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Any M&A transaction brings with it a set of common pitfalls, and experienced deal lawyers have developed ways to spot and avoid these hazards. However, health care M&A transactions are surrounded by an entirely new set of industry-specific risks as a result of the intricate web of laws and regulations applicable to entities in the health care industry. Failure to understand and address these matters can lead to real deal disaster.
Health care is one of the most regulated industries in the United States. Consequently, the scope of due diligence required in any health care M&A deal is drastically larger than corresponding transactions in other industries. Failure to comply with even a single regulation can cause massive economic detriment to a health care business. The government is able to issue fines and even levy operational restrictions on non compliant organizations.
In a typical M&A transaction in other industries, standard corporate due diligence request lists are use to help the acquiring company identify material financial risks that bear on the purchase price. In health care transactions, these standard lists are insufficient to address the much broader range of documents that are needed to assess regulatory compliance risks.
As regulation has increased in recent years with passage of the Affordable Care Act, among others, there has been a corresponding increase in enforcement activity by the various executive agencies charged with monitoring industry compliance. Because some of the laws impose strict liability, health care providers can receive severe penalties even for minor, unintentional infractions. Prohibitions on participation in federal health care programs are also possible, which can be a death blow to providers with operations that rely on cash flows from these programs.
Health care M&A due diligence also involves complex due diligence reviews of HIPAA compliance, an enormous undertaking by itself. Licenses, permits, and accreditations at the local, state, and even federal level are often not transferable, or require substantial preparatory work and long lead times, putting many deals at risk of exceeding the deal timeline. So much work is required overall that potential sellers are often best served by conducting defensive diligence before shopping themselves around or commencing a bid process. This defensive diligence is wisely followed by self-disclosure to the government of any non-compliance to address issues before the start of any deal making.
Corporate practice issues may arise as well, depending on the corporate form and whether the acquirer contemplates the service of licensed professionals. And for organizations with marketplace competitive implications, a thorough assessment of antitrust risk and compliance is required. All of these considerations make it crucial for health care businesses to involve attorneys experienced in health care and M&A transactions at the earliest possible stage, in order to successfully navigate the issues that dot the landscape of health care mergers and acquisitions.