Introduction to Due Diligence in Healthcare Transactions 

Due diligence is the backbone of successful healthcare transactions. Whether acquiring a medical practice, healthcare facility, or other type of healthcare business, a thorough legal and financial review is essential to avoid compliance pitfalls and financial risks. Overlooking a single issue—such as improper Medicare billing or an undisclosed liability—could lead to costly consequences, including legal exposure and regulatory fines.

This post is the first in our series on healthcare transactions, where we will explore key legal and financial considerations for buyers and sellers in the healthcare industry. Stay tuned for upcoming posts on structuring deals, navigating regulatory approvals, and mitigating post-transaction risks.

What Is Due Diligence? 

Due diligence is a systematic examination designed to confirm that a healthcare business is accurately represented and free of undisclosed liabilities. Buyers undertake this in-depth review to:

• Confirm Regulatory Compliance: Verify adherence to federal and state healthcare laws, including Stark Law, the Anti-Kickback Statute, HIPAA, and the False Claims Act.
• Assess Financial Stability: Examine revenue streams, liabilities, billing practices, and overall financial performance.
• Review Key Contractual Obligations: Validate payor agreements, leases, employment contracts, and other significant agreements.
• Identify Legal and Regulatory Risks: Detect any pending litigation, government investigations, or enforcement actions that could pose a threat.

Key takeaway: Failing to conduct a thorough due diligence review can expose the buyer to unforeseen financial and legal complications, much like purchasing real estate without a professional inspection.

Core Components of Healthcare Due Diligence 

Regulatory Compliance Review 

Given the heavily regulated nature of the healthcare industry, even minor lapses in compliance can result in substantial fines or legal issues. Areas requiring particular attention include:

• Medicare and Medicaid Billing Practices: To avoid inheriting fraudulent claims or improper billing methods.
• Licensure and Accreditation: Ensuring the target entity is duly licensed and accredited.
• HIPAA and Data Security Policies: Protecting against data breaches and related liabilities.

Financial Due Diligence 

A rigorous financial review goes beyond basic accounting; it aims to ascertain how the healthcare entity generates revenue and whether such revenue streams are sustainable. This involves:

• Revenue Sources and Reimbursement Trends
• Existing Liabilities, Debts, and Outstanding Audits
• Potential Underreported Expenses or Overreliance on a Single Payor

Buyers must also consider how the loss or renegotiation of significant payor agreements might impact the entity’s financial health post-transaction.

Legal & Contractual Review 

Contracts constitute a critical element of any healthcare transaction. A detailed review is necessary to determine:

• Transferability of Payor Agreements: Whether they can be assigned or will require renegotiation.
• Employment Contracts: Evaluating any restrictive covenants that could hinder future business operations.
• Vendor Agreements and Leases: Identifying concealed liabilities or obligations that may affect the transaction.

The Role of Legal Counsel 

A skilled healthcare attorney is essential for due diligence, overseeing financial, legal, operational, and regulatory reviews. Responsibilities include:

• Structuring the Transaction: Incorporating indemnification provisions or adjusting the purchase price based on due diligence findings.
• Securing Necessary Approvals: From regulators, payors, and any additional stakeholders before closing.
• Engaging Specialized Experts: Such as coding auditors, financial analysts, and compliance professionals, to maintain privilege, if needed.

Key takeaway: Having an experienced attorney at the helm ensures a smooth and efficient due diligence process. If you need guidance on your next healthcare transaction, our attorneys are here to help.

The Importance of Thorough Due Diligence 

Conducting a robust due diligence assessment reduces the likelihood of post-closing challenges and provides clear advantages:

• Risk Mitigation: Identifies potential liabilities before finalizing the transaction.
• Regulatory Assurance: Verifies compliance with all relevant healthcare laws.
• Financial Security: Confirms the business’ profitability and sustainability.
• Negotiation Leverage: Allows for purchase price adjustments or contractual modifications based on newly discovered risks.

Efficient Strategies for Comprehensive Due Diligence 

Due diligence need not be overly time-consuming or cost prohibitive. By employing a well-structured approach, buyers can ensure the review is both thorough and efficient.

This blog post is part of our ongoing series on healthcare transactions. In our next post, we’ll explore strategies to conduct thorough due diligence while keeping costs under control. Stay tuned for practical insights on streamlining the process without compromising regulatory compliance or financial accuracy.

Whether you are contemplating a merger, acquisition, or divestiture in the healthcare space, Mooradian Law offers customized legal guidance to help you navigate due diligence with confidence.

Contact Us Today 

Email: info@mooradian.law 

Phone: (734) 219-4890