The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on how investors should assess litigation and regulatory issues in provider services transactions. It is authored by Alan Chen and David Pivnick.
Sensitivities and new areas of focus by the government make strong compliance programs and transaction-level protections crucial for buyers in the healthcare industry, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21 and 22. David Pivnick, a partner in the Business & Securities Litigation group at McGuireWoods LLP, moderated a panel entitled “Best Practices for Investors Assessing Litigation and Regulatory Issues in Provider Services Transactions.” The panel drew strong interest and was led by Kara Coen, Director and Assistant General Counsel at Capital One Healthcare, and Matt Logan, General Counsel at Practice Velocity, LLC.
Here are five key points from the panel discussion:
1. The government has dedicated increased resources to regulating the healthcare and life sciences industry. President Trump’s administration has increased expenditures on enforcement, and particularly those that target pharmaceutical companies, healthcare providers, and others involved in the inappropriate distribution of drugs. Collaboration between federal agencies has increased and the use of data analytics by the Drug Enforcement Agency (DEA) has amplified the effectiveness of such collaborations. Such efforts in government cooperation at times involve collaborations amongst over ten agencies, and include non-enforcement government entities like the United States Postal Service (USPS).
2. In response to such trends, buyers should put in place transaction-level protections. Strong compliance programs put buyers in the best position to succeed even in the face of whistleblowers. Practically speaking, this translates into shifting how diligence is performed. In an effort to pick up on additional exposure that would not fall under historical malpractice, buyers should look carefully at target companies and their cultures. What message is the target company giving to its employees? Is compliance just lip service and a matter of checking the box, or is there an active effort to drive a message of personal responsibility? How are employees trained? What is the turnover rate?
3. Buyers should also revisit how they approach transaction documents. Representations and warranties cannot be limited to purely financial items. Special indemnity clauses can be useful if there are known issues, particularly those of known quantities. In addition, cyber liability insurance is increasingly recommended given data privacy breaches, many of which have been publicized in the mass media.
4. Once transactions close, transparency continues to be an area of emphasis. Credit agreements usually obligate borrowers to notify lenders of issues, oftentimes within a specified time period. Such post-closing obligations are generally precise both in what issues require notification, and the manner of notification called for. Certain best practices, such as using certified professional coders to perform audits and implementing routine OIG exclusion checks are signals of strong compliance programs.
5. Comprehensive plans should be put in place post-close. The panelists recommended offsite trainings that focus on topics beyond operations and stress personal accountability. McGuireWoods LLP’s focus on helping clients design such plans begin pre-closing, allowing for decreased areas of vulnerability for clients. Such plans help replace toxic work environments with ones that increase the possibility of success for clients and also keep businesses from being exposed to potential litigation and regulatory issues.