Healthcare Contracting During Mergers and Acquisitions – Part 1Part 1: Understand the Risk You’re About to Assume by Reviewing Provider Contracts During Due Diligence
In response to a variety of financial pressures, healthcare organizations are consolidating through hospital merger and acquisition (M&A) activity with hopes of increased efficiency, better cost control, and improved patient care. After hitting a record high in 20171, hospital merger and acquisition activity has remained strong, with five mergers and acquisitions already announced in early January 2020. Feeling the pressure of declining volumes and rising expenses, four Chicago hospitals (Advocate Trinity Hospital, Mercy Hospital & Medical Center, South Shore Hospital, and St. Bernard Hospital) are in negotiations to combine this year.2
Complicating healthcare transactions is the need to comply with a myriad of complex federal and state regulations. Health systems that are planning a merger or acquisition must perform due diligence to identify and protect themselves against financial, regulatory and compliance risks. As part of due diligence for upcoming transactions, several hospitals discovered provider contracts with potential Stark Law violations. Those hospitals disclosed the potential violations and settled matters with the federal government as part of closing the deal. Some of those settlements exceeded $30 million—a liability the purchaser avoided by conducting thorough due diligence.3
M&A legal experts recommend that healthcare due diligence include these physician contract considerations:
The Physician Self-Referral Law (aka Stark Law) prohibits providers from referring patients to receive designated health services (e.g., lab services, radiology, physical or occupational therapy) payable by Medicare or Medicaid from entities with which the provider (or an immediate family member) has a financial relationship. Penalties for Stark Law violations are steep—civil penalties up to $15,000 per incident, and $100,000 for willful circumvention.
The Anti-Kickback Statute prohibits the provision of anything of value (e.g., money or gifts) in exchange for the referral of patients or businesses that will be reimbursed under any federal health care program (e.g., Medicare or Medicaid). Fair market value (FMV) must generally be paid for physician employment and service contracts (e.g., clinical services, call coverage, medical directorships). Total physician compensation that exceeds FMV may be viewed as an incentive or reward for referrals. Penalties for Anti-Kickback Statute violations are expensive—criminal fines of $25,000 and civil fines up to $50,000 for each violation.
To avoid liability for Stark Law and Anti-Kickback Statute violations, legal teams must conduct a comprehensive review of all provider contracts, provider financial relationships, and other contracts to answer these questions:
- Are the provider contracts and compensation structure consistent with FMV and commercial reasonableness?
- Have the provider financial relationships been structured to comply with the Stark Law and Anti-Kickback Statue? In other words, do the contracts include any payment intended to induce referrals?
If the legal team’s review of contracts and provider financial arrangements uncovers compliance concerns, the M&A team must decide how to resolve them—e.g., by disclosure to the government, repayment, or contract revision/amendment.
Carefully reviewing provider contracts and financial relationships is essential at the beginning of the due diligence process to identify potential problems and evaluate their impact on the deal so the terms of the deal can be modified as necessary to account for the identified risk. Reviewing hundreds, or even thousands, of contracts manually is a daunting, time-consuming process. It requires utilizing manual resources that you just don’t have. The review process can be significantly expedited by using contract management software that stores digital contracts in a central database and includes compliance modules and a contract analytics tool that automatically scans contracts for key terms and clauses. TractManager’s Contract Analytics solution makes it simple to review contracts during M&A due diligence by identifying potential risks contained in all existing contract relationships.
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