Vertical Healthcare Companies Merging Compliance Programs
Perri Nena Smith
Loyola University Chicago School of Law, JD 2021
In 2020, The Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) released guidelines for vertical mergers to give clarity to companies so they can avoid harmful mergers. Healthcare companies are an industry that has been in the news for their high dollar mergers. Despite COVID-19 challenges, the second half of 2020 saw seven deals larger than $1 billion in healthcare. Additionally, in 2020, there have been 300 private equity deals in the healthcare industry. As companies consider the harmful competition effect of vertical mergers and acquisitions, they have another consideration of merging their compliance programs if the transaction is successful.
What are vertical mergers, and which healthcare company’s merge?
Vertical mergers are entities that combine companies or their assets at different stages of the supply chain. The FTC and DOJ encounter more problematic horizontal mergers than vertical mergers; more vertical mergers are likely successful in moving forward. In healthcare, vertical mergers can include combinations of hospitals acquiring physician offices, health plans and pharmacies, health plans and hospitals, laboratories and health plans.
However, with the popularity of healthcare mergers including vertical mergers, the FTC wants to investigate anti-competitive culture; healthcare mergers have been linked to higher prices for consumers. The recent FTC announcement stated they would study the popular hospital and physician office mergers. Aetna Inc., Anthem, Inc., Florida Blue, Cigna Corporation, Health Care Service Corporation, and United Healthcare are the six companies the FTC will begin to review for their patient-level commercial claims data for inpatient, outpatient, and physician services for competition in the healthcare market.
The Biden administration is expected to have a favorable regulatory landscape for health care, increased coverage, and stable reimbursement rates. While healthcare is a huge focus, it is assumed that the enforcement of antitrust laws should only affect larger deals like the six companies highlighted by the FTC study.
The deals in 2021 are predicted to include home health care, hospitals merging into larger systems, outpatient providers such as ambulatory surgery and diagnostic imaging, durable medical equipment, pharmaceutical companies and manufacturers, and skilled nursing facilities. Many of the predicted deals will be a vertical movement for the healthcare industry, and their compliance programs should be considered as the separate entities merge.
Consideration of compliance programs for each healthcare entity
The U.S. Department of Health and Human Service’s Office of Inspector General (“OIG”) leads the enforcement regarding compliance programs across the different healthcare entities that provide federal government services. The OIG has different guidance for hospitals, nursing homes, third-party billers, and durable medical equipment suppliers. When these different entities vertically merge, they should consider their current compliance program compared to the compliance program of the organization being acquiring to determine any key differences and potential changes to stay compliant.
An effective compliance program has a code of conduct with effective policies and procedures, a compliance professional, effective compliance training, effective communication, internal monitoring, a process to enforce standards, and a process to respond to issues promptly. Each of these elements is bound to be different with differing companies. In addition, there can also be a significant risk that a purchaser could inherit the other companies’ regulatory liabilities.
A recent merger like Optum-UnitedHealth Group and Change Healthcare is an example of a health service company and a health technology company combining. These are different companies that focus on different regulations would need to consider all relevant regulations when merging. As the companies combine, both entities will need to access their current regulatory responsibilities and each other liabilities. Failure to stay in compliance can cost healthcare companies millions of dollars. In the OIG 2020 semi-annual report, they report an expected almost one billion dollars in audit recoveries and over 3 billion in investigative recoveries.
Merging and acquiring companies is such an immense process that compliance aspect may get lost in the mix. In healthcare, the responsibility to stay compliant is too big a risk to overlook. Larger companies need to relay compliance in the culture down toward all affected levels of employment. Smaller companies might be even more at risk of oversight compliance issues until it is too late. Compliance should be at the forefront of merger and acquisition contracts, especially for vertical mergers where they merge different regulations.
In addition to getting more recognition by the DOJ and FTC for antitrust violations, vertical mergers can add more heat by the federal government through OIG enforcement for compliance failure.