The pace of hospital mergers and acquisitions has accelerated in recent years as health care facilities look to reduce their costs, but experts say risks posed by the entity being acquired require a thorough investigation before completing such a deal.

Challenges for hospitals include reimbursement pressures from all payers, pressure to maintain a hospital's tax-exempt status, changes in health care delivery methods, the need to update technology, regulatory and compliance changes, and the ongoing need to gain greater delivery efficiencies, according to a March report by Moody's Investors Service Inc.

Last year, there were 86 hospital M&As—the highest number of deals in the past decade, according to Irving Levin Associates Inc. However, the value of those deals, $7.94 billion, was a fraction of the $35.53 billion in hospital-related M&As in 2006, the record in the past decade, according to the Norwalk, Conn.-based company.

Hospital risk managers need to investigate a series of potential liability and compliance risks on the entity being acquired, said Madelyn Quattrone, senior risk management analyst with the Plymouth Meeting, Pa.-based ECRI Institute.

“The acquiring organization must be aware of liability risk, claims and regulatory compliance risks and history of the to-be-acquired providers and their corporate organizations,” Ms. Quattrone said.

Identifying and closing insurance coverage gaps is another priority. For example, “employing physicians who lack tail coverage for prior acts could expose the acquiring organization to future potential liability for prior acts of the physician,” she said (see related story).

%%BREAK%%

Doug Mitchell, a principal at Phoenix-based consulting firm David Douglass L.L.C., cited the need to monitor “claims made against an insurance policy where coverage is written on a claims made basis,” as well as risks associated with human resources-related issues at the acquired entity.

Significant Medicare-related risks also could be involved, said Todd Swanson, a principal in the business transactions department of Los Angeles-based law firm Hooper, Lundy & Bookman P.C.

“Common areas of focus are those associated with compliance with federal and state fraud and abuse laws,” Mr. Swanson said in referring to anti-kickback laws and physician self-referral restrictions. In addition, there is “possible exposure for past overpayments from, or false claims to, governmental and other third-party payers. Violations of these laws can lead to substantial recoupments by governmental payers, civil and criminal sanctions and possible exclusion of the provider from the right to participate in Medicare and Medicaid,” he said.

“Past improper billing practices by the selling facility could result in Medicare withholding such overpayments against the purchaser's future Medicare payments,” he said.

Examining hospital-acquired infections, such as methicillin-resistant Staphylococcus aureus or Vancomycin-resistant enterococci, is another concern as are outbreaks of other infectious diseases.

Dr. Joseph Perz, Atlanta-based epidemiologist and team leader with the Centers for Disease Control and Prevention, advised monitoring the entity being acquired and taking a close look at a few key areas, including its injectable medication preparation and administration, the extent to which a facility combines medications and its equipment reprocessing practices.

%%BREAK%%

While it may be uncommon for facilities to engage in poor practices such as reusing syringes, “you do want to tease that out,” Dr. Perz said. “Bad practices expose the (acquiring entity) to a lot of risk. It could be catastrophic. Retrospective notification of patients may be required.”

In short, poor health practices “could be a deal breaker,” he said.

Likewise, “there is more risk if a facility is doing a lot of manipulation of medicines on-site, such as compounding” or mixing medicines for a particular patient, Dr. Perz noted. “Then you need to adhere to CDC and pharmacy standards.”

Validating effective equipment reprocessing for items such as an endoscope also is critical. Poor practices that may lead to unsanitary conditions or risk of infection also can require retroactive notification of patients, he said.

The numerous, complex risks associated with acquiring a health care facility bring far-reaching implications (see box).

As the Patient Protection and Affordable Care Act comes into play, Ms. Quattrone urged all parties involved to “understand the competitive policies that underpin the Affordable Care Act and be clear about why they want to merge.”

She also noted that the Federal Trade Commission has stepped in to block or even undo some mergers, and that FTC monitoring of M&A activity will only increase.

In his experiences in negotiating hospital acquisitions as part of due diligence teams, Mr. Miller said potential “risks all required a workup to determine whether the acquisition would transfer the risk, risk finance cost and unwanted risk to our organization.”

%%BREAK%%

Risks associated with HR processes, compliance or insurance claims are more common to monitor, but a risk manager also must be on the lookout for unusual risk, Mr. Mitchell said.

During an acquisition of a physician practice, one of the acquiring entity's principals died suddenly. “When the risk management squad of the due diligence team lost this historian, it created additional work in order to replace this valuable information,” he said. “In essence, we had to do quite a bit more research.”

For risk managers about to embark on an acquisition process, Mr. Mitchell said, “Look at everything, and then look at it again; and when you're carrying out due diligence reviews, make sure your notes, tools and reports are categorized in an organized fashion. You want to be able to quickly lay your hands on your findings for the due diligence team.”