- The U.S. Department of Justice (DOJ) recently updated its guidance to Criminal Division prosecutors in evaluating a corporation's compliance program when making charging decisions (Guidance).
- The Guidance directs prosecutors – and, by implication, a corporation's compliance personnel and outside counsel – to address three "fundamental questions": Is the corporation's compliance program well designed? Is the program being implemented effectively? Does the corporation's compliance program work in practice?
- While the Guidance is not limited by industry, entities within the healthcare industry should take special note of the Guidance because an effective compliance program is more than just a "best practice" for healthcare entities: it is essential.
- Healthcare entities and their in-house and outside counsel should also use the Guidance as a resource tool in evaluating, reviewing and updating their existing compliance programs to ensure their ongoing effectiveness.
The U.S. Department of Justice (DOJ) recently updated its guidance to Criminal Division prosecutors in evaluating a corporation's compliance program when making charging decisions (Guidance).1 Unlike previous DOJ guidance documents that were limited in scope – e.g., to Fraud Section prosecutors,2 corporate monitor assessments,3 Foreign Corrupt Practices Act (FCPA) investigations,4 etc. – the new Guidance provides all federal prosecutors with a sweeping mandate, regardless of the type of industry, activities or misconduct at issue, to assess and evaluate the state of a corporation's compliance program both at the time of the misconduct and at the time of the charging decision following a period of investigation and remediation.
From broad general statements to specific "topics," the Guidance directs prosecutors – and, by implication, a corporation's compliance personnel and outside counsel – to address three "fundamental questions":
- Is the corporation's compliance program well designed?
- Is the program being implemented effectively?
- Does the corporation's compliance program work in practice?
The answers to these three questions, as determined by answers to a litany of specific questions organized by topics, will guide prosecutors in determining 1) the form of any resolution with, or prosecution against the company, 2) the monetary penalties to be imposed, if any, and 3) whether the company will have continuing compliance obligations (e.g., a monitorship or reporting obligations).
In answering these questions, the Guidance integrates and builds upon prior DOJ guidance and other guidance documents, including the Seven Elements of an Effective Compliance Program, issued by the Office of Inspector General (OIG) of the U.S. Department of Health & Human Services (HHS).5 While the OIG has promulgated guidance that varies slightly by the type of healthcare entity, the OIG encourages the application of the same seven elements across sectors to develop an effective compliance program.6
Is the Corporation's Compliance Program Well Designed?
In analyzing the first question, the Guidance states that "[t]he starting point for a prosecutor's evaluation of whether a company has a well-designed compliance program is to understand the company's business from a commercial perspective, how the company has identified, assessed and defined its risk profile, and the degree to which the program devotes appropriate scrutiny and resources to the spectrum of risks."7 Significantly, the Guidance emphasizes the importance of assessing a corporation's risk management process, the allocation of resources to high risk areas and transactions and the frequency of risk assessment updates, including revisions to policies and procedures in light of risk assessment results.
After a discussion of the importance of risk assessments, the Guidance elaborates on several components of a well-designed compliance program. Prosecutors are advised to review many of the OIG's above-listed factors, including:
- the content, design, comprehensiveness, accessibility, operational integration, and gatekeepers of policies and procedures
- the form, content, effectiveness and risk-based nature of compliance training
- an entity's communications regarding misconduct and the availability of compliance-related guidance
- the effectiveness of the reporting mechanism
- whether investigations are properly scoped by qualified personnel
- the responses implemented following an investigation
- the resources and tracking of investigation results
The Guidance also goes beyond the OIG's guidance by instructing prosecutors to evaluate third-party relationships. Similarly, in connection with mergers and acquisitions, the Guidance explains that comprehensive due diligence of acquisition targets is an element of a well-designed compliance program because it reflects not only the state of the acquirer's own compliance program, but also 1) helps the acquirer to properly value an acquisition target's worth and 2) serves to prevent ongoing misconduct or noncompliance by the target following acquisition, thereby minimizing potential liability for the acquirer.
Is the Program Being Implemented Effectively?
In analyzing the second question, "[p]rosecutors are instructed to probe specifically [into] whether a compliance program is just a 'paper program,' " or an effective one in practice.8 This inquiry focuses on investigating the corporation's commitment to fostering a culture of ethics and compliance by senior and middle management, as well as appropriate oversight by the board of directors. The Guidance aims to ensure that compliance functions are 1) structured so that they are sufficiently autonomous from management, including having direct access to the board of directors or the board's audit committee, and 2) appropriately resourced with respect to funding and dedicated compliance staff with sufficient experience and seniority within the corporation. Additionally, the Guidance instructs prosecutors to evaluate the compliance program's incentives for compliance and disincentives for noncompliance, by reviewing human resources processes, the consistent application of disciplinary actions and the utilization of an incentive system that includes promotions, rewards and bonuses for improving compliance and demonstrating ethical leadership.
Does the Corporation's Compliance Program Work in Practice?
Finally, in answering the third question, the Guidance directs prosecutors back to the initial mandate of assessing a company's compliance program both at the time of the offense and at the time of the charging decision. It instructs prosecutors to examine the method in which the misconduct at issue was detected, the resources expended to investigate the offense, the corrective actions undertaken to remediate and prevent future misconduct and the evolution of the compliance program over time in response to changing risks. Specifically, the Guidance instructs that compliance programs should continually improve and evolve through periodic risk assessments, internal audits, internal controls testing, ongoing updates and measurement of the company's "culture of compliance." To ensure a compliance program that works, DOJ advises that corporate investigations must be timely, thorough, properly scoped, conducted by qualified personnel and incorporate appropriate responses to the findings. Moreover, a company's analysis and remediation of underlying misconducted should be appropriately handled, by
- conducting root cause analyses
- recognizing prior weaknesses or failed controls
- identifying how the misconduct was funded
- evaluating the vendors selection process (if involved in the misconduct)
- analyzing any prior indications that may have been overlooked in detecting the misconduct
- reducing the risk to remediate potential future issues
- imposing accountability and disciplinary actions in response to the misconduct
While the Guidance is not limited by industry, entities within the healthcare industry should take special note of the Guidance because an effective compliance program is more than just a "best practice" for healthcare entities: it is essential.9
Importantly, the Guidance reaffirms the view that a rigid, one-size-fits-all approach is not appropriate for each company. Rather, a company should design a compliance program that is flexible and suitable with regard to its size, as well as its specific potential areas of risk. Given the breadth of industries within the healthcare sector, the Guidance supports the reality that hospitals, providers, suppliers, manufacturers, distributors, software vendors, Medicaid managed care organizations and others will need to develop compliance programs based on their size, particular business and unique risk profiles.
Healthcare entities and their in-house and outside counsel should also use the Guidance as a resource tool in evaluating, reviewing and updating their existing compliance programs to ensure their ongoing effectiveness at identifying and mitigating risks, evaluating the compliance efforts of third parties with which they do business, and in a merger and acquisition context, analyzing a target's compliance program during diligence. Indeed, the Guidance provides a helpful checklist of categories and questions to utilize in conducting such assessments.
Significantly, the Guidance also serves to provide insight into DOJ's thinking in determining the nature and severity of penalties following a compliance failure. The Guidance should, therefore, be viewed as providing healthcare companies and their outside counsel with an opportunity to assess and enhance a compliance program to prevent misconduct, or if misconduct does occur, to prevent it from going undetected for any significant period of time. Accordingly, any healthcare entity that has not actively assessed, reviewed and updated its compliance program within the past few years, should not receive the Guidance as unwelcome news, but as an opportunity to engage experienced legal and compliance counsel to help it address and remediate any gaps in its compliance program, document its commitment to a culture of compliance and avoid potential future problems.