Indemnification and Escrows in Healthcare Transactions

This post is part of Mooradian Law’s ongoing Healthcare Transaction Series, where we break down critical deal terms that shape the success of healthcare business transactions. In our last post, we unpacked the role of representations, warranties, and covenants. Here, we focus on the mechanisms that make those promises enforceable: indemnification and escrows.

Every deal has some uncertainty. But in healthcare, the stakes are often higher. Regulatory complexity and government and commercial payor requirements both add layers of post-closing risk. That’s where indemnification and escrows come in—providing contractual tools to manage exposure long after the ink is dry.

Indemnification: Allocating Risk Without Derailing the Deal

Indemnification provisions allow one party (typically the buyer) to recover losses from the other (typically the seller) if certain facts turn out to be untrue or if specific obligations aren’t met.

Indemnification often covers post-closing liabilities resulting from:

• Breaches of representations or covenants. 
• Pre-closing liabilities that survive closing (e.g., employment claims, unpaid taxes),
• Pre-closing regulatory issues, such improper billing, fraud and abuse compliance, or HIPAA violations.

Strategic Structuring Tips

1. Use Caps Thoughtfully

Most sellers negotiate a monetary cap on indemnification—often between 5% and 10% of the purchase price. This limits overall exposure, except for carve-outs like fraud or intentional misconduct. Buyers may push for uncapped liability for certain high-risk areas (e.g., healthcare regulatory breaches).

2. Include Deductible or Tipping Baskets

Deductibles and tipping baskets set a threshold of loss before indemnification kicks in.

• A deductible requires losses to exceed a set amount (e.g., $100,000) before the seller owes anything—and only for the amount above the threshold.
• A tipping basket requires the same threshold but allows recovery from the first dollar once the cap is exceeded.

In healthcare deals, baskets often range from 0.5% to 1% of the purchase price.

3. Define Covered Losses Clearly

Well-drafted indemnification clauses will address whether legal fees are recoverable, whether “duty to defend” obligations apply, and whether indirect damages (like reputational harm or lost profits) are included or excluded​

Escrows: Financial Backstop for Post-Closing Liabilities

An escrow is a portion of the purchase price held back—usually by a third-party agent—for a fixed time to cover indemnification claims or known contingencies.

Escrow Size and Duration

Typical escrows in mid-sized deals range from 5% to 10% of the purchase price. The release schedule often spans 12 to 18 months, but longer periods may be negotiated for regulatory concerns (e.g., pending OIG investigations or open cost report audits).

Interaction with Indemnification

A strong escrow doesn’t eliminate the indemnification obligation—it simply secures it. Buyers should ensure escrow funds remain accessible for as long as survival periods for key reps and covenants are in effect.

R&W Insurance: A Supplemental Option for Larger Deals

Representations & Warranties Insurance (RWI) is increasingly common in private equity-backed healthcare deals. It can reduce or eliminate the need for traditional escrows and indemnification—but with important caveats:

• RWI doesn’t cover everything (e.g., known breaches or certain regulatory matters).
• It’s costly and typically used in larger deals.
• It requires enhanced due diligence and specific underwriting procedures.

Still, when feasible, RWI can streamline negotiations and provide comfort to both sides—particularly when sellers seek a clean exit.

Putting It Together: Practical Takeaways

• Start Early: Identify regulatory hot spots—licensure issues, billing integrity, data privacy—and ensure any known or suspected issues are reflected in  the scope of indemnification.
• Don’t Default to Boilerplate Language: Tailor caps, baskets, and escrows to the size, risk, and structure of the deal. One-size-fits-all language rarely fits.
• Balance Matters: Buyers need protection; sellers need predictability. Provisions that are overly lopsided will slow negotiations and breed post-closing friction.

At Mooradian Law, we structure transactions that work in practice—not just on paper. Whether you’re buying, selling, or investing in a healthcare business, our team will help you allocate risk smartly, navigate regulatory hurdles, and close with confidence.

Contact Mooradian Law

Email: info@mooradian.law 

Phone: (734) 219-4890