Potential Pitfalls For the Health Care Private Equity and Family Office Investor

by Glenn P. Prives

Despite the uncertain reimbursement environment and the strict regulatory scheme, health care remains an attractive industry for private equity and family office investors.  On the other side, health care providers facing a murky future and looking for capital to expand their platforms are looking for the opportunities presented by private equity and family office investors.  The resulting marriage can prove fruitful for both parties.

Investors are typically aware of the tough regulatory environment in health care, but are not necessarily up to speed on what they should be looking for when conducting due diligence on potential provider partners.  Here are a few topics to keep in mind:

  1. Coding:  Providers have been scrutinized in recent years for improper coding, upcoding and insufficient documentation in the medical record to support the code provided for the service rendered.  The code directly corresponds with the reimbursement provided to the provider for the service.  Improper coding, whatever the reason for it, can result in recoupment of payments, civil penalties and criminal penalties.  An investor should engage a qualified and experienced coding consultant to audit the potential partner’s coding practices.
  2. Compliance:  Some providers are required by law now to have robust compliance programs in place while others are not required, but it is strongly recommended and may become required for all sometime in the near future.  Compliance programs consist of more than just a binder of policies and procedures collecting dust on the shelf; they include regular audits and risk management programs.  Experienced counsel should be engaged to review and audit a potential partner’s compliance program.
  3. Self-Referral and Anti-Kickback Laws:  These laws place strict limitations on relationships between providers and other potential referral sources.  What may be the valuable keys to the success of a provider (and, ultimately, an investor’s returns) exists in a dangerous minefield and tangled regulatory maze.  This goes beyond the well-known federal Stark Law and Anti-Kickback Statute and extends to various state versions of those laws, some of which mimic their federal counterparts and others which are completely different.  Experienced counsel should be engage to evaluate all relationships which may implicate these laws.
  4. Corporate Practice of Medicine Doctrine:  See Cecylia Hahn’s March 13, 2014 post on this blog for a complete explanation of this concept, but also be aware that many states have some form of this doctrine.  Of course, the doctrine is not identical across the states that employ it.
  5. Licensing:  Many states require that certain types of health care facilities be licensed and, in some instances, obtain a certificate of need before getting licensed.  It is vital to ensure that the facility has all of the licenses and permits that it needs as penalties for non-compliance can range from daily monetary penalties to complete shutdown of a facility.  Requirements vary from state to state.  Additionally, an investment, depending on the structure, may trigger a change of ownership or control that requires notice or consent of a licensing authority in connection with the investment.
  6. HIPAA:  For many years, HIPAA existed with little enforcement.  The regulatory scheme was out there, but a violation did not appear to lead to any consequences.  No more.  Heavy penalties for violations have been publicized in recent years, from hundreds of thousands of dollars to tens of millions of dollars, from small practices to large institutions.  When a breach happens, the government has seized upon that opportunity to examine whether the provider is strictly following HIPAA, including have the required policies and procedures in place and conducting risk assessments.  Experienced counsel should be engaged to review and audit a potential partner’s HIPAA compliance program.

The above are just a few of the areas that a potential investor should evaluate when exploring a transaction with a potential provider partner.  The rewards may be achievable in the partnership, but it is important to conduct the appropriate due diligence to avoid the possible penalties.