10.19.2022

What’s the No. 1 deal killer?

In the world of mergers, acquisitions and consolidation, the path to signing the deal is fraught with thorny complications that can bog down the process, open a Pandora’s box of questions and sometimes scare away a skittish buyer.

Deals made in the health care business require a sharp eye for regulatory compliance to hold risk in check. Clinical diligence can bring to light risky payment patterns, clinical documentation errors or other compliance red flags that grind M&A proceedings to a halt.

“Clinical diligence is probably the No. 1 thing that causes a buyer to walk away or greatly hedge,” said SimiTree Associate Principal Mark Romano, who has overseen behind-the-scenes diligence on many of the industry’s largest and most recent transactions.

It’s risky business

Health care acquisitions are attractive because they are generally among the most profitable for buyers, and the home care field has become especially lucrative in recent years.

But heavily regulated industries bring inherent risk, and a seller’s billing practices can jeopardize census, margins and more for the buyer, inviting Medicare audit scrutiny, demands for the return of overpayment, or accusations of fraud with potential civil or criminal liability.

Clinical diligence reveals aberrant billing practices or areas where the organization may be operating outside state or national norms, failing to meet industry standards, missing the mark in establishing eligibility and medical necessity for services, or making other costly mistakes.

“They may just be mistakes, but In Medicare’s eyes, you are fraudulently billing, and that creates risk that buyers are going to walk away from,” Romano said.

A silver lining

SimiTree experts say issues that turn up during clinical diligence aren’t always bad news for buyers and sellers.

“It’s a discovery process, and it offers the chance to identify problems that enable the organization take corrective action, shore up risks, and often improve overall performance and profitability,” Romano said.

Part of the process is carefully examining day-to-day operations to see how well compliance is incorporated into routine operations. Billing and coding audits, clinical documentation review, IT assessments and more pinpoint potential problem areas.

Operational assessments enable organizations to see where they can improve workflow, better deploy staff, expedite processes to meet required timeframes, and clean up documentation.

A strong post-acquisition integration program can keep the organization focused on follow-through for success. Read more about successful integration in these related articles:

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A few common errors

Among the most common issues discovered during clinical diligence are findings that have the potential to impact the integrity of the organization’s current and future census, according to SimiTree Senior Manager Nicole Hawthorne.

“For home health and hospice, this could include clinical documentation that does not support homebound status, skilled need and/or medical necessity for the payors that have these requirements, and these findings could impact the average daily census and the future revenue stream,” Hawthorne said.

“I would say this is the No. 1/top deal killer in my experience from the clinical diligence perspective,” she said.

Hawthorne said other common clinical diligence findings include technical errors that are not in compliance with conditions of payment for various payors. Lack of clinical documentation to support the claim often creates potential overpayment risk.

“The process of the clinical due diligence itself can also be an issue,” Hawthorne said. “For example, the target of the potential acquisition, or seller, may not be cooperative or timely with the requests from the potential buyer and/or the third-party vendor conducting the diligence.”

SimiTree can help

Whether you’re buying or selling, SimiTree’s M&A team offers a full range of professional services to assist home health and hospice providers in each phase of a successful transition, from business valuation and diligence to post close integration.

We bring a unique understanding of market dynamics and the complexities of our industry to every transaction, providing a detailed picture for buyers and sellers to move forward with confidence.

Use the form below to reach out to us today for more information about our extensive, industry-specific M&A services.

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