Want to Keep Health Care M&A on Track? Don’t Forget About Billing and Coding Issues
Investors in health care businesses are increasingly concerned about the potential financial exposure associated with a target company’s billing and coding practices. According to a recent Wall Street Journal article, there are 70,000 different codes health care providers must use under new regulations that went into effect on October 1, 2015.
Amid new challenges and opportunities brought on by the Affordable Care Act, the pace of mergers and acquisitions (M&A) in the health care industry has reached an all-time high. In fact, the sector has seen a record US$487 billion in deals year to date, according to DealLogic. And M&A activity is reaching all corners of the sector: physician groups, hospital systems, senior care, and various businesses that address quality and cost of care.
Unfortunately not all deals go smoothly or even close. Billing and coding issues could send a merger or acquisition off the rails or result in unwanted post-deal surprises. For example, buyers could face defense costs, fines, and penalties that could have a major impact on their balance sheets. And with government and regulatory agencies looking at coding with increased scrutiny, the assumed liability can be substantial.
Here are three considerations that can help reduce billing and coding errors and rein in liabilities before, during, and after a transaction:
- Conduct specific due diligence around the target’s billing and coding practices pre-transaction. Consider whether the target routinely audits its billing and coding processes and practices and whether it has history of investigations or complaints. As part of legal and insurance due diligence, identify whether the target company currently buys regulatory liability errors and omissions (E&O) insurance and review the coverage provided.
- Scrutinize seller representations in the sale and purchase agreement relating to billing and coding practices. Consider who will be responsible for costs associated with billing issues that occurred pre-close but only became known post-close.
- Consider new risk transfer insurance solutions. Representations and warranties insurance policies generally exclude warranties related to government billing programs, potentially creating a significant gap. Likewise, regulatory liability and billing E&O policies usually only cover future problems that take place after the closing of the transaction. Recently, new solutions have been developed that cover and indemnify for billing and coding investigations and claims related to the acquired company’s pre-transaction billing practices.
Whether you’re a buyer concerned about inheriting a target’s liabilities or a seller looking to make your company more attractive to purchasers, taking a close look at E&O issues related to billing and coding —and closing any coverage gaps — can help keep health care mergers and acquisitions on track.