Compliance Challenges and Best Practices for Health Plan Mergers & Acquisitions

Transcription

1 Compliance Challenges and Best Practices for Health Plan Mergers & Acquisitions HCCA Managed Care Compliance Conference Las Vegas, Nevada January 31, 2016 Annie Hsu Shieh, Esq., Central Health Plan of California Anthony Choe, Esq., Morgan, Lewis & Bockius LLP 1 Disclaimer The thoughts and opinions expressed by Ms. Shieh are her own and do not reflect those of Central Health Plan of California or any affiliated company. 2 1

2 Learning Goals Identify the challenges that consolidation in the managed care industry poses to corporate compliance programs Understand key issues associated with integrating compliance programs (e.g., risk areas, compliance cultures) Best practices and pitfalls to avoid 3 A Quick Audience Poll 4 2

3 5 New Challenges Laws Agency relationships Product lines Lines of Business Issues due to new product lines Customer relationships Contractual obligations Vendor arrangements 6 3

4 Why Merge? Why Expand? Growth New markets Economies of Scale / Cutting Costs Diversification Increased Capabilities Continuum of Care Filling Gaps Synergy Spreading Risk Creation of Other Efficiencies 7 Structuring Considerations Form of Acquisition Asset acquisition Stock acquisition Mergers Joint Ventures Post Acquisition Operating Structure Single Entity Parent Subsidiary Strategic Structure Horizontal integration Vertical integration Other Considerations Public company Non profit 8 4

5 Overview of M&A Forms We promise to go quickly 9 Asset Purchase Buyer Cash, Stock or Other Consideration & Assumption of Liabilities Seller Assets Stockholders of Seller Distribution of Cash, Stock or Other Consideration as part of or after asset sale 10 5

6 Asset Purchase Buyer, or subsidiary of Buyer, acquires assets of Seller for stock of Buyer, cash or other consideration and the assumption of none, some or all of the related liabilities of Seller Buyer has ability to specify assumed and excluded assets & liabilities Seller survives acquisition 11 Asset: Pro/Con Buyer Can pick and choose specific assets and liabilities Lower risk of assuming unknown or undisclosed liabilities Seller Left with known/unknown liabilities not assumed More complicated assigning specific assets 12 6

7 Stock Purchase Before: Buyer Cash, Stock or Other Consideration Shares of Stock Stockholders of Target After: Buyer Former Stockholders of Target (now hold the purchase consideration) Target Target 13 Stock Purchase Buyer acquires Seller s outstanding stock from the stockholders of Seller for stock of Buyer, cash or other consideration Negotiate directly with Seller s stockholders May acquire 100% of outstanding shares or less most Buyers want 100% ownership Seller continues to hold all of its assets and liabilities both before and after the transaction now has different stockholder(s) 14 7

8 Stock: Pro/Con Buyer Cannot pick and choose specific assets and liabilities will assume all liabilities (known and unknown) Seller Not left with any contingent liabilities Not practical if the Target has large number of stockholders all must agree to sell negotiations can be time consuming 15 Mergers Three basic structures. Favored form to acquire entities with a large number of shareholders or public companies. Straight Merger: Target merges into Buyer, with Buyer as surviving corporation Note: requires approval of Buyer s stockholders (as well as Target s stockholders) Reserve Triangular Merger: Forward Triangular Merger: Subsidiary of Buyer merges into Target with Target as surviving corporation Target merges into Subsidiary of Buyer, with Subsidiary as surviving corporation 16 8

9 Straight Merger Before: After: Stockholders of Target Cash, Stock or Other Consideration Stockholders of Buyer Former Stockholders of Target (If Stock Received as Consideration) Pre merger Stockholders of Buyer Seller Stock P Stock P Stock Target Buyer Buyer Target 17 Forward Merger Before: After: Stockholders of Target Cash, Stock or Other Consideration Buyer Buyer Former Target Stockholders (Hold $ if cash deal) Target Merger Subsidiary Subsidiary (combined with Target) Subsidiary is surviving corporation 18 9

10 Reverse Merger Before: After: Stockholders of Target Cash, Stock or Other Consideration Buyer Buyer Former Target Stockholders (Hold $ if cash deal) Target Merger Subsidiary Target (combined with Subsidiary) Subsidiary is surviving corporation 19 Merger: Pro/Con Buyer Cannot pick and choose specific assets and liabilities assume all liabilities (known and unknown) Seller Not left with any contingent liabilities Typically only majority consent of Target stockholders required very effective way of completing acquisition of a Company with a large number of stockholders Numerous third party consents may be required if Target merged out of existence 20 10

11 Stages of an M&A Transaction Phase 1: Planning Stage Strategic exploration Bid Stage Phase 2: Pre Closing & Due Diligence Letter of intent / Memorandum of understanding Due diligence (pre signing) Negotiate and sign Agreement Due diligence (pre closing) Phase 3: Post Closing Collaboration Aftermath

12 Don t Be Left Out! 23 Groundwork for Role of Compliance Externally Directed Tasks Get a seat at the table ( Deal Team role) Establish a clearly defined role and thresholds for involvement Maintain lines of communication Acquire resources Internally Directed Tasks Develop short & long term plans Assign tasks Allocate resources Do not underestimate what lies ahead 24 12

13 Buyers: Why Compliance Matters Expanding and new compliance requirements Increased scrutiny Government Private Industry / Customers Diversification of operations and risk Successor risk Go Forward risk 25 Targets: Be Prepared Documentation Policies Hotline Logs Corrective Action Plans Compliance Committee Minutes Establish lines of communication Attorney Client Privilege Mock due diligence 26 13

14 27 What is Due Diligence? Before the parties agree to a transaction, the Buyer will review the Target. Sometimes, a Target may evaluate the Buyer. It s like dating, but without the fun. Why? Gather information Assess the other party and decide on whether to purchase Identify risk areas 28 14

15 Getting Ready Access Resources Staffing Expertise / Skill Sets Lines of Communication Business Legal Outside counsel/consultants 29 Diligence Tips Start Early Develop a game plan or strategy Use checklists Keep the big picture in mind Coordinate with other parties Avoid inefficiencies Access to information 30 15

16 Your Role Assess the corporate compliance program & leadership Identify risk areas and steps to address Small deals small risks Pre close vs. post close Scope may depend on: Deal structure Type of Target The business of the Target Risk exposure Risk tolerance Timing 31 Conducting Diligence Determine what facts need to be reviewed/confirmed Preparing a focused diligence request list Avoiding noise Identifying key personnel to interview and asking the right questions Understanding the politics 32 16

17 Areas of Focus The business Relevant regulatory entities & compliance obligations Effectiveness of the compliance program Seven elements Culture Issues for the future Integration opportunities Best practices Areas for improvement Looking outside the box (or dataroom) What s missing? Inter relationships 33 Revisit the Seven Elements 1. Written policies and procedures 2. Compliance officer(s) and committee(s) 3. Training and education 4. Effective lines of communication 5. Monitoring & auditing 6. Enforcing standards through disciplinary guidelines 7. Responding to detected offenses and implementing corrective action plans 34 17

18 Limitations on Diligence FTC & DOJ Scrutiny Hart Scott Rodino Act Gun Jumping When competitors are involved Deal team walled off from day to day operations Includes insiders and third parties (e.g., attorneys, consultants) Pre close planning versus implementation 35 Dealing with Privilege Party assets privilege in due diligence Legal vs. Compliance vs. Business Hybrids and combinations Due diligence when on opposite sides of negotiation table disclosing privileged communications carries peril Verbal communications and common interest agreements Communications before a merger agreement signed may not be protected under common interest doctrine. What about HIPAA? 36 18

19 Pre Close Tasks Consents Disclosures and notifications Pre close restructuring Pros & Cons Flagging issues to address post close Focus on non competitive activities Addressing risk

20 The Honeymoon Period? Feeling Lost Leadership Priorities Personnel Systems Nomenclature Culture Feeling Overwhelmed The Human Element Drinking from a Fire Hose 39 What now? Have plans for Day 1, 30, 60, 90 Early progress is important Involve leadership Establish the culture (key area of vulnerability) Create integration points of contact / teams Take a trip and meet the other side Conduct interviews Include compliance and leadership 40 20

21 What now? (continued) Establish a benchmark Auditing/monitoring Surveys Take Inventory Make this a priority Capture institutional knowledge Identify strengths/weaknesses/gaps Identify key personnel and talent Establish relationships and lines of communication Access to IT system information may be lost 41 What now? (continued) Implement growth/integration plan Set expectations (realistic ones) Communicate expectations Be flexible / prepare for compromise Set the tone Prepare for the long haul / Walk before you run Identify low hanging fruit Update policies Commence trainings 42 21

22 What now? (continued) Addressing problems post close Dealing with issues flagged in diligence Addressing issues that were missed in diligence Working with target company personnel Desire/need to keep the new business successful Keeping the tail from wagging the dog 43 Structuring Considerations Organizing compliance committees: Geography, business lines, legacy vs. new Re tasking compliance staff Bringing out sourced compliance Maintaining, reestablishing and establishing relationships with key departments (e.g., ERM, Legal, HR) My way or the highway / Best of both worlds Identifying areas of overlap and differences Building infrastructure of influence 44 22

23 Structuring Considerations Corporate and operating structures Consolidation vs. Balkanization Board and executive leadership Committees and more committees Leadership buy in New priorities and risk tolerances Scalability 45 Final Thoughts Opportunity to revisit compliance program with fresh eyes Separate policies and compliance sub structures increasingly warranted Have realistic expectations Be patient More growth/acquisition on horizon Conduct a post mortem Remain prepared 46 23

24 Thank You! 24