McGuireWoods partner and host Geoff Cockrell invites Government Investigations & White Collar Litigation partners Mindy Sauter and Mike Elliott to discuss compliance and regulatory challenges within private equity healthcare investments. As Mindy explains, private equity groups are sensitive to compliance issues because they bring in individual entities that tend to function in a siloed manner.

The ideal member of the private equity group’s board is someone with healthcare experience who will look at the appropriate type of oversight of compliance functions, says Mike. In the new administration, Mike anticipates an increased push toward investigating antitrust violations, while Mindy suggests that investigations into healthcare fraud, waste and abuse will remain consistent with the current landscape.

Connect and Learn More

☑️ Mindy Sauter | LinkedIn

☑️ Mike Elliott | LinkedIn

☑️ Geoff Cockrell | LinkedIn

☑️ McGuireWoods | LinkedIn | Facebook | Instagram | X

☑️ Subscribe Apple Podcasts | Spotify | Amazon Music

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner Geoff Cockrell as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host Geoff Cockrell, a partner at McGuireWoods. Here at The Corner Series, we try to bring together dealmakers and thought leaders at the intersection of healthcare and private equity investing. Today I'm joined by two of my colleagues, Mindy Sauter and Mike Elliott, both in the Government Investigations Group where they focus largely on healthcare-related investigations. But Mindy, if you could start us off with a little introduction and then Mike, and then we'll jump into some questions.

Sure. Thanks, Geoff. And thanks for having us on today. I am Mindy Sauter, I've been with the firm since March of this year. Prior to that, Mike and I had a small boutique firm that did white-collar investigative work and healthcare work. And before that I was at the Department of Justice in the Northern District of Texas as a member of the healthcare Medicare and Medicaid Strike Force where I met Mike. We were trial partners there and then after we left the government, opened up our own practice and were lucky enough to join McGuireWoods in March.

Thanks for having us, Geoff. We really appreciate it. Just like Mindy said, we had our own law firm for about seven and a half years or so. Her description of our practice is accurate. We did a lot of healthcare work. A lot of that work dealt with entities who had some regulatory issues who were able to get around the bend. Before that, I was a prosecutor in the Northern District of Texas and then before that in the Southern District of Texas, which is where I started getting involved in certain types of white-collar and healthcare-related investigations and carry that on in the Northern District of Texas with the Medicare Strike Force.

Mindy, maybe I'll start with you. I always find it puzzling how private equity investing in healthcare sometimes gets a black eye in the press with respect to compliance type questions. Because from where I sit, I often find that private equity investors are necessarily the most careful, that they've got a big target on their back, they've got pretty expansive reputational risk. Mindy, has that been your experience? And if you could paint a little picture of what true care and compliance looks like?

Sure. I think that private equity investors are just intrinsically tied into the idea of compliance issues. And so they are thoughtful about them, they're proactive in terms of ensuring that the correct compliance programs are in place. I think sometimes when they go in to do roll-ups or they start looking into different groups for investment purposes, they encounter groups that have not historically had compliance programs or they've had compliance programs that are what we often refer to as paper compliance programs.

They have it laid out on paper and some type of policies and procedures, but they don't ever put it into action. So it's not actually a compliance program that you see working throughout the entities on a day-to-day basis. I think one of the issues that we do see is that while private equity groups are sensitive to the compliance issues, as they're bringing in these individual entities, all of them are functioning in a singular siloed manner in a lot of ways. And so the real task for these investors is to draw everybody under the same umbrella in the compliance world and make sure that the compliance efforts that they have are rolled out appropriately to each of those entities. And it's a top down compliance program. We cut out that siloed nature of each practice functioning in its own way.

Mike, one of the questions I get from private equity investors is that they often sit on the boards of their platform companies obviously, and they have questions about what their role as a board member in compliance looks like. Can you articulate a little bit what an individual private equity fund partner's role on the board of the platform looks like? And maybe more specifically what good versions of that look like and maybe bad versions that you've seen?

Sure. Usually it's very important to have a member of that private equity team on the board and those members that sit on it a lot of times have experience in the healthcare field. And really what they want to be looking at is the appropriate type of board oversight related to a review of compliance functions and basically the roles and relationships between the organization's audit group, their compliance team, the legal department, how those integrate. Asking the right questions about the sharing of that type of information. They also want to make sure that there's a mechanism and process for certain types of reporting within the organization. That is a very high level thing that a private equity board member would want to be in touch with. They want to be able to converse and have that relationship with legal counsel to talk about the approach in identifying certain types of regulatory risks and what types of decisions can increase that regulatory risk.

And then there are also certain methods of encouraging the cooperation amongst the members of the board, but also the various groups that the board is governing. So if you have an individual on a board who has that in mind and is asking those right types of questions, that is good. If you have an individual on a board who is just more passive and accepting some of the answers or explanations without digging into, let's say, some of those audits and bouncing it off of legal counsel and the compliance officer, then you're looking at a hole in that knowledge base and that's when things could potentially unravel. So we are in favor of the active board member in that sense. I think it saves money in the long run and it saves a lot of heartache if those types of approaches are implemented and that knowledge base is not only with that private equity group, but throughout the board itself.

Mindy, let's keep the conversation around what happens in the boardroom. One of the questions I get a lot or situations I encounter a lot is where the companies happen to make a decision and they're in a gray zone regulatorily. It's not clearly wrong, but it's edgier and there are lots of decisions that have to be made in that gray zone. It's just the nature of operating in a regulated business. When folks are making a decision in the gray zone, could you speak a little bit to, if this is ever second guessed, what does that second guess look like? And what will they wish that they had done in that meeting, in that process? What records should they make? What records should they not be making? And maybe if you could just talk about how to make close call decisions.

Sure. I think one of the first things that every board and entity should do is should have good healthcare regulatory council. We have run into so many entities that have really good deal and structuring council, transactional council, but maybe don't have that in depth knowledge of the healthcare regulatory space where they can guide them through these gray zones to really try to identify the risks and also how they can put forward appropriate resolutions and make sure they're documenting that correctly. And so I think that's probably the most important step that they can take right off the bat. The other thing is making sure that their compliance officer has the autonomy to make decisions and bring those decisions and those discussions to the board without having any fear of recourse because they're also weighing in on the legal side. That compliance officer needs to be really independent and have the ability to raise concerns that they can thoroughly talk through.

We really stress in all instances that any type of decision that's made, especially if you're making one in the gray area, is well documented. And so what you want to look at is you want to look at other practices that are similarly situated to yours and look through what type of corporate integrity agreements are out there related to those particular practices. Look and see what type of historical settlements have been made, what has been the overarching problem within their sector. And then look at their practices that they have in place and see if those practices are anywhere similar to the activities that have gotten these other entities into trouble. How can they tweak those to ensure that they don't run afoul of those same problems that similar entities have faced? And so I think they need to be very mindful of the current atmosphere of what the government's interested in and then they need to really look at their internal mechanisms for auditing, making sure that they're catching these types of problems and always fall back and rely on good healthcare counsel to direct them in the right direction in making these decisions.

Mike, another area where we encounter issues is in the context of an acquisition or affiliation with a new party. In that context, you're usually looking at the history of what Target has been doing and you invariably come across things where either they were making a judgment call where they were making edgier judgment calls than maybe you would've made, or a situation where you think that their historic practices were maybe across that line. When you're advising clients in an M&A context, how do you advise them to think about those situations and to put a fence around the exposure? How should they think about that?

Well, on the one hand, one of the things that you would first look at in that instance is the types of compliance notes and actions that were taken in order to address some of the deficiencies and see how they have been doing that and if they have been doing that. Basically what we're saying is making your own good evidence in that regard. So if they have not done that in the past, you would think about how to do that prospectively in order to frame the issues correctly. The other is the applicability and value of certain legal opinions that these groups have obtained. What is it? Really dig into what analysis was done? Was it done in accordance with what was instructed to that legal counsel or did it have some holes in it? Does it have to be readdressed? And the other thing that you can do in that regard is I think there's a lot of value to the advisory opinions that are out there. And these OIG advisory opinions, they're provided to the public and their general assessments of the efficacy of certain types of healthcare transactions and approaches to providing care.

And you can sometimes read the tea leaves on whether the situation that you're walking into is similar to the one that's being opined upon. And that's a good tool of handicapping where you're at in this process and to what extent fixes have to be made. And the value of having someone in the healthcare regulatory but also in the enforcement context is that we see a lot of subpoenas and either they're subpoenas to the grand jury, CIDs or HIPAA subpoenas that would outline certain types of requests. And the frequency of those types of requests or the novelty of a certain request really gives some decent insight into what the OIG thinks is important. And that also is a very good handicapping approach.

Mindy, in the context of a platform that's making a close call, Mike mentioned that in diligence for an acquisition, you might look at legal opinions that have been received by that target supporting the conclusion that they arrived at. In the context of just general representation of a healthcare company, we're giving advice on things all the time, some answers are easy and clear, others are more opaque, or the business necessity requires you to land in a location on that regulatory spectrum where it's not completely white, it's not certainly black, but you've made that kind of gray zone call. What's the value of that legal opinion in that context? I know clients, they know how we charge by the hour and generating a memo on something is not cheap. How should they think about the protection that affords? Obviously we're going to write that consistent with the advice that we're giving with the limitations of that advice. How should people think about the expense and utility of those sorts of opinions?

It is an expense and it's an expense that clients often don't want to undertake. But one of the things that we have seen and really believe to be true is that if you put that money in in the beginning, it really does have the potential to save you a ton of money in the end. And if you get into a situation where people are starting to ask hard questions about the practices that you're employing, if you have the ability to say, "Wait, we had some concerns and so we went to a respected healthcare lawyer and we walked them through what we wanted to do and they gave us direction in the form of a legal opinion, here it is."

And that gives them some daylight. And I think that it is money well spent and it gives us on the enforcement side when we get called by a client and they say, "Hey, we got a grand jury subpoena or we got a CID," and we have to start engaging in conversations with the government, if there's a legal opinion out there that's the basis for why they decided to start making these decisions and going down this path, it's one of the first tools that we will utilize in our conversations with the government as to why what they did was okay. The more important thing to think about that too though, and it's always important to stress, is that once you get that legal opinion and you've walked through what that structure is and you've talked this through with the different healthcare lawyers that you're working with, it's vital to make sure that you then carry that practice out in accordance with that legal opinion.

If you get that legal opinion and it tells you that you have to do these five things a very certain way and you only do three of those things that you're supposed to do and the other two are done a little bit wishy-washy or not quite in accordance with that letter, it really devalues the importance of the letter itself and it makes it harder for us on the investigative side when we're having those conversations to get that credibility behind it. And so I think that they are remarkably important. And it's also just as important that if you get one and you spend that expense, that you do everything you can to model your practice exactly to that letter so that if it ever becomes an issue, we have the ability to really lean on it in a way that can be helpful for the business.

Mike, we are recording this shortly after the election and know that we're going to be having an administration change. As you look forward to the next administration, would you anticipate that there would be a shift either in priorities or regulatory heat from one administration to the next or do those topics of both priorities and heat emanate more from the civil servant part of the government? What should we expect in the new administration?

That's an interesting question and I've been thinking about that myself and the first thing that came to my mind was the recent increased interest on the antitrust side and how that has been a real push. Those are investigations that have been ongoing. There's been inquiries from the FTC as well as the DOJ. I think there will be a look at where the value is in several of those investigations and how if they can be progressing in the way that they are right now.

And then the other I'm looking at I think is more generated towards the civil servants themselves, meaning the regulators and Medicare, also other HHS related investigatory bodies, where a lot of that is driven through the whistleblower process and are evaluated pretty much directly related to the laws themselves. There was not a down tick for the most part in the original Trump administration for False Claims Acts that were filed. And I think that it has maintained it's consistently gone forward. I think there will be more of a discerning approach about what is and what is not going to be picked up or intervened by the government. When you asked that question, the first thing that came to my mind was the antitrust side, and I think that remains to be seen.

I agree and think it does remain to be seen. I think there's some natural tensions on the Republican side of the aisle between populist policies and more traditional conservative policies and one of the areas of divergence of those two is in the interest around antitrust enforcement. The populist branch of the conservative party is more interested in pursuing those antitrust policies than maybe the more traditional business centered side of the conservative party. So it'll definitely be interesting to see how that plays out in actual policy. Mindy, also keeping it within the administration change question. Do you think that fraud and abuse type government action, you'd expect that to change dramatically or would you expect that to be pretty consistent?

I think it's going to be consistent. I think that because we have these Medicaid dollars and they're always a concern, I think that there is always going to be instances of investigation into fraud, waste and abuse when it comes to federal payers. I think maybe we could see it slow down a little bit in maybe the COVID enforcement. We might not see that be the task force that it's been in the last couple of years. But in terms of the just straight Medicare and Medicaid, TRICARE, federal payer enforcement, I don't think that we're going to see that relaxed with the administration change very much at all.

Mike, one of the areas that we've been navigating in the transactional context is not just the federal government, but state governments. They've taken a more activist approach on some of these antitrust questions as it relates to healthcare. But on the more fraud and abuse, even though the states have their counterparts most of the interesting and sometimes threatening aspects of dealing with investigations all center on the federal government. Are you seeing a change at the state level on other sorts of fraud and abuse or is that still principally a federal question?

I think it's principally a federal question, other than a few instances where the case was originally generated with the state, so there has been some type of cooperation with the state. I would say for example, Medicaid providers. I think Arizona is a good example of that. So you have the Access program in Arizona. There is a tremendous amount of allegations of fraud and abuse through the Access program. All that is Medicaid money. And as we know, even though it's administered by the state and recognized as a state program, it's still primarily funded by the federal government.

And so the resources of enforcement on the state level for the most part do not match the federal government. So there is that type of collaboration there. So what we may see is an identification of certain issues by state regulatory agencies and then that collaboration with the federal government based on how they look at the importance of that type of investigation or whether they can get some type of settlement or make a statement in the investigation that would speak to the other 49 states. The integrity of certain types of programs, what's the value of the federal government getting in there and investigating? But there are certain states that are more active than others, California obviously comes to mind. There are certain things in Texas where they have an interest and tag along with the federal government on. But a lot of that evidence is coming from state level and some of the enforcement shifted over.

So Mindy with our last question. As you're advising private equity funds that are working on being as compliant as they can, what would be the one piece of advice you would give them to implement going forward as they try to be the most compliant at a fund level and take seriously compliance at their platforms? What would be the one piece of advice for them?

After an acquisition, I think the most important thing to do is to perform annual compliance risk assessments. That is something that the OIG is essentially demanding at this point in the compliance programs that they are wanting to see all entities in the healthcare space have. That compliance risk assessment allows you to understand exactly what's happening in all areas across the board of the business. It looks at billing, it looks at your marketing, it looks at all aspects, and it gives you all the tools that you need to see if there are problems within the business. And it gives you an ability to figure out how to protect and move forward and fix those problems. I also think it's something that when you're looking at an investment opportunity, you should check with the entities and in the diligence, see if they have been performing those annual compliance risk assessments.

If they haven't, it tells you that they are going to have a hole in their compliance program that you're going to need to immediately address. If they have, then you've gotten lucky and it gives you a roadmap to show what historical problems they've had and it also shows you how diligent they've been about utilizing that information to try to fix it. And so that compliance risk assessment is really beneficial, not only in the diligence side, but also as you start to develop your own compliance program moving forward after acquisition, it helps you really keep everything in line and make sure you aren't missing anything.

I think we'll conclude this conversation there. Mindy, Mike, thank you so much for joining us. It has been a ton of fun.

Thanks, Geoff.

Thanks, Geoff.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and did not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.