Private equity and venture capital investors continue to flock to the hospice space. When negotiating with investors that are new to the industry, providers in some cases are coming to the table with parties that are not familiar with the regulatory environment, even as federal enforcement activity ramps up.

Of the 23 hospice-related deals in the fourth quarter of 2021, 18 involved private equity buyers, the M&A advisory firm Mertz Taggart recently reported. The number of hospice PE deals has hit record numbers in 2020 and 2021. Unprecedented valuations for hospice assets have not deterred prospective buyers. Multiples have reached as high as 26x, according to PwC’s Health Research Institute.

The influx of new investors is unlikely to abate in the near term, but communicating the value proposition of hospice and the web of regulations that surround it can become more complex, according to Bryan Nowicki, hospice attorney for Husch Blackwell. The purchase contract process requires careful diligence to ensure stakeholders are on the same page and making informed decisions. 

“In today’s world of a lot of mergers, acquisitions and transactions with hospice purchase or asset purchase agreements, each one of those kinds of contract settings brings a context with it,” said Nowicki in a recent Husch Blackwell podcast. “You really start to become much more cautious about the contract aspect of the business of hospices. It is important to understand as much as you can about hospices to make sure that knowledge gets into those contracts and that you’re not surprised with something hospice-specific that the contract for whatever reason doesn’t address adequately.”

Investors and providers can hit snags as they negotiate, and one potential source of these complications is the intensity of regulators’ gaze on the industry. Spiking regulatory activity may also be spurring more providers to consider selling their businesses in years to come.

In August 2020, the U.S. Centers for Medicare & Medicaid Services (CMS) resumed audits and medical reviews by Medicare Administrative Contractors (MACs) after stalling some enforcement activity earlier that year due to the pandemic.When the temporary reprieve ended, hospice providers saw an uptick in CMS Targeted Probe and Educate audits (TPE) audits, which are designed to identify providers that have frequent errors on their Medicare claims or billing practices that CMS considers to be unusual. TPE audits focus on services that have high national error rates, according to CMS.

Auditing liability has come to the core of contract dispute matters around hospice transactions, according to Husch Blackwell Hospice Attorney and Partner Meg Pekarske.

“We’re doing a ton of transactional work, and some of the contracts that we deal with are those that come out of selling a business or buying a business,” said Pekarske. “One of the things that’s coming up more and more is how the audit liability is handled in the purchase agreement. Liability under purchase agreements does get fairly complicated given that hospices are so highly audited right now and there’s a lot of TPE going on. Sometimes when you have corporate counsel who doesn’t really understand some of the liabilities that can come back and bite us, there could be some missed opportunities.”

In addition to TPEs, CMS revamped its survey process in the final rule for hospice payments in Fiscal Year 2022. The rule also contains provisions for surveyor training and greater transparency in public reporting of government and accreditor survey results.

The rule also directed CMS to establish a Technical Expert Panel (TEP) to aid in the design of a Special Focus Program (SFP). Hospices flagged by the program would be surveyed every six months versus the current three-year cycle, and SFP would grant CMS the authority to impose fines, suspend reimbursement or revoke a provider’s Medicare certification in cases of extreme negligence or repeated unresolved safety violations.

Audits and compliance programs can not only be expensive and time consuming for providers but also complicate purchase and asset agreements.

“If any hospice has been through an audit, the complexities of that process with recoupment and appealing, how long it takes to appeal and what goes into that … there’s just all sorts of moving parts that cannot be addressed in a transactional document,” said Nowicki. “It’s not that simple, especially when you’re talking about trailing and financial obligations, and who ultimately pays for liabilities that may have been incurred years ago, as audits often look at time periods years before they commence. Those kinds of areas in transactional documents that you try to work through that gray area, [and it’s] better off to have the hospice people involved up front. An ounce of prevention is worth a pound of cure.”

That ounce of prevention can come in the form of experienced financial advisors and legal representation with sufficient knowledge to preempt problems that could threaten a deal and present alternatives, according to Nowicki. Having legal counsel with hospice insight review contracts at the front end of negotiations could curb problems down the road, Nowicki stated.

“There’s probably more opportunities and alternatives than you believe there to be,” Nowicki said. “We know hospices well enough and how they operate on a business level that we can even jump in and start thinking about business strategies that work within a legal context so you don’t have to negotiate things in the context of a dispute. You negotiate them in the context of a transaction and make sure everybody has the same expectations going forward.”