Michael J. Coco writes:
If you have ever bought or sold a business, or you have experience with the process, you are aware of the due diligence efforts and multiple agreements required to close the deal. Transactions involving the sale or purchase of health care related business, such as a medical practice, often take the form of asset purchases, set in motion by executing an asset purchase agreement (“APA”). The APA can be a voluminous document written by the purchaser to protect the purchaser. APAs have been known to cover every conceivable circumstance that may reflect negatively on the purchaser after the acquisition. APAs have been known to cover everything from the seller’s violation of a local ordinance to more serious violations, including violations of federal law. With a novelette of protective provisions, a well-written APA seems to cover everything. But like all legal documents, a typical APA needs to keep up with evolving law and, in the case of health care, the law evolves quickly.
Major and fairly recent changes in healthcare law include the clear requirement under applicable HIPAA provisions for covered entities to have business associate agreements in place and for business associates to have subcontractor agreements in place. Breach notification rules and penalties have also been created or refined under HIPAA. The typical APA requires the seller to represent that it has not violated any law, and often expands this representation to its employees. However, few APAs discuss potential HIPAA breaches by employees, or breaches by business associates. More importantly, there may be no specific representation that the seller has in place all of the appropriate business associate agreements.
Although a good due diligence review should evaluate business associate agreements, the purchaser should consider adding specific business associate agreement and breach representations, along with the corresponding indemnification provisions. Buyers should request copies of all business associate agreements currently in place, as well as any subcontractor agreements. In addition, the buyer should ask a seller to disclose any circumstance in which it discovered a potential breach, but determined the breach was not reportable based on an internal risk assessment conducted by the seller. Because the buyer is ordinarily acquiring the good will of the medical practice as an essential element, a past breach by the seller or the seller’s business associate could seriously reduce the value of the buyer’s investment. For this reason, buyers should consider adding specific breach and business associate representations to their APAs.
[Michael Coco handles a range of corporate matters, focusing his practice primarily in the area of health law. As a former ER staff nurse and chemist, Michael has in-depth insight into such topics as FDA approval of medical devices as well as hospital compliance with federal and state laws and regulations, including privacy and security of health information and professional standards.]