New compliance challenges alter acquisition landscape

An increasing number of health care organizations are paying the price for compliance problems that existed at target companies prior to acquisition. One example is the University of Pennsylvania Health System, which recently paid $12 million to settle an issue relating to the partial hospitalization program of its target acquisition, the Presbyterian Medical Center.

Penn acquired Presbyterian in 1995, and most of the patients in the partial hospitalization program who raised allegations of improper reimbursement were patients in the program prior to Penn’s acquisition of the hospital.

Karl Thallmer, a partner in the Philadelphia office of the law firm Reed Smith, says it is instructive to note that the prosecutor said Penn failed to do a thorough due diligence before acquiring the program, and it may have sat on what it knew for too long, thereby allowing, in the interim, a whistle-blower to bring a claim.

But this trend is not only a concern for large publicly traded corporations, warns Katie McDermott of the Philadelphia-based Blank Rome. As evidence, she points to a recent $300,000 settlement that followed a deal struck by a podiatrist in Maryland and two other podiatrists who bought his practice.

During the course of that negotiation, representations were made about the economic viability of the practice and its annual revenues. But after the transaction was completed, the purchasers discovered that some revenue was coming from uncovered services and filed a qui tam suit.

The podiatrist pled guilty to a felony last month for defrauding the Medicare program and is paying the government $301,000, which represents treble damages from the amount that the government apparently found in the audit.

"This is a good illustration of what can happen in these transactions and why due diligence, even for small and medium providers is important," McDermott argues.

She also warns providers to take note of a shifting landscape in this arena. One important issue is due diligence, which she says has taken an urgent turn in response to government investigations of health care providers. "Many of the False Claims Act settlements of the last several years have dealt with successors," she notes.

According to McDermott, that is particularly true in the lab industry, as evidenced by the record settlement entered into by Fresenius earlier this year.

Another trend providers should note is the whole issue of financing health care transactions and practices, says McDermott. She says banks are now getting involved in compliance issues and want to have an understanding that they are not extending a significant line of credit to a health care entity that is under investigation and could have major liability.

"The banks are starting to wake up to the fact that their interests are dramatically affected by these government enforcement initiatives," asserts McDermott.

She says some banks are even starting to ask about compliance plans and fraud and abuse questions before giving a physician’s practice a line of credit. That means hospitals and physicians must inform the bank when they are under investigation, prepay review by contractors or if they have had a temporary suspension, she says.

(Editor’s note: See an upcoming issue of Compliance Hotline for advice on how to perform effective due diligence.)