Healthcare industry mergers and acquisitions can take on many shapes and sizes dictated by various regulatory and business law issues, but common to all such transactions is the Target’s obligation to make healthcare representations and warranties to the Acquiror. Representations and warranties (R&Ws) in general are heavily negotiated aspects of the parties’ agreement, and their healthcare specific portions are oftentimes more heavily negotiated than others. A close review of these healthcare portions is necessary to accurately depict any healthcare regulatory risks and avoid inadvertent triggers of indemnification requirements or termination rights.
A review of healthcare R&Ws typically includes (1) A review of the scope of healthcare R&Ws; and (2) Consideration of which healthcare R&Ws are applicable to the transaction.
- Scope of Healthcare R&Ws. It is important for the parties to understand and negotiate the scope of healthcare R&Ws. While the Acquiror will aim to broaden the scope, to reduce its risk, the Target will want to limit the scope and oftentimes has good reason to do so. The common avenues for addressing scope are within the healthcare R&Ws section, include (a) revision to the definition of “Healthcare Laws” (b) insertion of “Knowledge” qualifiers; (c) incorporation of an “Applicable Period” (d) materiality qualifiers and (e) disclosures.
(a) Healthcare Laws. The definition of “healthcare laws” is used throughout the healthcare R&Ws section within the definitive agreement and should include only those laws that are relevant to the Target’s business. For example, if the Target has not submitted claims to federal healthcare programs, or entered into arrangements involving federal healthcare claims, the Federal Anti-Kickback statute may not be relevant. The parties might negotiate whether this definition should include local laws and billing rules, or guidance or industry standard practices (even if not an express law). Laws that may need to be avoided within this definition are those unrelated to healthcare; for example, occupational health and safety laws which should be limited to employment specific R&Ws.
Examples of laws that are typically considered as Healthcare R&Ws include: The False Claims Act, the Civil Monetary Penalties law, federal and state anti-kickback statutes, federal and state referral laws, corporate practice of medicine laws, the Beneficiary Inducement Statute, the Clinical Laboratory Improvement Act, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Food, Drug and Cosmetic Act of 1938, the Controlled Substances Act, the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, and the Eliminating Kickbacks in Recovery Act.
(b) Knowledge. While the Acquiror will strive for broad healthcare R&Ws but the Target will want to limit the scope of its healthcare representations and warranties by attesting only as to the Knowledge of select individuals. This would address whether a non-managerial employee’s knowledge of a violation of a law that was not reported to management should be imputed on the Target. Consider the following variations of the same R&W:
Example 1: “Company has complied with all Healthcare Laws.”
Example 2: “To Company’s Knowledge, Company has complied with all Healthcare Laws.”
To the extent the parties negotiate Knowledge into the healthcare R&Ws, they will need to select which individuals have the knowledge that should be imputed on the Target. Typically, this includes the Officers and may also include Board Members and Managers or other high level employees. For healthcare R&Ws, it may be reasonable to include the knowledge of the Target’s compliance officers (including its Chief Compliance Officer, Privacy Officer and Security Officer) within the definition of “Knowledge.”
(c) Applicable Period. The Applicable Period of healthcare R&Ws addresses how far back the Target must attest to its compliance. Consider the following variations of the same R&W:
Example 1: “To Company’s Knowledge, Company has complied with all Healthcare Laws.”
Example 2: “To Company’s Knowledge, for the past three (3) years (the “Applicable Period”), Company has complied with all Healthcare Laws.”
It would be important for the Acquiror to consider statutory look-back periods of the Healthcare Laws relevant to the Target and ensure, at a minimum, those look-back periods are covered within the R&Ws. The Target will want to limit those look-back periods as much as possible to, for example, avoid the task of reviewing its historical operations particularly if it had change-overs in its managing employees who may not have the knowledge needed to appropriately attest to the past.
(d) Materiality Qualifiers. It is likewise important to understand where appropriate materiality qualifiers should be used to address the scope of healthcare R&Ws. The Target will want to reduce risk by ensuring it is only attesting to items that are “material”. For example, the Target’s radiation certificate may have expired for 1 day last year, which would technically violate a legal requirement but did not lead to a penalty. Consider the following variations of the same R&W:
Example 1: “To Company’s Knowledge, for the past three (3) years (the “Applicable Period”), Company has complied with all Healthcare Laws.”
Example 2: “To Company’s Knowledge, for the past three (3) years (the “Applicable Period”), Company has complied in all material respects with all Healthcare Laws.”
(e) Disclosures. In addition, the parties will disclose exceptions to the healthcare R&Ws in a collection of disclosure schedules attached to the definitive agreement, which impact how the transaction will proceed and how the healthcare R&Ws progress. This is the avenue for informing the Acquiror where the Target violated a law or rule in the past, or otherwise is unable to attest to a specific R&W. Consider the following variations of the same R&W:
Example 1: “To Company’s Knowledge, for the past three (3) years (the “Applicable Period”), Company has complied in all material respects with all Healthcare Laws.”
Example 2: “To Company’s Knowledge, for the past three (3) years (the “Applicable Period”), Company has complied in all material respects with all Healthcare Laws, except as set forth on Schedule 1.1.”
- Selecting the Healthcare R&Ws. The parties should also review which R&Ws are applicable to the Target’s business, and whether the Acquiror should make healthcare R&Ws to the Target. The scope of each of these R&Ws are typically addressed through the use of Knowledge, Materiality and Applicable Period qualifiers, as summarized above. Common healthcare R&Ws, include the following:
(a) Claims, Proceedings and Investigations. The Target may be asked to attest to whether it has Knowledge of any claims against the Target alleging a violation of a Healthcare Law, or whether any proceedings or investigations have been initiated against the Target that may result in a violation of a Healthcare Law or impact the Target’s business. Additionally, the Acquiror may want the Target to attest that there are no material internal compliance investigations on-going. It would be important for both parties to consider a R&W from the other party that it has never been excluded, disbarred or otherwise terminated from a federal or state healthcare program.
(b) Permits and Licenses. The Target may be asked to attest that it, and its employees and agents, possess all required permits, licenses certificates and other authorizations to conduct Target’s business.
(c) Billing and Reimbursement. If the Target submits claims to third parties, typically the agreement will incorporate a R&W surrounding the submission of those claims and reimbursement procedures, and compliance with any overpayments rules. For example, an R&W may state that the Target’s billing practices are in compliance with all applicable rules and Laws, and that the Target has paid all known and undisputed refunds, overpayments, discounts and adjustments.
(d) Privacy and Security. Compliance with privacy and security rules are also important to address specifically within the definitive agreement. The Acquiror may seek to require a Target R&W not only as to its compliance with HIPAA and other privacy and security laws, but also as to the Target’s privacy and security policies and procedures.
(e) Operational Compliance Practices. In some instances, the Acquiror will require the Target attest to having operationalized an effective compliance program consistent with all elements of an effective compliance program as established by the Department of Justice, or another agency of the federal government, or other select procedures.
Health care transactions involve a regulatory maze of health care laws and regulations making the negotiation of healthcare R&Ws complex. Depending on the size of the transaction, the parties may consider securing R&W insurance to help mitigate risks inherent in such transactions providing the parties with more certainty in finalizing a deal. Overall, the parties should involve qualified healthcare counsel to assist with the review and negotiation of the healthcare related terms of the definitive agreement.
This article was originally published in Healthcare Michigan, August 2021.
About the Author:
Rose Willis is Chair of Dickinson Wright’s Health Care Practice Group. She focuses her practice on health care regulatory, transaction, and corporate law in her representation of health care providers and suppliers and other participants in the health care industry. She regularly counsels health care industry clients on matters involving the privacy and security of health information, corporate documents, and compliance program elements, as well as software agreements, physician referral rules, and certificates of need. Rose can be reached at 248-433-7584 or firstname.lastname@example.org and you can visit her bio here.