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www.beneschlaw.com
Shannon L. Drake, Esq.
Senior Vice President and General Counsel
Aveanna Healthcare
Alan E. Schabes, Esq.
Partner, Healthcare and Life Sciences Group
Benesch, Friedlander, Coplan & Aronoff LLP
M & A Transaction in Home Health and
Hospice: Compliance and Due Diligence –
How Do I Get This Right?
Health Care Transactions Overview
Stages of Health Care Transaction
Exploration
Letter of Intent
Initial Due Diligence
Agreement Stage
Pre-closing Due Diligence
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Health Care Transactions Overview
Transaction
Post-closing Integration
At what stage or stages does Compliance/Legal get involved?
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Are you buying or selling?
What type of transaction (merger/acquisition/divestiture) is on the table?
Is there a difference between a merger and acquisition?
Does the type of agreement matter?
One area that will apply whether a company is buying or selling are the
CHOW Rules (42 C.F.R. § 489.18 and relevant manual provisions). CHOW
applies to ALL providers:
Hospitals (including critical access hospitals and long terms care hospitals)
Hospices
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Are you buying or selling?
Skilled nursing facilities
Home health agencies
Assess if this a CHOW situation – did the responsible legal entity change?
Should your concerns be different based on the type of transaction?
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“Due diligence is similar to dating before marriage”
Bill Baker
Partner and head of transaction services for healthcare at KPMG
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What is Due Diligence?
DUE DILIGENCE (www.merriam-webster.com)
1. Law: the care that a reasonable person exercises to avoid harm to other persons
or their property failed to exercise due diligence in trying to prevent the accident.
2. Business: research and analysis of a company or organization done in
preparation for a business transaction (such as a corporate merger).
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What is Due Diligence?
DUE DILIGENCE (www.businessdictionary.com)
1. General: Measure of prudence, responsibility, and diligence that is expected
from, and ordinarily exercised by, a reasonable and prudent person under the
circumstances.
2. Business: Duty of a firm's directors and officers to act prudently in evaluating
associated risks in all transactions.
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Factors Determining Scope of Due Diligence
Structure of Deal
Asset verses Stock
Nature of Provider
Low or high risk
Will Provider Number be Assumed?
Size of transaction
Don’t be fooled by the size
Does the target company have a Compliance Program?
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Factors Determining Scope
of Due Diligence (cont'd.)
Terms of Agreement
Representations and warranties specific to compliance
Right to receive compliance documents
Compliance conditions to closing
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Underlying Premises and
Justification for Transaction
What are you buying?
Home Health –
Skilled nursing and intensive therapy
Personal Care Services
Adult vs. Pediatric
Population Health Management and Wellness
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Underlying Premises and
Justification for Transaction (cont'd.)
Hospice
Inpatient vs. Outpatient
Palliative Care Services
Facility based vs. home based
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Initial Due Diligence
Does your company have a work group?
How often do they meet? How often should they meet? Who leads the group?
Does Compliance have a “seat at the table”?
New division (if acquiring/merging) will be Compliance’s “problem”
Is the problem fixable before the transaction closes?
If the problem is not fixable, this should be a factor in the sale price.
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Initial Due Diligence (cont'd.)
Compliance should participate in Due Diligence Request and look into:
Is there a Compliance Program;
Request target companies’ policies and procedures;
Billing reviews and audits; and
Government investigations and audits:
RAC Audits?
Does the company have a CIA?
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Initial Due Diligence (cont'd.)
Conduct an early pre-acquisition risk assessment on the target.
A pre-acquisition risk assessment could also be used as a lens through which
to view the feasibility of the business strategy and help to value the potential
target.
The risk assessment can be used as a base document and assist in
determining what might be required in the way of integration post-acquisition.
Social Media
Investigate what is out there.
What is the Target company’s reputation?
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Initial Due Diligence (cont'd.)
Antitrust Matters
Potential Successor Liability
Overpayment
60-day repayment
Failed to perform due diligence
False claims liability
Does due diligence/transaction trigger knowledge standard?
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Initial Due Diligence (cont'd.)
Initial due diligence – what needs to be prioritized?
1. Home Health – federal and state moratoriums and 36-month rule
2. Stock/equity vs. asset purchase
3. CHOW requirements
a. State licensing
b. Medicare
c. Medicaid
d. Third Party Payor Contracts
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Initial Due Diligence (cont'd.)
5. Technology review – Software review
a. Electronic medical record software
b. Billing software
c. Patient visit capture technology
d. Employee time and payroll tracking
e. Compliance
f. HIPAA/HITECH
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Initial Due Diligence (cont'd.)
6. Quality metrics
a. Home Health
i. Home Health Quality Reporting Program (HH QRP)
ii. Home Health Star Ratings
b. Hospice Quality Reporting Program (HQRP)
i. Hospice Item Set (HIS)
ii. Hospice Consumer Assessment of Healthcare Providers and
Systems (CAHPS®)
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Initial Due Diligence (cont'd.)
7. Billing and coding review
8. Review of referral source relationships and possible compensation
arrangements
9. Employee time keeping requirements
10. Litigation, Audits and Investigations
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Pre-Closing Due Diligence
Create Compliance due diligence check list
Determine Compliance and Operational key timelines in the integration
process, for items such as:
Regulatory requirements (privacy laws):
Will all regulatory requirements stay the same post transaction?
HR requirements (background screens, exclusions):
What must be in place on day 1?
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Pre-Closing Due Diligence (cont'd.)
Contracts (that have a direct effect on Compliance (will a Transition Services
Agreement be necessary?));
Data mitigation (passwords, emails, HIPAA):
What processes/security approvals need to be in place on day 1?
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Pre-Closing Due Diligence (cont'd.)
Calls with your counter-parts …
Develop relationships and understand history.
Compliance Program process review:
At this point, the basic structure of the Compliance Program should already
be known
Check for all seven elements
Analyze the effectiveness of the program
Ensure the right to audit before closing
Compliance budget
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Pre-Closing Due Diligence (cont'd.)
Board engagement
Training
Hotline
Anti-retaliation
Impose compliance process up front
Employment Matters
Copies of all personnel policies and all employee handbooks
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Pre-Closing Due Diligence (cont'd.)
Copies of all employment contracts (including letters to new hires outlining the
terms and conditions of employment and physician recruitment agreements)
Copies of collective bargaining agreements
List of all employee terminations within last 36 months
List of all employee reprimands, license investigations, suspensions, etc.
Copies of standard agreements which employees are required to sign
(confidentiality agreements, conflict of interests, etc.)
Professional Staff
Current and past medical and nursing bylaws, rules and regulations
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Pre-Closing Due Diligence (cont'd.)
List of all relationships that the target has with hospitals, nursing facilities, etc.
List of all formal medical staff grievance proceedings in last three years and
all pending processes
Physicians
Employed physicians verses independent contractors
List of all medical staff members by specialty, privileges, category of medical
staff
Medical Directors
Contracts
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Pre-Closing Due Diligence (cont'd.)
Compensation
Services required
FMV documentation
Are referrals from physicians tracked?
Are gifts to physicians tracked?
Accreditation
Sales and Marketing
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Pre-Closing Due Diligence (cont'd.)
Medicare Successor Liability
Assignment of Medicare Provider Agreements
CHOW 42 C.F.R. §489.18(c)
An assigned agreement is subject to all applicable statutes and regulations
and to the terms and conditions under which it was originally issued,
including:
Any existing plan of correction;
Has Compliance, legal or clinical reviewed?
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Pre-Closing Due Diligence (cont'd.)
Compliance with applicable health and safety standards;
Compliance with ownership and financial interest disclosure
requirements; and
Compliance with civil rights requirements.
Representation and Warranty Insurance Coverage
1. Insurer due diligence
2. Possible sources of coverage
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Pre-Closing Due Diligence (cont'd.)
3. Coverage Terms
a. Coverage limits
b. Retention amounts and caps
c. Exclusions – VERY IMPORTANT!
i. General Exclusions: R&W insurance policy will generally exclude
matters known to the insured or disclosed on the disclosure
schedules, interim breaches, forward looking statements,
covenants, working capital adjustments, asbestos and PCBs,
pension underfunding or withdrawal liability, the carry-forward
value of NOLs or other deferred tax assets and transfer pricing
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Pre-Closing Due Diligence (cont'd.)
ii. Deal Specific Exclusions (May be removed Subject to Heightened
Underwriting)
a) Regulatory matters (i.e. corporate integrity agreement,
compliance with healthcare laws, corporate practice of
medicine)
b) Data security (cyber breaches, privacy matters)
c) Financial statements (including a buy side QofE)
d) Patient Care issues (abuse/mistreatment of patients, medical
malpractice/ professional liability matters)
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Pre-Closing Due Diligence (cont'd.)
a) Employment law violations (violation of wage and hour laws)
b) Billing or reimbursement practices with respect to Medicare,
Medicaid, and other government payors
d. Cost of Coverage
e. Impact on Escrow - “Commercially reasonable efforts” / “Material
exclusions”
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“Integrating two organization is like trying to build
a rocket while its blasting off”
Anonymous
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Pre-Closing Integration Concerns
Planning and effort put into integration before the closing is critical to success.
Poor post-closing outcomes often start with:
Lack of due diligence leading to surprises
Delay in planning for integration (all effort put into closing the deal, not
digesting it)
Too much (or too little) focus on short-term “cost synergies”
Uncoordinated, leaderless integration
Unrecognized (or ignored) differences in risk profiles and cultures
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Pre-Closing Integration Concerns (cont'd.)
Lack of empowered transition management team accountable for results
Lack of transparency leading to misinformation; distrust from Target personnel
Out of the above, what can Compliance control or at least influence?
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Post-Closing Integration / Divestiture
1. Have a Plan for Stand-up “Day 1” organization and stabilization
a. Commitment to Executing and Managing the Post Transaction integration
plan
b. People: Two Compliance / Legal Departments become one … How do they
fit?
Develop relationships
Evaluate existing policies and procedures
Evaluate “scope” of each department (who handles what….)
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Post-Closing Integration / Divestiture (cont'd.)
What can items can you merge into one and how fast?
c. Process:
Define a step-by-step process to request information, records, etc. post
transition
Create form that indicates the reason for the request, contact
information, deadline, supporting documentations, etc.
Create a quick reference guide for the new operator that provides
important phone numbers, email addresses, processes, etc. for needs
post transition
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Post-Closing Integration / Divestiture (cont'd.)
One point of contact (i.e. team lead or single website/call center) for
communication with the new operator
Helps facilitate information requests and avoids duplicative efforts to
provide information to the new operator
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Post-Closing Integration / Divestiture (cont'd.)
2. Transition Service Agreements (TSAs)
Divested business units often require TSAs in order to ensure business
continuity
Legal may negotiate the agreement, but Compliance/Operations must own
the process
Several areas during transition have compliance implications:
Reimbursement;
Records;
Access to information;
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Post-Closing Integration / Divestiture (cont'd.)
Survey issues
Compliance investigations, etc.
Notifying families/patients
Handling equipment that contains PHI or other sensitive data (i.e. laptop
swiping)
3. Vendor partners
Involve vendors early in the transition process to achieve transition goals /
Identify “common vendors”
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Post-Closing Integration / Divestiture (cont'd.)
Maintain open lines of communication with vendors about transition plans due
to changes in transition dates, expectations, etc.
4. Compliance / Legal Matters in Transition
Identify liabilities that transition to new operator and remain with legacy
operator
Resolve compliance investigations, auditing and monitoring activities prior to
transition to new operator
Determine what compliance risks, if any, will be shared with new operator that
may span both operating time periods
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Post-Closing Integration / Divestiture (cont'd.)
The Compliance Hotline/Posters
Remind employees to remove any hotline posters and other reporting
communication that will not pertain to new operator
Inform hotline vendor of the operation transition date and provide them
with word tracks on how to respond to hotline calls after the transition date
(i.e. Does new operator have a hotline or main number?)
Develop a process to communicate hotline information post transition to
new operator for investigation and resolution
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Post-Closing Integration / Divestiture (cont'd.)
5. Policies - How company policies will be handled during post transition?
Will current operator be required to provide a copy of policies and
procedures to new operator? (if so, how - internet access on the first day
of transition?)
Policy Library – date policies were effective, where they were effective,
when revised…
Intellectual property, copyright and confidentiality implications of sharing
policies with new operator
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Post-Closing Integration / Divestiture (cont'd.)
6. Records – Who, What, Where and How Much….?
Who is the custodian of records and define the date
Who will assume cost to retrieve records post transition and for what purpose,
cap on costs, etc.
Determine where records will be stored for reasonable access
Which records will remain with prior operator vs new operator and for how
long
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Post-Closing Integration / Divestiture (cont'd.)
Develop a packing protocol for operations transitioning to a new owner
What types of paper records will remain on site for new operator vs what
will remain with operator
Provide instructions on how to index boxes of documents, labeling the
boxes, etc.
Provide training and several reminder calls and email about when the
record retrieval will take place
Have an employee from records management accompany records vendor
to retrieve records to ensure every office, closet, etc. is accounted for
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Post-Closing Integration / Divestiture (cont'd.)
7. More Records… Electronic Health Records
Determine what data from the EHR new operators must access post
transition
Work with EHR vendor to determine how to provide a copy of current patient
records to new operator
HIPAA issues of providing an entire copy of database if new operator
never cared for patient
Work with new operator and vendor to define date of new operator’s EHR
database and make sure everyone is in agreement
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Post-Closing Integration / Divestiture (cont'd.)
Define which fields will be copied to new operator’s EHR database
Be aware of risks with sharing a EHR database with new operator and/or
allowing new operator to document in operator’s EHR platform/database
Vendor capabilities to “delete data” and create a clean record vary if the
data is co-mingled; may create future challenges if data cannot be
separated
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Post-Closing Integration / Divestiture (cont'd.)
Define process for access to EHR systems post transition
Surveyors may need access to operator’s database to view pre-
transaction patient records; new operator will need to coordinate access
with operator
Must have a process for access controls and usage parameters for new
operator
Review agreement with EHR vendor regarding access since new operator
is not an employee, contractor, etc.
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Post-Closing Integration / Divestiture (cont'd.)
“Other electronic data”
Determine which systems have data that new operator must access or need
post transition
Consider electronic HR systems (payroll….), electronic business
documents, contracts new operator will assume, etc.
Define how electronic information will be shared with new operator securely
For example, PHI should not be saved on unencrypted thumb drives
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Post-Closing Integration / Divestiture (cont'd.)
Employees should not email company documents to their personal email
account to then access once they transition to the new operator
Work with IT and security department to monitor for this activity
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Speaker Contact Info
Shannon L. Drake, Esq.
General Counsel, Aveanna Healthcare
Alan E. Schabes, Esq.
Partner, Benesch, Friedlander, Coplan & Aronoff LLP
aschabes@beneschlaw.com
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