Due diligence is a critical part of assessing any acquisition. But where the target company is involved in providing healthcare items or services, the U.S. Department of Justice (DOJ) has given buyers yet another reason to conduct a specific assessment of the target’s compliance with healthcare fraud and abuse laws. These include, for example, the federal anti-kickback statute and civil monetary penalty statute governing remuneration in exchange for business, and the False Claims Act overpayment provisions. When acquiring an entity that earns its revenue from billing Medicare, Medicaid or other federal health insurance programs is it critical to conduct due diligence into whether the target is engaged in practices that may violate these laws not only because such problems will have to be corrected going forward, but also because such violations will likely require, either before or after closing, a repayment to the government for that prior conduct. Furthermore, sticking your head in the sand to avoid finding these issues will not only cause an unhappy day of financial reckoning when they are discovered, but it may be held against you by the government when the time comes to resolve them.

As a reminder of this, the DOJ Criminal Division recently published a set of sample topics and questions for prosecutors to use when evaluating a corporate compliance program that include an assessment of whether a company’s compliance function has been integrated into the company’s M&A due diligence process. These topics, which are part of a broader set of factors known as the “Filip Factors,” are used by prosecutors when scoping an investigation of potential misconduct, considering whether to bring charges, and negotiating plea and settlement agreements. The M&A-specific considerations included in the DOJ’s recent publication are:

  • Whether misconduct, or the risk of misconduct, was identified during due diligence.
  • How the company’s compliance function has been integrated into the M&A process.
  • Whether the company has an adequate process for tracking and remediating misconduct, or the risk of misconduct, identified during due diligence.
  • How the company implements compliance policies and procedures at new entities.

Understanding whether the value of a target company, or a set of assets, is impaired by liability for prior misconduct, or the cost of investigating and remediating it, is impossible without due diligence into these issues. Moreover, it is now apparent that the due diligence necessary to evaluate the issues will also count in the event that the company is investigated after closing.