There once was a time when Private Equity firms pursuing an acquisition in healthcare could focus their due diligence efforts on areas they were comfortable with analyzing. An acquisition target’s financial potential, value, personnel, and operational viability were comfort zones for PE companies forming the core elements of due diligence. But times have changed.
Healthcare, representing nearly 20% of GDP and topping $4 trillion per year, continues to be a torrid sector for M&A. But even as the sector grows, renewed governmental pressure on regulations and enforcement have made compliance due diligence a must-have for PE firms. In addition to actual healthcare regulations, laws shielding acquiring entities have recently been stripped away.
The Department of Justice has made it clear that it intends to hold PE sponsors accountable for compliance violations by their portfolio companies.
“When a private equity firm invests in a company in a highly regulated space like healthcare or life sciences, the firm should be aware of laws and regulations designed to prevent fraud. Where a PE firm takes an active role in illegal conduct by the acquired company, it can expose itself to liability under the False Claims Act.”
Principal Deputy Assistant Attorney General, Ethan P. Davis
The False Claims Act is just one of many possible areas of exposure but it’s a hefty one. Liability exposure includes treble damages, $12k to $25K per claim penalties, exclusion from programs and other administrative consequences. The onus is on PE firms to be fully aware of the compliance status and potential risks of violations before heading into any deal.
But regulatory compliance due diligence can’t just be a sanitizing and Band-Aid operation prior to an acquisition. Post-acquisition it is the expectation of the government that PE firms are overseeing and managing corruption and fraud risks within their portfolios. Therefore, to avoid future penalties, fines, and sanctions, it is important to establish a sustained “culture of compliance” in acquired companies.
At HCN we have seen a meaningful uptick in PE firms seeking our expertise in pre-diligence regulatory compliance analysis. We are not only identifying potential compliance exposure, but frequently our services turn up unrealized value through billing audits. Investors are also using our post-acquisition compliance services to assure their portfolio is avoiding regulatory risk in a sustained manner while capturing all the revenue they are due.
As the government continues to focus on regulations and enforcement in healthcare, it appears that compliance due-diligence and post-diligence will continue to be a necessity, and strong areas for HCN to add value for our PE clients for the foreseeable future.