Due Diligence of Compliance Issues in Acquisitions
Successor liability issues are a central factor to consider when assessing the scope of compliance due diligence. The acquiring organization must assess the degree to which it will assume liability for the past obligations of the target company. If there is no risk that past obligations for compliance issues will be assumed, compliance efforts can at least conceptually be focused on integrative activities rather than assessive activities. In effect, if there is no risk of successor liabilities, the acquiring organization can focus on the future, at least when it comes to compliance issues. Of course there is never a perfect world and likewise, there is never a perfectly “clean” deal when it comes to successor liability. This is particularly true in the health care industry, which has some counteractive rules regarding successor liability.
Normally, if an asset acquisition takes place, the acquiring entity will only assume the liabilities that it expressly assumes or which attach to the assets that it is acquiring. Normally, the closing process will result in satisfaction of liabilities that might attach to the acquired assets. Past Medicare liabilities can be an exception to this general rule. Under Medicare rules, even if the transaction is structured as an asset purchase, all of the past provider’s Medicare liabilities will be passed forward to the acquiring provider. This is because the Medicare change of ownership rules (sometimes referred to as CHOW rules) provide for the automatic assignment of the past provider’s Medicare provider agreement. By virtue of the automatic assignment of the provider agreement, the acquiring party is deemed to assume virtually all past Medicare obligations of the target company.
Federal courts have consistently upheld these rules and have held the acquiring organization liable for past obligations. Federal cases have specifically held acquiring parties for overpayments that were previously paid to the seller and civil penalties arising out of the actions of the seller that occurred before the acquisition.
The outside parameters of successor liability are yet to be tested in the context of recently expanded health care fraud and abuse laws. Medicare regulations specifically state that the acquiring party does not assume past obligations based on personal fraud. However, questions still remain whether corporate fraud can be assumed under successor liability theories. Issues regarding the extent to which liability based on “knowledge-based” statutes, such as the False Claims Act, can be passed on to the acquirer. Our initial reaction may be that it is not possible to assume responsibility for a knowledge-based violation. But what about violations that are invoked based on the “reckless disregard” for the truth? Is it possible that failure to perform reasonable due diligence could be construed as “reckless disregard?”
Medicare rules permit the acquiring organization to specifically reject the provider agreement of the previous entity. However, there are very specific, time sensitive requirements for effectively rejecting past obligations. Additionally, rejection will require the acquiring party to obtain independent certification and enter into a new provider agreement. This process will inevitably result in interruption of revenues to the acquiring party. This will in turn affect purchase price and other business factors.
General Priorities in the Yates Memorandum
- The Yates Memo prioritizes the manner in which Government civil and criminal law enforcement investigations are conducted.
- It begins by proclaiming that “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing . . .
- [accountability] it deters future illegal activity, incentives to changes in corporate behavior . . . and it promotes the public’s confidence in our justice system.”
The Yates Memo identifies six “key steps” to enable DOJ attorneys “to most effectively pursue the individuals responsible for corporate wrongs.”
- Corporations will be eligible for cooperation credit only if they provide DOJ with “all relevant facts” relating to all individuals responsible for misconduct, regardless of the level of seniority.
- Criminal and civil DOJ investigations should focus on investigating individuals “from the inception of the investigation.”
- Criminal and civil DOJ attorneys should be in “routine communication” with each other, including by criminal attorneys notifying civil counterparts “as early as permissible” when conduct giving rise to potential individual civil liability is discovered (and vice versa).
- Absent extraordinary circumstances, DOJ should not agree to a corporate resolution that provides immunity to potentially culpable individuals.
- DOJ should have a “clear plan” to resolve open investigations of individuals when the case against the corporation is resolved.
- Civil attorneys should focus on individuals as well, taking into account issues such as accountability and deterrence in addition to the ability to pay.
Data Mining Used to Identify Practice Outliers
A Note From the OIG Presentation at the HCCA Compliance Institute
The federal government is actively using data to identify providers who perform outlier billing. If your billing patterns reflect a pattern that is greatly outside of norms, you should be prepared to defend the deviation from the norm. Certainly not every practice pattern that falls outside of norm indicate nefarious wrongdoing. What is important is that your practice maintain awareness of and understand the reasons why billings may be picked up as falling outside of industry norms. You must be prepared to educate government officials as to the reasons for having outlier claims data.
Primary care and pediatric practices will have very little opportunity to deviate from norms in most cases. Highly trained specialists such as neurological surgeons can easily have unusual practice patterns that translate into outlier data that could trigger further government inquiry into billings. Proactive audits performed as part of active compliance program will help the provider identify potential issues. If abnormal data is identified through this process, the provider can address the situation in a proactive manner before the government becomes involved.
If there is an explanation for the anomalies, the provider can establish it in advance. This type of practice approach strengthens the case if the government later raises the issue. The provider should be fully prepared to explain the reasons for the apparent anomalies. In a small and highly specialized practice, data anomalies can easily result from numerous possible non-nefarious reasons. Because the government is actively using data analysis to identify fraud, the provider should assume that data that falls outside of norms will eventually be questioned. Preparation, readiness, and proactivity are the keys to resolving issues with government investigators.
One message was loud and clear when OIG and DOJ lawyers spoke at the HCCA compliance institute. The government is increasingly looking at data to identify inherent billing patterns, referral patterns and other information that could be reflective of improper billings, kickbacks, or other violations.
This information spotlights the need for providers to take a proactive approach in identify their own errors before the government brings these errors forward in a much less friendly manner. If errors or overpayments are identified, repayment should be made promptly. Repayments that are not made promptly are deemed to become false claims and expose the provider to much more severe penalties.
If the circumstances warrant, it may also be necessary to consider using the OIG or CMS self disclosure process to investigate potential penalties.