M&A Buyers Scour Hospice Financials for Compliance Risks

Buyers in a hot hospice M&A market are bringing compliance under a microscope as regulators keep a tight watch.

All hospice transactions undergo some type of compliance review. But there’s nothing routine about these reviews in today’s current hospice regulatory environment. Combing through a hospice’s referral streams and financial or claims data can help identify potential compliance issues.

Despite slowed intensity thus far in 2022 compared to previous years, the hospice sector has “remained active” and “still outpaces” other markets in health care, according to a recent report from Bass Berry & Sims. Regulators have kept a close watch on hospice deals as merger and acquisition activity swells in the space. This includes the U.S. Centers for Medicare & Medicaid Services (CMS), the U.S. Department of Health and Human Services Office of the Inspector General (OIG), and in some cases, the Justice Department.

Buyers want to make deals that won’t put them at legal or financial risk.

When considering a sale, hospices should anticipate scrutiny across the board — and be ready with data and documentation to back their decisions, according to Carrie Uebel, vice president and chief ethics and compliance officer at Compassus.

“With financial considerations, extrapolation is not just a possibility, it’s going to be a probability,” said Uebel at the National Association for Home Care & Hospice (NAHC) Financial Management Conference in Las Vegas.

With regulatory stakes running high, buyers and their representatives are digging into operational and financial details to uncover any potential compliance risks related to fraud or kickback schemes.

Regulators and investigators have broadened their strokes on alleged False Claims Act (FCA) violations by hospice providers, as well as the closely related anti-kickback statute. Some FCA cases have also resulted in multi-million dollar settlements, hospice operators facing criminal charges, imprisonment, or being barred from practicing.

FCA cases often hinge on whether a hospice billed Medicare for services a patient was not eligible to.i They sometimes involve kickback schemes in which providers essentially bribe clinicians to get referrals

Compliance has become a complex web to navigate for sellers and buyers alike, and the devil is often in the details with these transactions.

Discrepancies in payroll and staff expense records can signal potential kickbacks or fraud, according to Mark Kulik, managing director at M&A advisory firm The Braff Group.

“We’re going to ask tough questions and drill into hidden secrets in your financial statements,” said Kulik at the NAHC conference. “We’re going to look at areas of significant salary bonus and compensation across the board, especially in non-leadership. If we’re seeing that certain roles are getting a sizable paycheck every single pay period over a certain timeline, that’s something to separate out and it begs the question about what they were doing to earn it. Cycle bonuses being paid to individuals is another thing to scrutinize along the same lines. [These] are hidden gems of your financial statements that will capture and catch the eye of a buyer.”

Kulik continued with an example. For instance, if a hospice with a $15 million annual revenue has nine medical directors on staff, this should “jump off the page” for a buyer, he said.

This can call into question whether these medical directors were on staff because they were giving the hospice direct lines of patient referrals. It would also signal a potential concern of legitimacy for patient care received if patient revenue grew year over year, along with the size of these medical directors’ staff salary, he continued.

“The question might be where are the referrals and revenue coming from?” said Kulik. “Is this ‘pay for play’? It begs a compliance question.”

Buyers can also detect potential eligibility and fraud compliance risks by looking into a hospice’s reimbursement history and ties to its patient referral streams, according to Uebel.

The stakeholders in a deal are going to look for red flags in utilization rates for the four levels of hospice care and the settings in which they provide them.

“[Regulators] are looking at which hospice services are being provided in assisted living facilities, and hospice services that were not provided at all four levels of care,” said Uebel. “The relationship between a facility and a hospice that has, for example, 40% of its claims tied to those patients, this gives greater latitude to have additional claim areas looked into. If you don’t have claims submitted, then are these patients truly in the right level of care, and does that hospice have the ability to provide it?”

Along with a hospice’s historical billing claims, auditing activity can also give clues to its long-term path for compliance.

Auditors can extrapolate data that apply to compliance review in a hospice transaction, using both internal reporting as well as publicly available information.

Buyers can learn through the diligence process whether a hospice has incurred any payment suspension periods or civil monetary penalties (CMPs), according to Uebel.

With regulators taking a firm look at program integrity, a history of frequent CMPs can expose potential fraud issues specific to patient eligibility, Rachel Hold-Weiss, partner and attorney at the law firm Arent Fox Schiff, said at the NAHC conference.

“Civil monetary penalties are becoming part of the new hospice lexicon,” said Hold-Weiss. “There are certain states that when you’re doing an acquisition, they’ll ask questions to hospice owners about these civil monetary penalties imposed. If you’re not compliant, you’re issued a CMP and [the U.S. Centers for Medicare & Medicaid Services (CMS)] can impose CMPs for each day a hospice is deemed in an ‘immediate jeopardy’ situation of condition level deficiencies. You have to have a plan of correction in place to make sure whatever it was, it doesn’t reoccur. This can be for a very long time and might exceed thousands per day.”