AMARILLO, TX – It has been the goal of entrepreneurs over the centuries: start-up business, build the business up, and sell it for a profit. This has been the cycle in the restaurant industry, the sporting goods industry, and the DME industry. Because of the “perfect storm” of competitive bidding, post-payment audits, prepayment reviews, and constantly changing regulations, an increasing number of DME suppliers have decided to sell.
At the same time, with the tsunami of 78 million “baby boomers” retiring at the rate of 10,000 per day, the demand for DME is increasing exponentially. This is resulting in a large number of new players coming into the industry. The bottom line is that there are a large number of DME suppliers being purchased and sold. In buying a DME supplier, the most important action the purchaser can take is to conduct thorough due diligence.
Three Types of Due Diligence
With an acquisition (asset or stock), there are three types of “due diligence:” Financial Due Diligence, Corporate Due Diligence, and Regulatory Due Diligence. With a stock acquisition, due diligence is particularly important. This is because all of the “skeletons in the closet” remain with the entity being purchased. With an asset acquisition, due diligence is also important but it does not have to be as thorough as due diligence pertaining to a stock acquisition. This is because the purchaser of assets will only assume the liabilities that the purchaser chooses to assume.
• Financial Due Diligence entails the review of bank statements, cash flow statements, tax returns, and financial statements. The goal of this due diligence is to determine the financial condition of the seller. This type of due diligence is handled by the purchaser’s accountants.
• Corporate Due Diligence entails reviewing documents to confirm that the seller is a legal entity in good standing. Steps include (i) obtaining a Certificate of Good Standing from the state of incorporation of the seller; (ii) obtaining a UCC Lien Search Report which shows that the seller’s assets are not subject to a perfected security interest; (iii) obtaining confirmation that the seller does not owe corporate franchise taxes, use/sales/excise taxes, personal property taxes, past due payroll taxes, etc.; and (iv) review of the seller’s corporate minute book to determine if the seller has the appropriate organizational agreements in place and has up-to-date minutes. Normally, this type of due diligence is handled by the purchaser’s attorney.
• Regulatory Due Diligence entails reviewing documents to confirm that the seller is compliant with health care statutes and regulations. Steps include (i) reviewing patient files to confirm that they contain the requisite documentation; (ii) reviewing results of current and ongoing post payment audits and prepayment reviews; (iii) reviewing communications with governmental agencies; (iv) reviewing the patient complaint log; (v) reviewing the seller’s marketing practices and the seller’s arrangements with referral sources; and (vi) interviewing employees. Normally, the purchaser’s employees and the purchaser’s attorney work together to handle this type of due diligence.
Regulatory Due Diligence Checklist
1) Review a statistically valid sample of patient files. This review should be broken down by (i) product category and (ii) payor category (Medicare, Medicare Advantage, Medicaid, Commercial). The goal of the review is to determine if the files have required documentation: physician order, CMN, AOB, delivery ticket, qualifying test results, PT evaluation, physician progress notes, etc.
2) Obtain confirmation that the seller’s Part B DMEPOS supplier numbers are in good standing.
3) Obtain confirmation that the seller’s Medicaid provider numbers are in good standing.
4) Obtain confirmation that the seller has the requisite surety bonds.
5) Obtain confirmation that the seller’s accreditation is in good standing.
6) Determine if the seller is required to have one or more licenses in the state in which the seller is located. If the answer is “yes,” then determine if the licenses are in good standing.
7) If the seller is serving out-of-state patients, then (i) determine if the seller needs one or more licenses in these other states; if so, determine if the seller has such licenses and if they are in good standing; (ii) determine if the seller is required to “qualify as a foreign corporation” in these other states; if so, determine if the seller has so qualified; and (iii) determine if the seller is responsible for sales taxes arising from sales in the other states; if so, determine if the seller is current in paying its sales tax obligations.
8) Review the facts and results of past and current post-payment audits and prepayment reviews and enforcement actions.
9) Review past and current communications with governmental agencies and contractors (e.g., the NSC, ZPICs).
10) Review the facts and results of past and current governmental investigations and contractor enforcement actions.
11) If the seller has a patient complaint log, then it needs to be reviewed.
12) Determine how the seller generates its business (how the seller “gets its patients”). This includes reviewing the seller’s marketing programs and advertising. Does the seller “purchase leads” (e.g., internet leads)? If so, obtain the specifics.
13) Does the seller pay any money to a 1099 independent contractor (person or entity) that directly or indirectly generates business for the seller? If so, obtain the specifics.
14) Does the seller directly or indirectly pay any money (or provide “anything of value”) to a referral source such as a physician, hospital, discharge planner, respiratory therapist? If so, obtain specifics.
15) Does a person or entity (who/that is in the position to generate business for the seller) own an equity interest in the seller? If so, obtain specifics.
16) Does the seller own an equity interest in another entity that generates business for the seller? If so, obtain specifics.
17) Review managed care contracts and other third party payor contracts. In doing so, determine if the contracts will be affected by the purchaser’s acquisition.
18) Will the purchaser take over the seller’s premises? If so, will the purchaser assume a lease, sign a new lease with the landlord, or buy the premises?
19) If the seller has marketing reps, are they 1099 independent contractors or W2 employees? If the reps are 1099s, then how does the seller pay them?
20) Review the seller’s policy (and actual practice) regarding waiving co-payments and deductibles.
21) Is the seller a party to a loan closet arrangement, consignment arrangement, or stock and bill arrangement? If so, obtain the specifics.
22) Does the seller place an “employee liaison” on the premises of a hospital, physician or other referral source? If so, what are the liaison’s duties?
23) Does the seller place phone calls to prospective customers? If so, have the prospective customers given their electronic or “blue ink” consent to be called by the seller?
24) Does the seller have any former or current employees who are unhappy or disgruntled? If so, obtain specifics.
25) Has any person or entity ever stated that the seller is violating any laws? If so, obtain specifics.
26) Review all written employment agreements.
27) Review all other written agreements to which the seller is a party.
28) Does the seller have any verbal agreements in place that the seller is honoring?
29) If the purchaser will hire one or more of the seller’s employees, then determine if any of them are on the OIG exclusion list.
30) Does the seller have a corporate compliance plan? If so, then it needs to be reviewed.
31) Does the seller have a HIPAA compliance plan? If so, then it needs to be reviewed.
32) Has the seller ever been a plaintiff or defendant in a lawsuit? If so, obtain the specifics.
33) Does the seller anticipate that it will be a plaintiff or a defendant in a future lawsuit? If so, obtain the specifics.
Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or firstname.lastname@example.org.