Health care providers are heavily regulated, that’s no surprise to private equity investors. As a result, investing in health care provider businesses requires savvy in assessing what regulatory risks an acquisition target may present and whether or not those risks are an impediment to moving forward with a transaction.

Common risks include: reimbursement and claims issues, internal audits, external audits, regulatory investigations, criminal and civil government initiated litigation, and licensure and inspection citations or deficiencies.

The diligence process often uncovers one or many issues with any of these common risk areas. Analyzing what type of affect one or more of these issues may have on whether or not to move forward with a transaction requires asking the right questions and digging in to a certain level of detail.

Initially, framing the type of risk involves answering some basic questions (these are in no particular order) –

  • Is the business a single provider entity or multiple providers?
  • Does the business operate in a single jurisdiction or multiple jurisdictions?
  • Is the business a single provider type or an integrated provider?
  • What % of revenue does the business unit affected by the issue contribute to the overall enterprise?
  • Can the business unit affected be separated out from the rest of the business?
  • What is the significance of the regulatory violations at issue, i.e. how much of a risk to the business does the issue present?
    • If the violation either can or will result in major financial loss or loss of operating licensure, the transaction may need to be abandoned.
    • If the violation results in payment of small fine (e.g. local health department inspection report not posted), the investor may choose to absorb the issue.
    • If the violation is somewhere in between a major and minor issue, the parties may look to creative ways (such as, escrows, specific indemnities, and closing conditions) to address which party assumes the risk.
    • If the violation seems minor or middle of the road, but the government has the ability to assess significant penalties, an investor will need to get very comfortable with an understanding of the possibility that a significant penalty may or may not be assessed. A minor regulatory violation may carry a penalty of license revocation if it’s not corrected within a specific time frame.

These questions are certainly not comprehensive and this quick discussion cannot substitute for sound professional advice. However, these questions are a good starting point for framing the issue and figuring out whether or not as an investor you can “put a box around” the issue and move forward with a transaction.

These and other related issues were the subject of our Health Care Private Equity Roundtable event on March 31, 2016 entitled “Putting It in a Box: Evaluating Health Care Regulatory Risk.”