We have worked on several ketamine acquisitions and one of the most important aspects of any business is due diligence. Shortly after a term sheet or letter of intent is executed, most buyers send a due diligence requirements list to the seller. This post focuses on the healthcare regulatory issues a buyer might want to focus on on a ketamine deal. Since every business is unique, there is no “one size fits all” advice. However, there are many common elements that we’ve seen for ketamine deals.
Since there are a variety of healthcare regulatory issues for a ketamine clinic acquisition, this post will focus on some of the applicable federal laws. In our next post, we’ll detail some of the other legal issues a buyer should consider.
Below are some of the most common issues we’ve seen with the various deals we’ve been involved in. Because every problem is complex, the following is just a summary of the problem. However, in order not to break the law, each buyer should use a health care professional to ensure the seller is complying with the law and to ensure that the buyer continues to comply with all laws.
Third party payers and Medicare issues
Are there contracts with third party payers (e.g. insurance companies, HMOs, PPOs, etc.)? If so, you need to review these agreements to ensure that you are meeting the requirements set out in them. A Google search also shows that Medicare reimburses certain ketamine-related procedures. Therefore, as part of your due diligence, seek all information related to third party reimbursement, including whether the seller is a participating Medicare provider.
If the seller is a Medicare provider, certain federal laws apply. These laws provide for both criminal and civil liability. The “big three” federal laws that apply to government reimbursement are the Anti-Kickback Act (“AKS”) (42 US Code § 1320a – 7b), the False Claims Act (“FCA”) (31 USC §§ 3729) – 3733) and the Stark Act (42 US Code § 1395nn). Also, depending on which state your business is located in, there may be state laws that mimic (and / or be unique) some of the federal laws. Hence, you need to check both federal and state law to make sure the seller meets the requirements.
The AKS prohibits the payment or receipt of valuables in return for a patient referral. According to current case law, it is forbidden if even “one purpose” of the payment is to bring about a transfer. The AKS criminal law can result in both jail sentences and fines. When the federal government brings an indictment under the AKS, it is often counted under the FCA as well. The FCA prohibits individuals and providers from making “false claims” to the federal government. If a provider requests a refund that includes remuneration for a transfer, it is likely that they have also violated the FCA.
The Stark Act is a ban on recommendations in which a provider has a financial interest (directly or indirectly). However, for the Stark Act to apply, the services provided must be one of the 10 “Designated Health Services” listed under Stark. We have not yet had a chance to determine if any of the ketamine-related procedures are part of any of the designated health services. However, we caution the buyer not to check if Stark applies to their transaction.
Finally, there is at least one statement from the Office of Inspector General (which is housed in the US Department of Health) which stated that the AKS also applies if there is a private third party payer (e.g. HMOs, PPOs, liability insurance) ), etc.). Therefore, even if the seller is not a Medicare participating provider, a buyer should consider whether the seller is receiving payments from third parties. In this case, the buyer should investigate which federal laws apply.
As a consequence of the foregoing, the seller should also have a compliance plan in place when receiving federal reimbursement. The Office of the Inspector General of the US Department of Health has published various guidelines on compliance plans (CLICK for more information on compliance plans for physicians). A compliance consists of seven elements including: (1) performing internal monitoring and auditing; (2) Implementation of compliance and practice standards; (3) designate a compliance officer or contact; (4) carry out appropriate education and training; (5) respond appropriately to identified criminal offenses and develop corrective actions; (6) develop open communication channels with employees; and (7) enforcement of disciplinary standards through well-publicized guidelines.
We have designed and implemented compliance plans for healthcare customers. Since each provider is unique, care must be taken to tailor a compliance plan to a customer’s specific needs. Aside from the above, a vendor should have policies and procedures in place that will help implement the compliance plan. In addition, employees must be trained and retrained on a regular basis for a compliance plan to take effect. If there is a fraud and abuse problem and the provider has a compliance plan that has been properly implemented and followed, the OIG will consider the compliance plan to be a mitigating factor. Hence, in today’s healthcare environment, having and following a compliance plan is of paramount importance.
Health Insurance Portability and Accountability of the 1996 Act (“HIPAA”)
HIPAA is federal law that helps protect the confidentiality of a patient’s medical information, among other things (HIPAA calls this “Protected Health Information” or “PHI”). In addition to HIPAA, state health care confidentiality laws also apply if they are stricter than the requirements of HIPAA.
As part of a due diligence, a buyer should check whether the seller has entered into “business partner agreements” with third parties that support the provider with payments, treatments and / or operations in the healthcare sector. And even in the absence of such agreements, a buyer should analyze whether agreements with business partners are necessary for his protection after the deal is concluded. A buyer should also obtain information about whether there are currently known HIPAA violations (whether recently reported or still notifiable). Not only is there a possible civil liability towards the federal government, in certain cases a patient can also take legal action against the provider.
Under HIPAA, even receiving patient information due diligence triggers HIPAA requirements and business partner requirements. HIPAA was changed in 2013 and now even a business partner is directly liable under HIPAA (CLICK here for more information). If you are selling your ketamine clinics and the buyer is requesting PHI, consider whether a business partner agreement is required.
That being said, every buyer should get cyber liability insurance to protect themselves from HIPAA violations. Additionally, a buyer should also check that the seller has cyber liability insurance and, if so, that it covers any violations that occurred prior to the deal. Fines, penalties, and lawsuits can be very costly when violating the HIPAA.
Part 2 regulations
Part 2 provisions are often overlooked by health professionals (see 42 USC § 290dd-2 and 42 CFR Part 2). The provisions of Part 2 apply, among other things, if a provider offers treatment with substance use disorders (SUD) and This provider also receives federal funding for such treatments (e.g. Medicare, Medicaid, etc.). As with HIPAA, the Part 2 provisions aim to protect the confidentiality of a patient’s medical records when those individuals are receiving SUD treatments. The Part 2 Regulations have recently been updated (CLICK for a good summary of the updates). For a good overview of the provisions of Part 2, please click here.
Because ketamine can be used for SUD treatment and Medicare reimburses certain procedures, it is important to understand the contours and implications of the Part 2 provisions. Additionally, a buyer may also need to analyze when the Part 2 regulations are more stringent than HIPAA and / or state law. In this case, Part 2 regulations may apply (instead of HIPAA and / or state law).
Healthcare is an incredibly complex area of law. It’s one of the most regulated industries in the United States. Any health care business needs to be examined from many different angles. A buyer could follow in the seller’s footsteps after closing and thus be liable for previous violations by the seller. Hence, great care must be taken to protect a buyer from the many traps that exist under various federal health care laws.
For more information on ketamine, check out the following blog posts: