Navigating Indemnification Obligations in a Health Care Transaction: Managing Health Care Liability

Health care mergers and acquisitions have been, and continue to be, on the rise. Many factors have contributed to the increase, such as: the need to decrease expenses and increase efficiencies; the need to expand services, coupled with increased costs to update technology; the shift from traditional fee-for-service reimbursement to alternative models that focus on patient outcomes and coordinated care; and overall decreases in reimbursement by government and commercial payers. This article explores the importance of indemnification as a risk allocation tool in these private company transactions, certain nuances of an indemnification construct, and the transformative potential of representation and warranty insurance for a health care transaction.

Due Diligence

Mergers and acquisitions in the health care sector present industry-specific challenges for both a buyer and seller. Due diligence is a vital step in every transaction for a buyer, especially given the highly regulated nature of the health care industry. Whether the transaction is an asset purchase, equity purchase, merger or joint venture, a buyer will focus on regulatory compliance when conducting its due diligence review. A buyer will want to know that a seller has been operating in compliance with federal and state fraud and abuse laws, conditions of participation and reimbursement requirements for Medicare and Medicaid, corporate practice of medicine prohibitions, fee-splitting prohibitions, federal and state privacy and data security statutes and regulations, and state licensure and certification regulations governing both professionals and entities, just to name a few. The potential liability of a buyer with respect to some of these matters can survive the closing of a transaction irrespective of the structure. For example, if a buyer assumes the historical billing numbers of a seller, even if the transaction is structured as an asset purchase, the seller’s Medicare and Medicaid liabilities will transfer to the buyer. During the due diligence process, a buyer can identify the regulatory risks associated with the acquisition that will shape the structure of the transaction as well as the negotiation of the acquisition agreement. By identifying health care compliance issues during due diligence, a buyer also can require a seller to take certain remedial action prior to the closing of the transaction. The parties may even restructure a transaction based upon regulatory due diligence findings to limit the transfer of liability from the seller to the buyer.