The Due Diligence Imperative
Healthcare Regulatory Environment (Part III of VI)
In the March/April 2018 issue of The Value Examiner, the author underscores the importance of undertaking rigorous due diligence to better understand the regulatory burdens and operational risks notwithstanding efforts to repeal and replace.
With the passage of the 2010 Patient Protection and Affordable Care Act (ACA), i.e., â€śObamacare,â€ť providers are facing even more extensive regulatory scrutiny, much of which attention is focused on the increasing number of rules and the strict prosecution of fraud and abuse violations. Â Although significant efforts have been expended attempting to â€śrepeal and replaceâ€ť the ACA, the landmark legislation remains standing, and the sweeping nature of the ACA will continue to drive ongoing changes in the structure and financial operation of many healthcare provider enterprises, likely resulting in an even further increase in the pace of hospital/physician practice integration/transactional activities, as well as an increase in the number of U.S. physicians who are currently employed by hospitals. Â These increases have, in the past, served as a catalyst for enhanced regulatory scrutiny from the Office of Inspector General (OIG), the Internal Revenue Service (IRS), and the Department of Justice (DOJ), through the development of such initiatives as the Fraud Enforcement and Recovery Act (FERA) and the Healthcare Enforcement Action Team (HEAT).
This increased scrutiny of the healthcare industry, at both the federal and state level, requires the analyst to conduct a thorough and robust due diligence exercise, due to the significant inherent risk in the industry.
In conducting the general research related to the subject interest being appraised, the analyst should first develop an understanding of the controlling laws and regulations pertinent to the engagement, which may change depending on factors such as the state in which the enterprise, asset, or service is located; whether the provider(s) receive(s) reimbursement from Medicare, Medicaid, or other government payors; and/or, whether any of the enterprise(s) involved in the engagement is tax exempt. Â In addition, the analyst should be conversant with federal fraud and abuse laws such as the Stark Law (Stark), the Anti-Kickback Statute (AKS), and the False Claims Act (FCA), that, in general, state that physician compensation, for example, cannot be tied to the volume or value of referrals, and that a provider may not submit any requests for reimbursement to the government when the provider is materially noncompliant with the program regulations.
As part of the requisite due diligence in conducting general research related to proposed legislation, the valuation analyst should consult government websites, such as www.regulations.gov, which includes information on proposed bills, as well as current legislation. Â State laws should also be researched for any CPM or CON issues, as these regulations may have a significant effect on the subject interestâ€™s competitive position, by acting as a barrier to entry for new healthcare providers. Â It is vital to the due diligence exercise that the analyst determines the pertinent current laws and proposed legislation that may have an impact upon the ultimate value of the healthcare enterprise, asset, or service.
Specific to the subject interest, the valuation analyst should search the Secretary of State (SOS) office of the state(s) in which the subject interest operates to ensure that the enterprise is in good standing and that there are no liens against the subject interest.Â To conduct these searches, the analyst should visit: (1) the Business Services section of the SOS office website, and search the business to determine that the business entity is active and in good standing; and, (2) the Uniform Commercial Code (UCC) section of the SOS office website, to determine who (if anyone) has an interest in the personal property of the subject interest. Â The analyst should also consult federal legal databases, such as Public Access to Court Electronic Records (PACER), and state court databases, such as Missouriâ€™s CaseNet, to ascertain any past or pending litigation against the subject interest. Â Additionally, the analyst should conduct a search of national and regional news services related to the subject interest and related parties in order to gather further (and potentially pertinent) information.
It should be noted that subsequent events, i.e., events that would not have been known or knowable as of the valuation date, but which also may have a deleterious effect on the value indication for the subject property, must, according to professional standards, be disclosed within the valuation report to the client. Â However, these subsequent events will not have an impact on the valuation opinion reported, as of the valuation date, and may require a decision by the client as to whether an updated valuation report, i.e., with a valuation date after the subsequent events, should be undertaken.
Specific research is information and data that is directly related to, or obtained from, the subject enterprise, asset, or service being valued. Â As the name suggests, specific research is client specific and changes depending on the specific facts and circumstances related to that engagement.
There has been a paradigm shift in the healthcare industry over the past several years, most notably manifested in the various provisions of the ACA, which has already resulted (at least in part) in healthcare transactions becoming increasingly complex and subject to emboldened regulatory review, requiring that the risk averse analyst seek out and obtain robust general and specific research data and information in conducting a complete and thorough due diligence process (that will withstand scrutiny) related to a subject property interest being appraised, regardless of whether it is an enterprise, asset, or service.
This article is published here with permissions and can be viewed in its entirety in The Value Examiner, March/April 2018 issue.
 Â Â Â Â Â â€śPatient Protection and Affordable Care Actâ€ť Public Law 111-148, 124 Stat 119 (March 23, 2010), as amended by â€śHealth Care and Education Reconciliation Actâ€ť Public Law 111-152, 124 Stat 1029 (March 30, 2010).
 Â Â Â Â Â For more information about the efforts to repeal and replace Obamacare, reference â€śObamacare Repeal and Replaceâ€”In the Heat of the Night: Now You See it, Now You Donâ€™tâ€ť Health Capital Topics, Vol. 10, Issue 7, July 2017, https://www.healthcapital.com/hcc/newsletter/07_17/PDF/ACA.pdf (Accessed 11/20/17).
 Â Â Â Â Â â€śHospitalsâ€™ Race to Employ Physiciansâ€”The Logic behind a Money-Losing Propositionâ€ť By Robert Kocher and Nikhil R. Sahni, New England Journal of Medicine, Vol. 364, No. 19 (May 12, 2011), p. 1790â€“1791.
 Â Â Â Â Â â€śLaws Against Health Care Fraud Resource Guideâ€ť Centers for Medicare and Medicaid Services (September 2015), p. 1.
 Â Â Â Â Â â€śLimitation on Certain Physician Referralsâ€ť 42 U.S.C. Â§ 1395nn (2010); â€śCriminal Penalties for Acts Involving Federal Health Care Programsâ€ť 42 U.S.C. Â§ 1320a-7b (2015).
 Â Â Â Â Â â€śFalse Claims Actâ€ť 31 U.S.C. Â§ 3729 (2009).
 Â Â Â Â Â Â Â Â â€śGeneral Informationâ€ť Regulations.gov, https://www.regulations.gov/faqs (Accessed 11/10/17).
 Â Â Â Â Â A useful source for tracking state legislation is the National Conference of State Legislatures, http://www.ncsl.org (Accessed 11/21/17).
 Â Â Â Â Â â€śPublic Access to Court Electronic Recordsâ€ť United States Courts, www.pacer.gov (Accessed 11/21/17).
 Â Â Â â€śMissouri Case.netâ€ť Missouri Courts, https://www.courts.mo.gov/casenet/base/welcome.do (Accessed 11/21/17).
Todd A. Zigrang, MBA, MHA, ASA, FACHE, is president of Health Capital Consultants, where he focuses on the areas of valuation and financial analysis for hospitals and other healthcare enterprises. Mr. Zigrang has significant physician-integration and financial analysis experience and has participated in the development of a physician-owned, multispecialty management service organization and networks involving a wide range of specialties, physician-owned hospitals as well as several limited liability companies for acquiring acute care and specialty hospitals, ASCs, and other ancillary facilities.
Mr. Zigrang can be contacted at (314) 997-7641 or by e-mail to firstname.lastname@example.org.