to the False Claims Act, civil enforcement we're seeing an , a significant uptick in those acquisitions and , and assisting , uh, attorneys such as yourself and and others in , in that diligence space on the front end. And then often if there are issues identified how to remediate those issues, whether it's through improved processes and , uh, scenarios within, within the operations of the healthcare organization or in the response to the government , um, as we go through. But as we were talking, there was just a lot of , uh, material for us to, to really think about a lot of activity in this space. Um, I know one article I've read recently said that PEs private equities are estimated to comprise about 35 to 40% of the healthcare acquisitions in in 2023. Um, and we just see that, you know, continuing to increase it probably feels a little heavier in some healthcare segments than others, but that interest by private equity and healthcare investors, for some, you know, they have a , a great portfolio. They have a lot of experience in healthcare. I think for others, healthcare feels safe, maybe from an economic and , um, a recession perspective. You know, everybody says healthcare is recession proof , but I don't know that they come in with that historical appreciation for the complexities and risks that come in healthcare. What are some of the things you're seeing or thoughts that are crossing your mind related specifically to private equity and some of these other investors?
Speaker 3:So, you know, what we're seeing is, is that this administration , uh, the Biden administration far more than the previous administration is, is really laser focused on private equity. There is a level of skepticism from this administration for , uh, private equities involvement in the healthcare space that is , um, it's, it's, it's really kind of breathtakingly skeptical. It, it's not just a , uh, a Biden administration thing because we've recently seen , um, a bipartisan congressional inquiry , uh, from Senators Grassley and White House concerning private equity , uh, involvement in healthcare and potential, you know, negative patient outcomes. Um, and , and I think the, the real headline grabbing enforcement actions from the Biden administration have really been, and I trust , focused , focused , um, some criminal , uh, some civil , uh, the, the, the criminal enforcement has resulted in a number of jury acquittals , uh, which is, which is interesting , uh, because , uh, the DOJ antitrust persists in, in those , uh, enforcement matters. But I don't think it's exclusively focused on antitrust. And we've seen, i I , I think healthcare providers should expect , um, false Claims Act ke tam whistleblower focus, as well as, you know, department of Justice , uh, you know, non antitrust criminal focus on, on, on private equity. Um, and I think those focuses would be , uh, based upon flawed compliance or performance incentives that lead to patterns of patient harm or, or billing fraud such as upcoding. Um, and then, you know, one of the things, Lori , that you mentioned was , um, that some private equity has experience with healthcare, and so they, they have a better appreciation for how heavily regulated this space is. Um, but sometimes you get , uh, folks who are new to healthcare and they don't fully appreciate that some things like a commission structure, which is perfectly acceptable in selling cars or , uh, or other businesses is, is viewed with such skepticism by the government as a potential kickback that , um, you know, not fully appreciating , uh, some of those intricacies of, of the regulatory regime for, for healthcare can be real problematic for private equity. And, and frankly, I, I kind of think the government views , uh, the new to the healthcare space explanation as kind of almost a red flag, although I don't know that it should be, but I think it often is by them .
Speaker 2:Yeah, I agree. I think when we see , um, and I, I think as we'll talk about , uh, through our conversation today, where there are opportunities for those new to healthcare to show that they're coming in and, and doing their diligence through hiring competent counsel , hiring consultants, those pieces to help them really understand. But even in the last couple of weeks that I've had conversations with some that are newer to healthcare, and it's, you know, let's just get to the business case and let's talk about how it should be from a business perspective, and, and that's well and good , um, but in healthcare, that business case is just different. And , uh, those risks, just like you talk about from a commission's perspective, and , um, it's, you know, I just wanna, I just wanna bill Medicare. Well, there's all these rules that come with that. There's liability that could go back six years that comes with that. Um , and , and I think , think it's just understanding how to navigate that process to, to do a good deal and , uh, and tructure yourself . We see some that are very, have become very robust and , and created very robust compliance infrastructures. It permeates through the organization . You see that tone of the top that the seven elements of a, of a compliance program that the DOJ is looking for just is there and others that it's , um, you know, we'll get to that later on. We've gotta get the transactions done and, and it's an afterthought. So I think we'll talk about some of those risks as , as we go through. I know one way that I feel like some , uh, some people approach the transactions is really evaluating that impact of government payers kind of bifurcating the, the government payers from the commercial payers so that, you know, the focus is on, like, for example, when we're assisting with diligence, we're doing coding and documentation reviews compared to Medicare coding and billing guidelines, operational compliance assessments based on the 60 day rule and how overpayments are addressed. Um, those types of things that really have their foundation tentacles from an operational perspective, but they're really seated by that, that government perspective. What does Medicare expect to see in these processes? But as you and I were talking , um, there were some, I think that, you know, there's, that risk expands beyond just the government payers. What are your thoughts between due diligence and then some of those additional risks?
Speaker 3:So, you know, the, the pre-transaction due diligence process is , is not often suited towards a full throated analysis of what are, what are the , some of the compliance issues. Um, and this really is, due diligence really is kind of the ultimate second guessing situation for the government. Uh , the government's hindsight is, is always 2020 on these things. Um, the , the first question that they'll have for you is, you know , uh, was your due diligence sufficient? Um, did you, what did you do to identify compliance issues? Did you, did you check with the compliance hotlines or the complaint functions or, or whatever kind of compliance function at the, at the , uh, entity that you're looking to acquire? Um, and you know, if the answer to that is, is no, that's a problem. Um, you know, the worst thing you can do , uh, in a transaction is to ignore , uh, compliance issues generally. Um, moreover, if, if you identify a compliance issue , um, it's even worse to ignore it. Uh, it's almost, it's almost indefensible. And so I think then the, then the government second guessing goes to the, to a second level, and that is, okay, you've identified compliance issues. Was , was your response sufficient? Um, and this goes back to a point that, that you made earlier, Lori , and that is the , uh, importance of involving experienced counsel, particularly if you don't have a strong background in healthcare. Uh , it's, it's been my experience that the folks who wing it , uh, and, and, and don't , uh, hire quality council experience counsel to, to look into compliance issues , uh, are the ones who place themselves in some, in some hot water here. Um, and I think, I think that leads to the first point of, did you engage counsel and experts to, to analyze the compliance issue or issues? And I think that will help you make the first of a potentially , uh, difficult decision if a compliance issue is identified. And there are , uh, significant liabilities that could be associated with that. You know, one of the things that I've advised multiple , uh, private equity entities is, is don't fall in love with the deal. Uh , have the discipline to walk away if, if what you're acquiring , um, has a, a significant issue there and you're, you're effectively inheriting a potential criminal , um, most likely civil liability, you know, that's gotta be part of your risk analysis. And then, and then really that leads to the next level of analysis is, okay , um, post transaction, what are you gonna do about it? Um, because whistleblowers, relators counsel are 100% gonna focus on your degree of management of that entity post-transaction, you identified a compliance issue. What did you do about it? Did you press pause on the, on the situation, fix it, remediate , um, you know, having a controlling voice in that surviving entity is, is going to be viewed as , uh, and then if the compliance issue continues, that is, that is the hook that we've seen the DOJ use to , um, to argue for private equity liability , um, for post-transaction , um, compliance issues. Um, how did you manage it there ?
Speaker 2:And I think , I'm sorry. I was gonna say that, you know, going into explicitly, I think you're referring to being named as a defendant in these cases, right? Because of the, the controlling stake that they have in the business and, and, and how they are , um, the influence that they, that they wield post transaction .
Speaker 3:Yeah, that's right. You know, if you're just a, if you're purely an investor, you know that , that there really shouldn't be any liability associated with that. It's, it's when it's when you have some , uh, a degree of management and control and, and you make that decision, right , to continue with that compliance issue , uh, either without remediation, without sufficient remediation , uh, I should say sufficiency is always in the eye of the beholder. Who is the DOJ ? Uh, you know, short of pressing pause and, and resolving it on the spot, I'm, I'm not sure they'll, they'll be satisfied or relators counsel would ever be satisfied with that. But, you know, recently the DOJs compliance guidelines have , have really been trying to create incentives for, for self-reporting , uh, particularly in the m and a context by , uh, memorializing a, a safe harbor for, for self-reporting. But let me just make this clear about, about those items. Um, those are focused on criminal enforcement , uh, to date, that's ya , that's largely been FCPA , uh, for , you know, foreign Corrupt Practices Act enforcement. Um, but certainly antitrust criminal enforcement is in play. And as, as any, as everyone knows with , uh, any False Claims Act, Keam case, anti-kickback statute or healthcare fraud , um, issues are potentially criminal. And those are at stake in almost every , um, one of those False Claims Act KEAM cases. So , um, nevertheless, I think that a self-report to DOJ to, to potentially mitigate that FCA liability is , is a consideration, but it's a super complex analysis. And, and one thing to add that was just recently , uh, discussed by the DOJ was that they are going to, they're in the process right now of creating a criminal whistleblower program. And I, I think this is gonna be very interesting to see because, you know, as it stands right now in the False Claims Act context whistleblowers and key tams account for 90% of, of the, of the cases that, that are brought , um, if, if there are gonna be incentives for folks to , um, to , uh, also, you know, present potential criminal violations , uh, to the government, then I , I , I think we're gonna start seeing a lot more of the anti-kickback statute and healthcare fraud compliance issues being brought , uh, to Maine Justice and to local US attorney's offices for, for, for criminal focus. It's still in construction mode, but, but there's no question that it's gonna be designed to, to deputize your employees and your competitors as bounty hunters. I, I really, this, this is gonna be very, very interesting to see what this program looks like and, and what these financial incentives look like.
Speaker 2:I know it's one of those where we often say in healthcare, tongue in cheek, particularly in the aspect that we're viewing you and I and and others , uh, in , in the service industry, like we are viewing healthcare. You know, part of our job is to help our clients stay out of the orange jumpsuits. You're saying that could really elevate from a criminal perspective that, you know, it was, it was a part of it before, a component of it, but that that could just continue to escalate.
Speaker 3:Yeah, and you know, it's, it's relatively rare, I think with the , um, with, with the , uh, client mix that, that I have, that that criminal issues really arise. It happens. Um, but I, I, I do think that this is going to increase , um, you know, a criminal focus on, on all not, and, and particularly in the mergers and acquisitions space. Mm-hmm . <affirmative> , but it's also gonna be in everything else. And , and , um, I think this is designed to go back to the Yates memo of 2015, individual accountability. Uh, I , I think they're really trying to bring , uh, executives and medical directors and physicians , um, kind of in line that, that they want this compliance tone at the top and , uh, if you don't have it there, there are gonna be consequences. And now they're , they've got some bounty hunters out there looking to bring those consequences.
Speaker 2:Right. I know , um, again, a lot of the focus is , is from a government perspective, sometimes when we're , uh, doing our diligence activities, we'll see processes in place, in , in medical practices in particular that might violate , um, you know, the traditional terms of a commercial payer contract. Um, and so we differentiate between, you know, areas of risk. But as you and I were talking, you had some other thoughts related to , um, that area in particular in just that avoiding, avoiding Medicare and Medicaid participation isn't enough to shield you from risk. What are, what are some specific examples that, that come to mind for you in that area?
Speaker 3:Yeah, you know, we, we've seen healthcare entrepreneurs in the last 10 years try to figure out a way to avoid anti-kickback statute enforcement. And the idea was, is that they were, they were going to try to figure out some way to financially incentivize , uh, physicians to , uh, prescribe ancillaries , uh, like, you know, MRIs or, or labs or, or what have you , um, you know, DME, you know, those kinds of things. And someone I think at some point tried to try to figure out that , um, avoiding federal payers avoids the federal anti-kickback statute. And, you know, with the passing of cra that's, that's not necessarily the case anymore, at least for labs and sober homes. Um, but , um, what, what they've, what they tried to do was try to create a compliance structure within their , um, their companies to, to avoid anti-kickback statute , uh, to avoid government payers. And , and this has really rarely been successful because usually you've got some kind of government payer , um, reimbursement leaking through, whether it's secondary payer or lesser known government , uh, payer program. But , um, so, so gov federal government money is, or even state government money is, is unlikely to be eliminated , uh, in total. But what this simply did was this shifted their activities towards entirely commercial insurance payers. Um, I think, I think when they eliminated the government money, they obviously reduced the False Claims Act risk because False Claims Act is obviously directed only towards government money and is a statute designed to punish fraud against the government. Um, but we are seeing commercial insurers aggressively litigating these issues directly against the, again, so-called healthcare entrepreneurs, but the, the most aggressive , uh, reaction to the , um, we don't take federal money has really been criminal enforcement. And it's been , uh, using the Travel Act , uh, 18 USC 1952 , uh, which is a Kennedy era anti mafia statute that was , uh, designed to federalize, at least in, in some regard, federalized state , uh, bribery , uh, statutes. Uh , at the time, you know , uh, mafia folks were, were bribing judges, and they wanted to bring those, those, but they wouldn't cross state lines to do it. They'd make phone calls. And so what they wanted to do was, was try to utilize the , um, commerce clause, the , the breadth of the Commerce Clause to bring , um, federal criminal enforcement to a state bribery charge. And so most states have commercial bribery statutes and or patient solicitation statutes. Texas is one of them. And those , uh, at least the case law says that both of those are predicate offenses for , uh, for travel Act. And so, at least in Texas, the enforcement started with the Forest Park Medical case up in Dallas. Um, there is a Fifth Circuit opinion , uh, from late last year. Uh, it's United States v Shaw, it's , uh, SHAH . And in that , uh, the argument was made, Hey, we didn't have the , uh, you know, we tried to avoid federal payers, so we didn't have the intent to violate the anti-Kickback statute, and you can't come back now and, and use a commercial bribery statute when we were in compliance with the federal anti-Kickback statute. Um, and the Fifth Circuit re rejected that argument , um, there is, you not need to know that you are , um, billing federal payers to violate the anti-kickback statute. Um, which I think guts some of the, some of the defenses that, that the defendants thought they had at that point. It's, this has also been, the Travel Act has been used in other Texas federal districts. We've seen it in California, New Jersey, Kansas, and, and Massachusetts as well. I don't think it's going anywhere. I think so long as the commercial insurers , uh, have a voice with federal enforcers , uh, we're gonna see more and more , uh, travel Act , uh, indictments.
Speaker 2:It's interesting. Before our conversation, the , the Travel Act had not been on my radar. Um, but as you walk through these examples, I can see how that will continue to escalate. I think one point you made , uh, that resonated is, is related to the federal anti-kickback statutes and sometimes working with , um, even folks that are not brand new to healthcare, they also forget about the state anti-kickback statutes. So there is obviously federal considerations then , then the state implications are , um, pervasive as well . Um, so you've got that from an a KS , anti-kickback status perspective. But, you know, as we turn back from a private equity perspective, we're also beginning to see some states really honing in on , um, their approach to private equity in healthcare. Uh, for example, in Oregon, they are , there's a house bill , uh, that's being considered that would really , um, minimize the, the ability to use the friendly PC models that are often used to , uh, uh, put it comply in air quotes with the , the corporate practice of medicine , um, rules that I know various state to state and, and have different perspectives. Are you seeing anything else from a state , um, or anything else that might impact how some of these transactions are structured going forward ?
Speaker 3:Forward ? Yeah, the corporate practice of medicine , um, is, is a , is an interesting one. I increasingly seeing civil investigative demands , um, from state attorneys general , um, as well as , uh, DOJ , um, regarding , um, the friendly PC structure. Um, you know, oftentimes I think this is an education process, particularly if, if the private equity or, or whoever the, you know, whoever put the program together, if they scrupulously used , uh, legal , uh, advice to put it together, then it becomes a, a very easy education process with the government to, to explain to them, here's what we did, here's why we did it. Here are the codes at issue, and here's here's how this works. And you're working with your regulator at that point to, to educate them. And, and it can actually be, I mean, you know, slightly expensive, but a , a , uh, a , a good process, you , you establish credibility with your regulator, which is a good thing. Um, but I think the, the real focus of the government concern is that they , that there are non-physicians making healthcare decisions, which is, you know, a hand in glove with the , uh, administration's concerns with , uh, private equity involvement in healthcare to begin with. They , they have concerns that that bottom line thinking of non-physicians , uh, is impacting healthcare decisions of the physicians , uh, revenue targets , uh, incentives or benchmarks to prioritize reimbursement. Uh , those are gonna be areas of, of, of interest to government regulators where you have, you know , uh, private equity involved in a a , a friendly PC model kind of situation. I think, I
Speaker 2:Think that lends to really the, the foundation , um, again, of a com , of a com , good compliance infrastructure within the PE acquisition model itself to, excuse me, evaluate not only individual deals and transactions, but also the corporate structure with which they're going to operate going forward. And again, leveraging , um, strong counsel , strong resources , um, consulting development experience using individuals who are experienced in these areas , um, from within the healthcare space to not start from scratch, if you will, as they are evaluating how they're going to transact and operate and, and set up. You mentioned that tone from the top, and we know in the compliance space that that's just foundational and key. It has to, it has to integrate itself and, and be, you know , um, inherent throughout the organization regardless of, of the level of, of the individual or the staff or the activities within the organization. Really kind of focusing on that diligence piece, the , the initial infrastructure. I think as , as we're coming kind of to an end of our conversation today and thinking about some takeaways for our listeners, for me, it really comes back to that diligence, that diligence on internally as you're setting up your processes and protocols, what the, the foundational platform and practices are going to look like, and then the diligence that's conducted in those deals. I like your, your statement about not falling in love with the deal. We've all seen those and , and I think identifying on the front end, what are walkaway types of scenarios that you find and which ones do you put on the, okay, we're gonna fix it as soon as we own it , uh, perspective , um, remembering that, you know, sometimes diligence gets pushed to the end, and I understand you wanna make sure the finances and economics are gonna work, that you can navigate some of those initial terms, but that also sometimes makes it rushed and not given the attention that it needs, so that somewhere there might be some red flags that need to be probed that gets, it gets hurried up to, to hit within, say, a 60 day LOI , uh, before that expires and such. But really remembering that some of these impacts could, could have, if you, if you take over a tax id, you're doing a stock purchase, you're, you're taking that risk dating back, you know, six years and it takes some time to uncover and discuss what that will look like, figure out what your plan's going to be going forward. Um, and then really addressing on the front end day one, here are the key things that we have to tackle. There are some, there's always a list of things that have to be done day one , uh, post-transaction, but from a compliance perspective and what you do with the information like you referred to earlier, Jay , um, I think is just critical as, as any party goes through mergers and acquisitions in , in the healthcare space.
Speaker 3:I, I agree with that. Um, I think, I think my main takeaway is, is again, going back to that, that tone at the top, the, the increased criminal focus and the ubiquitous presence of whistleblowers and potential false claims act, liability , um, and individual accountability, I think all just kind of , um, really kind of is, creates an institutional pressure on, on the executives and the physicians and the medical directors. And, you know, one of the other lessons from the Forest Park Medical , uh, case up in Dallas is, is that , uh, it, it can't just be papered up. It has to be genuine. If it's not genuine bet the whistleblowers will show up to the government with, with emails or recorded phone calls where executives are calling compliance a cost center or, or other kind of, you know, non-genuine views of, of the importance of, of compliance. Um, when that tone at the top is, is genuine, it really does reflect , uh, on, on every part of the company and its decisions. And it , and that's a, that's a very, very good thing. Um, so I , I really think that , um, the , the genuine tone at the top I think is the main takeaway for me.
Speaker 2:Excellent. Any other closing thoughts?
Speaker 3:Uh, not for me. This has been a lot of fun, Lori . Thank you very much.
Speaker 2:Well , uh, Jay , I really appreciate you participating , uh, with me today in this podcast. We appreciate everybody's time today and hope everyone has a great rest of their day.
Speaker 3:Thank you, Lori .
Speaker 1:Thank you for listening. If you enjoyed this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about a HLA and the educational resources available to the health law community, visit American health law.org.