Increased Healthcare M&A Activity: Representation and Warranty Insurance Coverage



Written by Cody Vicknair, Robert Hall and Douglas Grimm

The business of managing and operating health care facilities has grown increasingly more complex since the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010 and the Health Information Technology for Economic and Clinical Heath Act (HITECH) in 2009. Each medical facility must conform to a variety of new rules and regulations that include, but are not limited to: the adoption of Electronic Health Records (EHR), and the preparation for the transition to the 10th revision for the International Classification for Diseases (ICD-10) by October 1, 2015. The result has been a dramatic increase in healthcare mergers and acquisitions, as practice and facility budgets are not prepared to absorb the associated costs and additional liabilities.

An outgrowth from the healthcare consolidation resulted in over $4 billion in Representations and Warranties insurance placements from last year, which was more than double from 2011 to 2012. The coverage helps protect the buyer and seller from losses from inaccurate representations, such as during the due diligence analysis, or from poorly structured purchase and sale agreements.

“The primary focus of health care regulatory attorneys during transactions such as these is to ensure that the representations and warranties that are made are accurate, enforceable and agreed upon by both parties to the deal,” comments Douglas Grimm, Chair of the Health Care Practice at Stradley Ronon Stevens & Young in Washington, D.C. “The coverage is an excellent tool for both parties’ peace of mind during what can be a challenging transaction.”

Healthcare transactions and deal structures are becoming increasingly more complex as the government shifts 1/6 of the US economy from a fee-for-service/volume-based practice model to a value-based model focused on the determination of outcomes relative to cost. There are a basket of exposures within the enterprise that need to be evaluated, like direct and vicarious liability from prior activities, director and officer decisions, and even unforeseen claims from sexual molestation, fiduciary liability or employment practice liability. It will be critical for healthcare stakeholders to retain the counsel from niche attorneys and specialty brokerages to fully protect their interests during, and after, closing transactions. Representations and Warranties coverage protects the buyers and sellers, and creates the ground work to help close healthcare transactions.


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