Tightening Hospice Regulation May Give Some Buyers Pause in M&A Deals

Regulatory attention heating up in the hospice industry could be impacting buyers’ mergers and acquisitions decisions.

Nuances in the regulatory environment can be difficult to navigate, perhaps more so for private equity and venture capital investors that are new to the industry. Changes to federal enforcement practices during the next year could bring some additional pressure, according to Erin Burns, senior associate at health care law firm Husch Blackwell.

“Hospice transactions are more complicated than just your average business deal,” Burns said in a recent Husch Blackwell podcast. “On the corporate side of things, they can sometimes be 10 steps ahead and have not given thought to the regulatory considerations, which can put some time constraints on your deal and could impact timing of closing and other things.”

Regulators have sharpened their gaze on hospice in recent years. Hospice organizations are under increasing legal and regulatory scrutiny related to medical necessity complaints under the False Claims Act and the closely related anti-kickback statute. These cases generally involve allegations that hospices billed Medicare for services for which patients were not eligible, according to a 2021 report from Bass, Berry & Sims.

Some hospices have faced criminal and financial repercussions for their involvement in such practices, giving buyers a vested interest in understanding the rules, including those around patient eligibility.

The U.S. Department of Health & Human Services Office of the Inspector General (OIG) is planning a nationwide audit of hospice eligibility for the calendar year 2023. The audit will focus on patients who did not have a hospitalization or emergency department visit prior to electing hospice.

OIG is conducting audit following results of previous, less extensive inquiries. While OIG routinely examines compliance throughout the health care sector, the impact of their reports can be substantial. Two OIG reports in 2019 shook the industry with findings that condition-level deficiencies posed safety risks to patients.

On the seller side of transactions, hospice can expect investors to place their compliance programs under a microscope when they come to the table, according to Howard Young, partner at global law firm Morgan Lewis.

“The level of Medicare audit activity has increased, with a particular focus on long stay hospice patients and hospice patients who reside in long-term care and [assisted living] facilities,” Young told Hospice News in an email. “With this continued CMS audit scrutiny and the OIG nationwide hospice audit, private equity and strategic investors are well advised to take an even closer look at the quality of hospice documentation and active clinical oversight of hospice physicians in their acquisition due diligence.”

In response to the 2019 OIG reports, Congress enacted new enforcement provisions through the Consolidated Appropriations Act of 2021. This includes a forthcoming Special Focus Program from the U.S. Center for Medicare & Medicaid Services’ (CMS), which is currently in development by a Technical Expert Panel.

Hospices flagged by the proposed SFP program would be surveyed every six months rather than the current three-year cycle. SFP surveyors would have the authority to impose fines, suspend reimbursement, appoint temporary management to bring the hospice into compliance, or revoke a provider’s Medicare certification altogether.

The SFP program was set to roll out this year, but CMS delayed its start to gauge stakeholder feedback and ensure that the program is designed effectively for hospices.

Hospices also face a potential rise in Unified Program Integrity Contractor (UPIC) audits on the near horizon. CMS contracts UPIC entities to conduct investigations and audits related to potential fraud, waste or abuse. Some hospices have already begun seeing penalties from a rise in UPIC audit activity, including reimbursement suspensions or Medicare claim repayments.

These regulatory moves could have investors growing weary of hurdles to cross when evaluating a hospice asset.

“I have seen buyers become much more cautious in acquisitions, including myself, as Medicare has ramped up audits,” Eddie Norris, managing partner at Canyon Home Care & Hospice, previously told Hospice News. “We have been, and continue to be, very selective with our hospice acquisitions.”

The volume of hospice PE deals has hit record numbers in 2020 and 2021, but the pace has slowed this year. Private equity deals accounted for roughly 9% of all hospice and home health deals in the third quarter, according to a recent report from Bass, Barry & Sims.

Around 11 hospice transactions took place in Q3 2022, compared to 24 during the same period last year, the M&A advisory firm Mertz Taggart recently indicated.

The ways investors approach regulatory details in hospice transactions can substantially impact their potential return on investment, according to Meg Pekarske, a partner on Husch Blackwell’s hospice and palliative care team.

The contracting process requires careful diligence to ensure stakeholders are on the same page and making informed decisions.

“I can’t emphasize enough, do this regulatory stuff in the beginning instead of baking something in from the corporate side, and then on the regulatory side realizing it doesn’t work or that there could be cons,” Pekarske said during the podcast. “If you do things incorrectly, a parade of horribles can go on in the back end.”

For example, buyers could “inherit” any potential compliance risks and any reimbursement issues tied to them, according to Pekarske. Buyers ultimately assume the hospices’ compliance responsibilities when they take over the business, including responding to auditing requests for documentation and potential recuperation of Medicare reimbursement, Pekarkse stated.

“You’re assuming all their liabilities going back from the beginning of time,” Pekarkse said. “You can try to manage this with corporate documents, but when you assume the Medicare provider number, all of that is yours. You could reject or terminate the number, but sometimes it’s not possible and gets very complicated.”

Buyers are paying close attention to auditing patterns involving their potential acquisition targets, ultimately avoiding deals with those under heavy scrutiny, according to Al Veach, founder and CEO of M&A advisory firm Agenda Health.

The expense and complexity of ensuring compliance and responding to an audit may also be driving more hospices to sell, according to Veach.

“Audits ultimately only impact businesses that they were unlikely to buy. Buyers are confident in their ability to run a clean hospice, so they aren’t going to be overly concerned about the threat of an audit,” Veach told Hospice News in an email. “It may push more hospice owners to sell though. The cost of responding to more rigorous and frequent examinations may prove to be more than what a smaller operator is willing to tolerate.”

Buyers must also take into account the difference between the way mergers and acquisitions are defined in a business context versus the payer world, according to Burns.

“Mergers and acquisitions, those have different meanings to Medicare,” Burns said. “For example, when you’re talking about a merger from a corporate perspective, it may not actually be a merger from a Medicare perspective. [In some Medicare regions] you may not be able to merge, even though you can merge from a corporate side. There’s only limited providers that can merge, so you may be required to do a change of ownership or a change of information filing.”